Introduction

The key features of international enterprises and multinational enterprise groups are that they carry on business operations in several countries and they conduct cross-border transactions; their size and centralized control provide them with efficiencies and cost savings from their intra-entity or intra-group transactions respectively, which are unavailable to independent enterprises carrying on similar business operations. Their reason for engaging in business restructuring is usually to either maintain or improve their competitive position; these enterprises engage in business restructuring to maximize synergies and economies of scale, to streamline the management of business lines and to improve the efficiency of global operations. Business restructuring is defined by the OECD as the cross-border transfer by an enterprise of functions, assets and risks.

A permanent establishment is treated as a separate and independent enterprise under the authorized OECD approach for attributing profits to the permanent establishment under the 2008 Commentary on former Article 7(2) and new Article 7(2). Permanent establishments may be involved in the business restructuring of an international enterprise if assets, functions and risks are transferred to, or from, a permanent establishment. The authorized OECD approach requires such transfers to be recognized for the purposes of Article 7. Business restructuring of international enterprises operating abroad through permanent establishments inevitably leads to changes in the allocation of business profits to the permanent establishments involved in the restructuring. Under former Article 7 the change in the allocation of profits must be consistent with the arm's length principle, but applying the arm's length principle to permanent establishments raises complex issues. Under the authorized OECD approach in the 2008 Report, a two-step process is used to attribute profits to a permanent establishment. The first step involves a functional analysis which in the case of business restructuring involving a permanent establishment requires examining whether assets, functions and risks have been transferred to, or from, a permanent establishment. Such transfers will qualify as notional intra-entity transactions. Under the second step, a transfer price must be determined for the transaction using the transfer pricing methods.