By\u00a0Ashwin Vishwanathan\u00a0 Attribution of profits to a permanent establishment (PE) has been a confounding issue of taxation. The government\u2019s intent to bring clarity, consistency and predictability to this is a welcome step. Releasing the recommendations for public consultation is even more laudable as it encourages key stakeholders to collaborate and co-develop a fair framework. The recommendations in their current form have far-reaching ramifications for all businesses and, thus, require reconsideration of several aspects. Implications for business: Discarding the arm\u2019s length principle in favour of a mechanical fractional apportionment may be ambiguous. It is likely that this may create differences with international principles, double taxation and lead to disagreements across borders as other countries may not necessarily subscribe to the same methodology. The proposals seek to create an artificial distinction between arm\u2019s length price and arm\u2019s length profit, even though the latter is universally used to infer the former. General economic principles under rational behaviour and, consequently, the arm\u2019s length standard expect entities to earn a return commensurate to their functions and risks, and what similarly placed independent parties in the market would earn irrespective of their corporate form. By creating this artificial distinction, a taxpayer group may end up being differently taxed depending on the legal entity form chosen to operate in India. A subsidiary will be held to a differential benchmark compared to a PE (i.e. a branch office or a project office). This appears to contradict Indian tax law itself, which enshrines the arm\u2019s length principle applying equally to PEs. The form of presence in a country for a multinational group is a decision contingent on a variety of commercial, regulatory and legal factors, and this sort of PE taxation regime could be a disincentive for foreign investment in India. The need for a new profit attribution methodology is premised on the argument that the transfer pricing principles using the functional, asset & risk (FAR) analysis only address the supply side of the economy, while profits are a function of both supply and demand. Profits of an enterprise are driven by the market in which it operates and factors influencing the industry therein, and will reflect demand and supply conditions. To separately build in additional compensation for a market jurisdiction through the three-factor method based on equal weight to sales (representing demand) and manpower and assets (representing supply including marketing) seems difficult to understand and justify. A deeming profit margin of 2% in cases where the global profit is either negative or less than 2% further weakens the underlying premise of this methodology since the demand factor is presumed to impact profit but not loss. It is also unclear how global profit would be identified in situations where a group has multiple business segments or activities and only one or a few of them are conducted in India. The three factors are also debatable in the current environment where business models are rapidly evolving and supply chains are transforming radically, given the digital wave. The weights assigned to these factors may further vary across businesses and impose a straitjacket on computing taxability without taking into account economic reality. Digital businesses commonly characterised by scale without mass, reliance on intangibles, and data and user participation will face a fourth factor, i.e. \u2018users\u2019 in determining profit attribution subject to the significant economic presence criterion. Users would carry a 10-20% weight depending on the user intensity of the business. User intensity itself is a subjective concept and will require greater elucidation and clarity before it can be applied in any formula. The next steps: Companies need to review and monitor their business models for implications of these proposals even though they are not final. The public consultation process is a good opportunity for taxpayers to submit their thoughts and ideas to the government, and explain their reservations on some of the recommendations and alternative policy formulations to be considered. This is a question with multiple dimensions requiring a carefully crafted solution. Half measures or hasty implementation will defeat the stated aim of clarity and predictability on this issue.