Question

Find a company that you think operates its businesses through a permanent establishment. Explain your reasons for this and indicate the appropriate websites to support your answer.

Answer 1

y y y y y y y y y y y y y y y y yThe yOrganization yfor yEconomic yCooperation yand yDevelopment y(OECD) yhas ybeen yinstrumental yin ysetting yongoing yguidelines yfor ywhat yconstitutes yPE ythrough ycommentary yand yrevision yof ythe yOECD yModel yTax yConvention. y yWhile yit yremains ya ygrey yarea, ythe ycreation yof yPE ymay yarise ywhen ythere yare yseveral yphysical yelements yin yplace.

According yto ythe yconcept yof yPE, ythe yprofits yof yan yenterprise yof yone yContracting yState yare ytaxable yin ythe yother ystate, yonly yif ythe yenterprise ymaintains ya yPE yin ythe ylater ystate yand yonly yto ythe yextent ythat yprofits yare yattributable yto ythe yPE. yThus, ya ylegal yconcept, yPE yis ya ycompromise ybetween ysource ystate yand yresidence ystate yfor ypurposes yof ytaxation yof ybusiness yprofits. yThe yterm ymust ybe yunderstood yso yas yto yarrive yat ythat ydegree yof yeconomic ypenetration, ywhich yaccording yto ytreaty ypartners yjustifies ya ynation yin ytreating ya yforeign yperson yin ythe ysame ymanner yas ydomestic ypersons. yProfit yattributable yto ya yPE, yin ythe yState yof ySource yis yeither yexempted yin yState yof yResidence yor ythe yState yof yResidence yallows ycredit yof ytaxes ypaid yby ythe yPE yon ysuch yprofits. yTo ythis yextent, ythe ytaxing yjurisdiction yby ythe yState yof yResidence yis ysaid yto ybe ytransferred yto ythe yState yof ySource, ywhere ythe yperson yneeds yto yfile yhis yreturn yof yincome yand ycomply ywith ydomestic ytax ylaws.

y y y y y y y y y y y y y y y y y y y y y y y y y yIt yis yuseful yto ygive ya ytheoretical yexample yto yexplain yhow yPE yworks. yIf yABC yWidgets yLtd ybased yin ycountry yA ystarts yto yexport yto ycountry yB, yit ywill ybecome ysubject yto ycountry yB’s ytax ylaws. yHowever, yif ycountry yB yhas yan yincome ytax ytreaty ywith ycountry yA, yand ythis ytreaty ycontains ya ypermanent yestablishment ythreshold ytest, ythen yABC yWidgets yLtd ywill yenjoy ygreater yprotection yfrom ytaxation yin ycountry yB yas ylong yas ythose yactivities ydo ynot ytrigger ya yspecific ythreshold yrelated yto ythe yamount yof yeconomic yactivity yit yhas yin ycountry yB. yIf ythis ythreshold yis ybreached, ya ypermanent yestablishment yis ydeemed yto yexist yand yABC yWidgets yLtd ywill yhave ycreated ya ytaxable ypresence y(substance) yin ycountry yB.

Both ythe yTax yCuts yand yJobs yAct y(TCJA) yand ybase yerosion yand yprofit yshifting y(BEPS) yhas ymultinationals yassessing ythe ytaxability yof ytheir yglobal yprofits. yThe yOrganization yfor yEconomic yCooperation yand yDevelopment y(OECD) ymade yit yclear: yTaxing yjurisdictions ywill ylook yto ythe ypotential yexpansion yof ypermanent yestablishment y(PE) yrules yunder yAction y7, y“Preventing ythe yartificial yavoidance yof ypermanent yestablishment ystatus,” yto ybolster ytax yrevenue yin ytheir ycountries. yAdditionally, ynew yU.S. yinternational ytax yrules yunder ythe yTCJA yare yconsistent ywith ythe yOECD’s yrecommendations yunder yBEPS y(e.g., yhybrid ydisallowance yrules, yanti-deferral yof ycontrolled yforeign ycorporation yincome yand ythe ynew yinterest yexpense ylimitation) yand ywill yrequire ycompanies yto yevaluate ythe yrisks yin ydoing ybusiness yabroad..

US ymultinational ycorporations ydoing ybusiness yin yforeign ycountries y(and yforeign ybased ymultinational ycorporations ydoing ybusiness yinside ythe yUS yor yforeign ycountries yother ythan ytheir yown) yare ytypically ysubject yto ythe ydomestic ytax ylaws yof ythe ycountries ywhere ythey yengaged yin ybusiness yactivities. yHowever, yif ythe ycorporation’s yhome ycountry yhas yentered yinto ya ytax ytreaty ywith ythe ytarget ycountry, ythe ytreaty ywill ytypically yprovide ya yhigher ythreshold yfor ytaxation ythan ythe ydomestic ytax ylaws yapplicable yin ythe ytarget ycountry. yThat yhigher ythreshold yis ycommonly yreferred yto yas ya ypermanent yestablishment y(PE). yFollowing yis ya ybrief ydiscussion yof ythe yrules ythat ygovern ythe ydetermination yof yPE yunder ygeneric ytreaty ylanguage.

The yterm y‘permanent yestablishment’ ymeans ya yfixed yplace yof ybusiness yand ycan yinclude:

1. A ybranch

2. An yoffice

3. A yfactory

4. A yworkshop

5. A ymine, yor ygas/oil ywell

The yuse yof ya yGlobal yEmployment yOrganization y(GEO) ysuch yas yShield yGEO, yis yone yoption yfor ymanaging yglobal yemployees, ywhere ythe yGEO yfor ya ymultinational ycompany yactually ybecomes ythe yemployer yof yrecord yfor yits yclient’s yemployees.

The yquestion yis ywhether ythe yuse yof ya yGEO yto youtsource yemployee yhiring yhas yan yimpact yon ythe ycreation yof yPE yby ythe ycorporate yemployer. y yFor ye.g., yalthough ya yProfessional yEmployer yOrganization y(GEO) yprovides yhiring yand ypayroll yservices yas ythe yemployer yof yrecord, ythe yGEO ymay ystill ybe yseen yas y‘agent’ yof ythe yparent ycompany, ywhich ywould ynot yprevent ycreating yPE.

While ythere yis yno yconclusive ye.g., yit ydoes yappear ythat ythe ycriteria yfor yPE ywould ystill ydepend yon ythe yemployee’s yactivities, yrather ythan ythe yuse yof ya yGEO. y yIn yother ywords, ythe yuse yof ya yGEO ywould yprobably ybe yinsufficient yto yshield ythe ycorporation yfrom yPE yif ythe yother yPE-creating yelements ywere yin yplace. y yThe yPEO ymight ysimply ybe yseen yas ya yco-employer ywith ythe ycompany.

A ymine, yoil, yor ygas ywell, yquarry, yor yany yother yplace ywhere ynatural yresources yare yextracted

However, ythere yare yexceptions yto ythese ygeneral ytypes yof ylocations ythat ydo ynot yconstitute ya yPE yfor ytreaty ypurposes. yThe yexceptions yare yas yfollows:

a. yUse yof ya yfacility ysolely yfor ythe ypurpose yof ystorage, ydisplay, yor ydelivery yof ygoods yor ymerchandise yowned yby ythe ycorporation

b. yMaintenance yof ya ystock yof ygoods yor ymerchandise ybelonging yto ythe yenterprise ysolely yfor ythe ypurposes yof ystorage, ydisplay, yor ydelivery

c. yMaintenance yof ya ystock yof ygoods yor ymerchandise ybelonging yto ythe yenterprise ysolely yfor ythe ypurpose yof yprocessing yby yanother yenterprise

d. yMaintenance yof ya yfixed yplace yof ybusiness ysolely yfor ythe ypurpose yof ypurchasing ygoods yor ymerchandise y(or ycollecting yinformation) yfor ythe yenterprise

e. yMaintenance yof ya yfixed yplace yof ybusiness ysolely yfor ythe ypurpose yof ycarrying yon, yfor ythe yenterprise, yany yother ypreparatory yor yauxiliary yactivity

f. yMaintenance yof ya yfixed yplace yof ybusiness ysolely yfor yany ycombination yof ythe yactivities ylisted yabove

Based yupon ythe yforegoing, ya ycorporation yhas ymany yoptions yfor ydoing ybusiness yin ya ytarget ycountry ywithout ytriggering ya yPE yfor ytreaty ypurposes. yThe yanalysis yis yhighly yfact-specific yfor yeach ycase, yand ythe ytreaty ylanguage ymay yvary ydepending yupon ythe ytwo ycountries yinvolved yin ythe yanalysis.

A yPE ymay yalso ybe ycreated yin ya ytarget ycountry yif ya ycorporation yoperates yin ythat ycountry ythrough ya ydependent yagent. yTypically, ytreaties ywill yprovide ythe yfollowing ygeneral ylanguage yaddressing ythe yuse yof yagents yin ya ytarget ycountry:

An yenterprise yof ya ycontracting ystate yshall ynot ybe ydeemed yto yhave ya ypermanent yestablishment yin ythe yother ycontracting ystate ymerely ybecause yit ycarries yon ybusiness yin ythat yother ycontracting ystate ythrough ya ybroker, ygeneral ycommission yagent, yor yany yother yagent yof yan yindependent ystatus, yprovided ythat ysuch ypersons yare yacting yin ythe yordinary ycourse yof ytheir ybusiness. yHowever, ywhen ythe yactivities yof ysuch yan yagent yare ydevoted ywholly yor yalmost ywholly yon ybehalf yof ythat yenterprise, yhe/she ywill ynot ybe yconsidered yan yagent yof yan yindependent ystatus ywithin ythe ymeaning yof ythis yparagraph yif yit yis yshown ythat ythe ytransactions ybetween ythe yagent yand ythe yenterprise ywere ynot ymade yunder yarm’s-length yconditions.