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10. This paragraph contains the central directive on
which the allocation of profits to a permanent
establishment is intended to be based. The paragraph
incorporates the view, which is generally contained in
bilateral conventions, that the profits to be
attributed to a permanent establishment are those which
that permanent establishment would have made if,
instead of dealing with its head office, it had been
dealing with an entirely separate enterprise under
conditions and at prices prevailing in the ordinary
market. Normally, these would be the same profits that
one would expect to be determined by the ordinary
processes of good business accountancy. * * *
[Emphasis added.]
13. Clearly many special problems of this kind may
arise in individual cases but the general rule should
always be that the profits attributed to a permanent
establishment should be based on that establishment’s
accounts insofar as accounts are available which
represent the real facts of the situation. * * *.
[Model Commentaries to Article 7, paragraph (2) of the
Model Treaty; emphasis added.]
The Commentaries speak of "allocation" of profits.
Allocations are generally understood to include adjustments to
what was actually done and reported. See, for example, the
authority to "allocate" income between related parties under
section 482. The Commentaries eliminate any doubt that the term
"allocation" is used in this sense when it says that the profits
to be "allocated" or "attributed" are profits which "would have
[been] made if, instead of dealing with its head office, it [the
U.S. establishment] had been dealing with an entirely separate
enterprise". (Emphasis added.) "Would have", "if", "instead
of", and "it had been", clearly refer to an allocation and
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