The business profits Article sets out the method by which the
profits of the permanent establishment are to be measured. It
provides that there shall, in each contracting state, be attributed
to that permanent establishment the profits which it might be
expected to make if it were a distinct and separate enterprise
engaged in the same or similar activities under the same or similar
conditions and dealing wholly independently with the enterprise of
which it is a permanent establishment. It is a simple arm's length
rule, albeit not always simple to apply. The United Kingdom can tax
only so much of the profits of a non-resident enterprise as are
attributable to the permanent establishment in the United Kingdom.
Where the enterprise derives income from the United Kingdom which
is not attributable to the permanent establishment, then such
income cannot be taxed under the business profits Article. Where
there is a permanent establishment which appears to be making
little or no profits and there is evidence that the enterprise is
deriving profits in the United Kingdom otherwise than through the
permanent establishment, enquiries should be made in order to
establish that there are good commercial reasons for this and that
the profits are not being diverted from the permanent establishment
to a non-taxable source.
The business profits Article also provides that no profit
shall be attributed to a permanent establishment by reason of the
mere purchase of goods by the permanent establishment.
