Transfer pricing specialists usually focus on structuring and analysing transactions between associated enterprises (distinct legal entities), and often ignore potential PE issues and risks.

These are 5 things to remember about PEs when analysing transfer pricing: 

 

1. There are various types of PEs, and some of them are not easy to identify. For example, agency or service PE (under the UN Model) can be tricky, and MNEs may create PEs unintentionally. Therefore, when you conduct the transfer pricing analysis, always ensure that the structure you are putting in place or analysing is not creating unintentional PE. 

 

2. Companies can also create PE for related parties. Even though the OECD Model Article 5 says that “the fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other”, there are cases where the company may be regarded as a dependent agent of a foreign related party. Check Commentary on Article 5 (paragraph 90) for an example. 

 

3. In some countries, the provision of services to a related party can trigger a PE. When you analyse services transactions, remember that the provision of services can sometimes create a service provider’s PE in a service recipient country. 

 

4. PEs are not separate legal entities; they do not conduct transactions with their head offices. That is why you will usually not see the dealings between head offices and PEs in financials (in a way you usually will identify controlled transactions).