Review of the Tax Arrangements Applying to Permanent Establishments

On 24 May 2012, the then Assistant Treasurer, the Hon David Bradbury MP, announced  that the Board would undertake a review of tax arrangements applying to permanent establishments, to be completed by 30 April 2013.


In July 2010, the OECD approved a new Article 7 (Business Profits) and Commentary for the Model Tax Convention on Income and on Capital, which incorporated a new authorised approach to the attribution of profits to permanent establishments (e.g. branches).

The new Article 7 more clearly hypothesises the permanent establishment as a separate enterprise from the enterprise of which it is a part and applies usual transfer pricing principles, subject to the required functional analysis determining the recognition of relevant ‘dealings’ between the permanent establishment and the enterprise’s other operations. The new Article 7 Commentary recognises economic differences between permanent establishments and subsidiaries and the new Article is not intended to achieve equality between permanent establishments and subsidiaries in all respects. The 2010 OECD Report on the Attribution of Profits to Permanent Establishments explains in detail how to apply the new authorised approach, which it refers to as the functionally separate entity approach.

Australian tax law currently allocates actual income and expenses of the taxpayer to a permanent establishment using functional analysis and applying the arm’s length principle by analogy (which is often referred to as the relevant business activity approach). Australia has not lodged new reservations or observations to the Article or the Commentary at this stage, though from 1994 to 2005 it had an observation to the effect that it applied the relevant business activity approach. Tax treaties continue to be negotiated on the basis of the former OECD Model Article 7, pending final decisions on the functionally separate entity approach.

The issue of attribution of profits to permanent establishments is especially relevant to the finance sector. Given the significance of this sector and the Government’s objectives in enhancing Australia’s status as a leading regional financial centre, it is important that the policy settings be carefully considered. Of course permanent establishments are a feature of other industries and policy in this area will have to give appropriate weight to impacts beyond the finance sector.

Policy making is complicated by the fact that countries have not universally adopted the new Article 7, or the relevant Commentary. A number of OECD countries (including New Zealand) have entered reservations to the change and the United Nations Committee of Experts on International Cooperation in Tax Matters has not viewed changes as relevant to the United Nations Model Convention. Importantly a number of key regional economies (China, Hong Kong, Indonesia, Malaysia, Thailand and India) are known to have reserved their position on the new Article 7.

On 1 November 2011, the Treasury released a Consultation Paper ‘Income tax: cross border profit allocation – Review of transfer pricing rules’ examining the need to rewrite Australia’s tax law concerning profit allocation. That Paper contained a section dealing with the attribution of profits to permanent establishments in which Treasury sought views on the desirability of adopting the new OECD approach in treaty and non-treaty cases. Treasury also sought views on any potential revenue implications of adopting the new OECD approach. Most submissions did not comment on this aspect and those that did said that in practice little revenue impact would be expected.

Terms of Reference

Against this background, on 24 May 2012 the then Assistant Treasurer, the Hon David Bradbury MP, announced  that the Board would examine and report on the advantages and disadvantages of Australia adopting the functionally separate entity approach to the determination of the profits attributable to a permanent establishment in its tax treaty negotiations and in the domestic law.

In announcing the review, the Assistant Treasurer stated, “It makes sense to ask the Board to look at all the impacts now in a considered way as we move to assess what the right policy response for Australia is in this area”…

“As part of the review, the Board will also look at the cap that currently exists on the interest rates on certain international interbank loans, which is currently set by the London Interbank Offered Rate (LIBOR), including those between an Australian bank and its foreign head office.”

The Board was requested to report to the Assistant Treasurer by 30 April 2013 and to consult extensively with stakeholders.

Full Terms of Reference are available as an attachment to the Assistant Treasurer’s announcement on 24 May 2012.

Consultation Process

In undertaking this review the Board consulted widely and provided all stakeholders with the opportunity to participate in the review.

The Board appointed a working group of its members comprising Ms Annabelle Chaplain (Chair of the Working Group), Mr Chris Jordan AO (Chairman of the Board), Mr John Emerson AM and Mrs Teresa Dyson to oversee this review.

Discussion Paper

On 31 October 2012 the Board of Taxation released its Discussion Paper on the Review of Tax Arrangements Applying to Permanent Establishments.

The Chairman of the Board of Taxation, Mr Chris Jordan AO, announced the release of the Discussion Paper via a press release. The Board has developed this Discussion Paper to invite submissions and facilitate stakeholder consultation on the issues raised.

Board’s Report

The Board completed its review of tax arrangements applying to permanent establishments and provided its report to the then Assistant Treasurer in April 2013.

On 4 June 2015, the Government announced the release of the Board’s report [PDF 1.27MB] on its review of tax arrangements applying to permanent establishments.

Further information on this review can be obtained from the Board of Taxation Secretariat on (02) 6263 4366 or at

Submissions received

Submitter Download
Australian Bankers Association 539KB
Australian Financial Markets Association 464KB
Deloitte 463KB
Ernst & Young 3MB
Pitcher Partners 597KB
The Tax Institute 273KB