Question

find a company that you think operates its business through a permanent establishment. explain your reasons for this and indicate appropriate websites to support your answer

Answer 1

The imost iimportant iissue iin ithe itreaty ibased iinternational ifiscal ilaw iis ithe iconcept iof iPermanent iEstablishment i(PE).All ithe ithree imodel iconventions inamely, iUN i(United iNations) iModel, iOECD i(Organization ifor iEconomic iCo-operation iand iDevelopment) iModel iand iUS i(United iStates iof iAmerica) iModel iuse iPE ias ithe imain iinstrument ito iestablish itaxing ijurisdiction iover ia iforeigner’s ibusiness iactivities.

i i i i i i i i i i i i iAccording ito ithe iconcept iof iPE, ithe iprofits iof ian ienterprise iof ione iContracting iState iare itaxable iin ithe iother istate, ionly iif ithe ienterprise imaintains ia iPE iin ithe ilater istate iand ionly ito ithe iextent ithat iprofits iare iattributable ito ithe iPE. iThus, ia ilegal iconcept, iPE iis ia icompromise ibetween isource istate iand iresidence istate ifor ipurposes iof itaxation iof ibusiness iprofits. iThe iterm imust ibe iunderstood iso ias ito iarrive iat ithat idegree iof ieconomic ipenetration, iwhich iaccording ito itreaty ipartners ijustifies ia ination iin itreating ia iforeign iperson iin ithe isame imanner ias idomestic ipersons. iProfit iattributable ito ia iPE, iin ithe iState iof iSource iis ieither iexempted iin iState iof iResidence ior ithe iState iof iResidence iallows icredit iof itaxes ipaid iby ithe iPE ion isuch iprofits. iTo ithis iextent, ithe itaxing ijurisdiction iby ithe iState iof iResidence iis isaid ito ibe itransferred ito ithe iState iof iSource, iwhere ithe iperson ineeds ito ifile ihis ireturn iof iincome iand icomply iwith idomestic itax ilaws.

It iis iuseful ito igive ia itheoretical iexample ito iexplain ihow iPE iworks. iIf iABC iWidgets iLtd ibased iin icountry iA istarts ito iexport ito icountry iB, iit iwill ibecome isubject ito icountry iB’s itax ilaws. iHowever, iif icountry iB ihas ian iincome itax itreaty iwith icountry iA, iand ithis itreaty icontains ia ipermanent iestablishment ithreshold itest, ithen iABC iWidgets iLtd iwill ienjoy igreater iprotection ifrom itaxation iin icountry iB ias ilong ias ithose iactivities ido inot itrigger ia ispecific ithreshold irelated ito ithe iamount iof ieconomic iactivity iit ihas iin icountry iB. iIf ithis ithreshold iis ibreached, ia ipermanent iestablishment iis ideemed ito iexist iand iABC iWidgets iLtd iwill ihave icreated ia itaxable ipresence i(substance) iin icountry iB.

i i i i i i i i i i i i i i i i i i i i i i i i i iBoth ithe iTax iCuts iand iJobs iAct i(TCJA) iand ibase ierosion iand iprofit ishifting i(BEPS) ihas imultinationals iassessing ithe itaxability iof itheir iglobal iprofits. iThe iOrganization ifor iEconomic iCooperation iand iDevelopment i(OECD) imade iit iclear: iTaxing ijurisdictions iwill ilook ito ithe ipotential iexpansion iof ipermanent iestablishment i(PE) irules iunder iAction i7, i“Preventing ithe iartificial iavoidance iof ipermanent iestablishment istatus,” ito ibolster itax irevenue iin itheir icountries. iAdditionally, inew iU.S. iinternational itax irules iunder ithe iTCJA iare iconsistent iwith ithe iOECD’s irecommendations iunder iBEPS i(e.g., ihybrid idisallowance irules, ianti-deferral iof icontrolled iforeign icorporation iincome iand ithe inew iinterest iexpense ilimitation) iand iwill irequire icompanies ito ievaluate ithe irisks iin idoing ibusiness iabroad. iThis iarticle iaddresses isome iof ithe irisks iof idoing ibusiness ioffshore iand ibeing iclassified ias ia ipermanent iestablishment.

US imultinational icorporations idoing ibusiness iin iforeign icountries i(and iforeign ibased imultinational icorporations idoing ibusiness iinside ithe iUS ior iforeign icountries iother ithan itheir iown) iare itypically isubject ito ithe idomestic itax ilaws iof ithe icountries iwhere ithey iengaged iin ibusiness iactivities. iHowever, iif ithe icorporation’s ihome icountry ihas ientered iinto ia itax itreaty iwith ithe itarget icountry, ithe itreaty iwill itypically iprovide ia ihigher ithreshold ifor itaxation ithan ithe idomestic itax ilaws iapplicable iin ithe itarget icountry. iThat ihigher ithreshold iis icommonly ireferred ito ias ia ipermanent iestablishment i(PE). iFollowing iis ia ibrief idiscussion iof ithe irules ithat igovern ithe idetermination iof iPE iunder igeneric itreaty ilanguage.

As imentioned iabove, iwhere ia icorporation’s ihome icountry ihas ientered iinto ia itax itreaty iwith ia itarget icountry, ithe ibusiness ioperations iof ithe ihome icountry icorporation iare iprotected ifrom itarget icountry itaxation ias ilong ias ithose iactivities ido inot icreate ia iPE iin ithe itarget icountry. iTypically, ia itax itreaty idefines ia iPE iusing ithe ifollowing itwo igeneral itests:

1. Whether ithe icorporation ihas ia ifixed iplace iof ibusiness iwithin ithe itarget icountry, ias idefined iunder ithe ilanguage iof ia ispecific itreaty

2. Whether ithe icorporation ioperates iin ithe itarget icountry ithrough ia idependent iagent ithat ihabitually iexercises ithe iauthority ito iconclude icontracts ion ibehalf iof ithe icorporation iin ithe itarget icountry

Note ithat ithe idefinition iof ia iPE iis itypically isimilar iunder iboth ithe iOrganization ifor iEconomic iCooperation iand iDevelopment i(OECD) imodel itreaty istandard ilanguage iand iUS imodel itreaty istandard ilanguage. iHowever, ia ispecific itreaty ishould ialways ibe iexamined ifor iexceptions ior idifferences ifrom istandard ilanguage.

Under ithe ifirst iprong iof ithe iPE itest ioutlined iabove, ia icorporation imust ioperate iin ia itarget icountry ithrough ia ifixed iplace iof ibusiness ito icreate ia iPE. iA ifixed iplace iof ibusiness ihas ibeen idefined ito iinclude ithe ifollowing itypes iof iphysical ilocations:

1. Place iof imanagement

2. Branch ior ian ioffice

3. Factory

4. Workshop

A imine, ioil, ior igas iwell, iquarry, ior iany iother iplace iwhere inatural iresources iare iextracted

However, ithere iare iexceptions ito ithese igeneral itypes iof ilocations ithat ido inot iconstitute ia iPE ifor itreaty ipurposes. iThe iexceptions iare ias ifollows:

a. Use iof ia ifacility isolely ifor ithe ipurpose iof istorage, idisplay, ior idelivery iof igoods ior imerchandise iowned iby ithe icorporation

b. Maintenance iof ia istock iof igoods ior imerchandise ibelonging ito ithe ienterprise isolely ifor ithe ipurposes iof istorage, idisplay, ior idelivery

c. Maintenance iof ia istock iof igoods ior imerchandise ibelonging ito ithe ienterprise isolely ifor ithe ipurpose iof iprocessing iby ianother ienterprise

d. Maintenance iof ia ifixed iplace iof ibusiness isolely ifor ithe ipurpose iof ipurchasing igoods ior imerchandise i(or icollecting iinformation) ifor ithe ienterprise

e. Maintenance iof ia ifixed iplace iof ibusiness isolely ifor ithe ipurpose iof icarrying ion, ifor ithe ienterprise, iany iother ipreparatory ior iauxiliary iactivity

f. Maintenance iof ia ifixed iplace iof ibusiness isolely ifor iany icombination iof ithe iactivities ilisted iabove

Based iupon ithe iforegoing, ia icorporation ihas imany ioptions ifor idoing ibusiness iin ia itarget icountry iwithout itriggering ia iPE ifor itreaty ipurposes. iThe ianalysis iis ihighly ifact-specific ifor ieach icase, iand ithe itreaty ilanguage imay ivary idepending iupon ithe itwo icountries iinvolved iin ithe ianalysis.

A iPE imay ialso ibe icreated iin ia itarget icountry iif ia icorporation ioperates iin ithat icountry ithrough ia idependent iagent. iTypically, itreaties iwill iprovide ithe ifollowing igeneral ilanguage iaddressing ithe iuse iof iagents iin ia itarget icountry:

An ienterprise iof ia icontracting istate ishall inot ibe ideemed ito ihave ia ipermanent iestablishment iin ithe iother icontracting istate imerely ibecause iit icarries ion ibusiness iin ithat iother icontracting istate ithrough ia ibroker, igeneral icommission iagent, ior iany iother iagent iof ian iindependent istatus, iprovided ithat isuch ipersons iare iacting iin ithe iordinary icourse iof itheir ibusiness. iHowever, iwhen ithe iactivities iof isuch ian iagent iare idevoted iwholly ior ialmost iwholly ion ibehalf iof ithat ienterprise, ihe/she iwill inot ibe iconsidered ian iagent iof ian iindependent istatus iwithin ithe imeaning iof ithis iparagraph iif iit iis ishown ithat ithe itransactions ibetween ithe iagent iand ithe ienterprise iwere inot imade iunder iarm’s-length iconditions.

Typically, ithe ianalysis ito idetermine iwhether ian iagent iis iworking ias ian iindependent iagent ican ibe idetermined iby iexamining iwhether ithe iagent iis:

1. Acting iin ithe iordinary icourse iof itheir ibusiness

2. Economically iindependent ifrom ithe ihome icountry icorporation ithat ihas icontracted ifor itheir iservices

3. Legally iindependent ifrom ithe ihome icountry icorporation ithat ihas icontracted ifor itheir iservices.

Further, iwhen iexamining ithe iagency irelationship, iit iis ihelpful ito ialso iidentify ithe icategory iof ithe iagent ithat ihas ibeen ihired iby ithe ihome icountry icorporation. iFor iexample, iagents ican ibe iconsidered iany ione iof ithe ifollowing:

1. An iimporter ior idistributing iagent

2. A igeneral isales icommission iagent

3. A iconsignment iagent

Each itype iof iagent imust ialways ibe ioperating iin ithe iordinary icourse iof itheir ibusiness i– iand imust imeet ithe ieconomic iand ilegal iindependence itests ito iprotect ithe ihome icountry icorporation ifrom ibeing iconsidered ias ioperating ia ibusiness ithrough ia ipermanent iestablishment iin ithe itarget icountry. iIn iall icases, iconsideration iof ithe iissues idiscussed iabove imust ibe imade iwhen iany iclient ior ipotential iclient iis iexpanding itheir ioperations iinto ia iforeign icountry.