Permanent establishment

Last updated

A permanent establishment (PE) is a fixed place of business that generally gives rise to income or value-added tax liability in a particular jurisdiction. The term is defined in many income tax treaties and in most European Union Value Added Tax systems. The tax systems in some civil-law countries impose income taxes and value-added taxes only where an enterprise maintains a PE in the country concerned. [1] Definitions of PEs under tax law or tax treaties may contain specific inclusions or exclusions.

Contents

History

The concept of PE emerged in the German Empire after 1845, culminating with the German Double Taxation Act of 1909. [2] Initially, the objective was to prevent double taxation between Prussian municipalities, and this was extended to the entire German federation. [2] In 1889, the first bilateral tax treaty, including the concept of PE, was concluded between the Austro-Hungarian Empire and Prussia, marking the first time the concept was used in international tax law.First tax treaty of 1899 After years of preparatory works, in 1928, the League of Nations developed a model to tackle cross-border double taxation and to counter tax evasion. [2] Since then, an extensive network of bilateral tax treaties was gradually established, particularly through the influence of the OECD Model Tax Convention, [3] where this concept persisted. [2]

Types

In the OECD Model Tax Convention, essentially three types of PEs can be construed: [3]

The UN Model Tax Convention, which gives greater consideration to developing countries, adds what is known as a service PE in article 5(3)b. [4] Some countries, such as Saudi Arabia, have been trying to extend the concept of service PE into a virtual service PE. [5]

Under the Base Erosion and Profit Shifting project being developed by the OECD and endorsed by the G20, [6] a new nexus based on significant digital presence is being considered under Action 1, aimed at Addressing the Tax Challenges of the Digital Economy. [7]

Fixed place of business

The starting point for determination if a PE exists is generally a fixed place of business. The definition of PE in article 5 of the OECD Model Income Tax Treaty [8] is followed in most income tax treaties. [9]

The commentary indicates that a fixed place of business has three components:

The requirements of what constitutes a PE within the scope of a particular treaty depend on what interpretation a particular country places on that term, in context of the text of that treaty. As per Article 3 of the Vienna Convention on the Law of Treaties, no one is entitled to claim rights under a particular treaty unless otherwise authorised by the contracting state. Therefore, if a particular contracting state places a different meaning on the term 'permanent establishment' than what the taxpayer seeks to place, the taxpayer would be left with virtually no remedy within that state, other than to seek a mutual agreement to that dispute with the other contracting state to that treaty.

Indicative list of permanent establishments

The OECD Model Tax Convention includes a short indicative list of prima facie PEs. These, however, are not automatically PEs as the requirements set out, namely, for a fixed place of business PE must be met. [13] The list is as follows:

Specifically excluded places

Many treaties explicitly exclude from the definition of PE places if certain activities are conducted. [14] Generally, these exclusions do not apply if non-excluded activities are conducted at the fixed place of business. Among the excluded activities are:

Other specific provisions

Construction or Project PE

Many treaties provide specific rules with respect to construction sites. Under those treaties, a building site or construction or installation project constitutes a PE only if it lasts more than a specified length of time. The amount of time varies by treaty. [15]

Agency PE

In addition, the activities of a dependent agent [16] may give rise to a PE for the principal. [17] Dependent agents may include employees or others under the control of the principal. A company is generally not considered an agent solely by reason of ownership of the agent company by the principal. [18] However, activities of an independent agent generally are not attributed to the principal. [19]

Service PE

Some treaties deem a PE to exist for an enterprise of one country performing services in the other country for more than a specified length of time [20] or for a related enterprise. [21]

BEPS Action 7 and 15

In October 2015, the OECD released the final reports on the Base Erosion and Profit Shifting (BEPS) project. Action 7 was targeted at Preventing the Artificial Avoidance of Permanent Establishment Status and proposes a large number of changes that are set to be included in the next version of the OECD Model Tax Convention. The OECD expects many of these changes to be applied to currently existing tax treaties through the work based on Action 15 on Developing a Multilateral Instrument to Modify Bilateral Tax Treaties. [22] A large number of countries are involved in the negotiations that are expected to be concluded by the end of 2016. [23]

The final report on Action 7 proposes substantial changes to the definition of Agency PE and stricter requirements to the exclusions provision: [24]

"These changes will ensure that where the activities that an intermediary exercises in a country are intended to result in the regular conclusion of contracts to be performed by a foreign enterprise, that enterprise will be considered to have a taxable presence in that country unless the intermediary is performing these activities in the course of an independent business.

The changes will also restrict the application of a number of exceptions to the definition of permanent establishment to activities that are preparatory or auxiliary nature and will ensure that it is not possible to take advantage of these exceptions by the fragmentation of a cohesive operating business into several small operations; they will also address situations where the exception applicable to construction sites is circumvented through the splitting-up contracts between closely related enterprises."

Related Research Articles

An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them. Income tax generally is computed as the product of a tax rate times the taxable income. Taxation rates may vary by type or characteristics of the taxpayer and the type of income.

Multinational corporation Corporation operating in multiple countries

A multinational company (MNC) is a corporate organization that owns or controls production of goods or services in at least one country other than its home country. Black's Law Dictionary suggests that a company or group should be considered a multinational corporation if it derives 25% or more of its revenue from out-of-home-country operations. However, a firm that owns and controls 51% of a foreign subsidiary also controls production of goods or services in at least one country other than its home country and therefore would also meet the criterion, even if that foreign affiliate generates only a few percent of its revenue. A multinational corporation can also be referred to as a multinational enterprise (MNE), a transnational enterprise (TNE), a transnational corporation (TNC), an international corporation, or a stateless corporation. There are subtle but real differences between these terms.

In taxation and accounting, transfer pricing refers to the rules and methods for pricing transactions within and between enterprises under common ownership or control. Because of the potential for cross-border controlled transactions to distort taxable income, tax authorities in many countries can adjust intragroup transfer prices that differ from what would have been charged by unrelated enterprises dealing at arm’s length. The OECD and World Bank recommend intragroup pricing rules based on the arm’s-length principle, and 19 of the 20 members of the G20 have adopted similar measures through bilateral treaties and domestic legislation, regulations, or administrative practice. Countries with transfer pricing legislation generally follow the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations in most respects, although their rules can differ on some important details.

Many countries have entered into tax treaties with other countries to avoid or mitigate double taxation. Such treaties may cover a range of taxes including income taxes, inheritance taxes, value added taxes, or other taxes. Besides bilateral treaties, multilateral treaties are also in place. For example, European Union (EU) countries are parties to a multilateral agreement with respect to value added taxes under auspices of the EU, while a joint treaty on mutual administrative assistance of the Council of Europe and the Organisation for Economic Co-operation and Development (OECD) is open to all countries. Tax treaties tend to reduce taxes of one treaty country for residents of the other treaty country to reduce double taxation of the same income.

A wealth tax is a tax on an entity's holdings of assets. This includes the total value of personal assets, including cash, bank deposits, real estate, assets in insurance and pension plans, ownership of unincorporated businesses, financial securities, and personal trusts. Typically, liabilities are deducted from an individual's wealth, hence it is sometimes called a net wealth tax. This is in contrast to other tax plans such as an income tax, which is in use by countries like the United States. Wealth taxation plans are in use in many countries around the world and seek to reduce the accumulation of wealth by individuals.

Double taxation is the levying of tax by two or more jurisdictions on the same income, asset, or financial transaction.

Gross fixed capital formation

Gross fixed capital formation (GFCF) is a macroeconomic concept used in official national accounts such as the United Nations System of National Accounts (UNSNA), National Income and Product Accounts (NIPA) and the European System of Accounts (ESA). The concept dates back to the National Bureau of Economic Research (NBER) studies of Simon Kuznets of capital formation in the 1930s, and standard measures for it were adopted in the 1950s. Statistically it measures the value of acquisitions of new or existing fixed assets by the business sector, governments and "pure" households less disposals of fixed assets. GFCF is a component of the expenditure on gross domestic product (GDP), and thus shows something about how much of the new value added in the economy is invested rather than consumed.

International taxation is the study or determination of tax on a person or business subject to the tax laws of different countries, or the international aspects of an individual country's tax laws as the case may be. Governments usually limit the scope of their income taxation in some manner territorially or provide for offsets to taxation relating to extraterritorial income. The manner of limitation generally takes the form of a territorial, residence-based, or exclusionary system. Some governments have attempted to mitigate the differing limitations of each of these three broad systems by enacting a hybrid system with characteristics of two or more.

The criteria for residence for tax purposes vary considerably from jurisdiction to jurisdiction, and "residence" can be different for other, non-tax purposes. For individuals, physical presence in a jurisdiction is the main test. Some jurisdictions also determine residency of an individual by reference to a variety of other factors, such as the ownership of a home or availability of accommodation, family, and financial interests. For companies, some jurisdictions determine the residence of a corporation based on its place of incorporation. Other jurisdictions determine the residence of a corporation by reference to its place of management. Some jurisdictions use both a place-of-incorporation test and a place-of-management test.

In economics, personal income refers to an individual's total earnings from wages, investment enterprises, and other ventures. It is the sum of all the incomes received by all the individuals or household during a given period. Personal income is that income which is received by the individuals or households in a country during the year from all sources. In general, it refers to all products and money that you receive.

Taxation represents the biggest source of revenues for the Peruvian government. For 2016, the projected amount of taxation revenues was S/.94.6 billion. There are four taxes that make up approximately 90 percent of the taxation revenues:

The tax legislation of Azerbaijan is comprised by the Constitution of Azerbaijan Republic, the Tax Code and legal standards which are adopted herewith. The taxes levied in Azerbaijan can be generally broken down into 3 main types: state taxes, taxes of autonomy republic and local (municipal) taxes. State taxes include the following: personal income tax, corporate tax, value added tax, excise tax, property tax, land tax, road tax, mineral royalty tax and simplified tax. Taxes of autonomy republic are the same as state taxes but levied in Nakhichevan Autonomous Republic.

This article covers the best practices and needs for reform in entrepreneurship policies in Egypt.

Formulary apportionment, also known as unitary taxation, is a method of allocating profit earned by a corporation or corporate group to a particular tax jurisdiction in which the corporation or group has a taxable presence. It is an alternative to separate entity accounting, under which a branch or subsidiary within the jurisdiction is accounted for as a separate entity, requiring prices for transactions with other parts of the corporation or group to be assigned according to the arm's length standard commonly used in transfer pricing. In contrast, formulary apportionment attributes the corporation's total worldwide profit to each jurisdiction, based on factors such as the proportion of sales, assets or payroll in that jurisdiction.

OECD International economic organisation

The Organisation for Economic Co-operation and Development is an intergovernmental economic organisation with 37 member countries, founded in 1961 to stimulate economic progress and world trade. It is a forum of countries describing themselves as committed to democracy and the market economy, providing a platform to compare policy experiences, seek answers to common problems, identify good practices and coordinate domestic and international policies of its members. Generally, OECD members are high-income economies with a very high Human Development Index (HDI) and are regarded as developed countries. As of 2017, the OECD member countries collectively comprised 62.2% of global nominal GDP and 42.8% of global GDP at purchasing power parity. The OECD is an official United Nations observer.

Transfer mispricing, also known as transfer pricing manipulation or fraudulent transfer pricing, refers to trade between related parties at prices meant to manipulate markets or to deceive tax authorities. The legality of the process varies between tax jurisdictions; most regard it as a type of fraud or tax evasion.

A patent box is a special very low corporate tax regime used by several countries to incentivise research and development by taxing patent revenues differently from other commercial revenues. It is also known as intellectual property box regime, innovation box or IP box. Patent boxes have also been used as base erosion and profit shifting (BEPS) tools, to avoid corporate taxes.

Base erosion and profit shifting Multinational tax avoidance tools

Base erosion and profit shifting (BEPS) refers to corporate tax planning strategies used by multinationals to "shift" profits from higher-tax jurisdictions to lower-tax jurisdictions, thus "eroding" the "tax-base" of the higher-tax jurisdictions. The Organisation for Economic Co-operation and Development (OECD) define BEPS strategies as "exploiting gaps and mismatches in tax rules".

The OECD G20 Base Erosion and Profit Shifting Project is an OECD/G20 project to set up an international framework to combat tax avoidance by multinational enterprises ("MNEs") using base erosion and profit shifting tools. The project, led by the OECD's Committee on Fiscal Affairs, began in 2013 with OECD and G20 countries, in a context of financial crisis and tax affairs. Currently, after the BEPS report has been delivered in 2015, the project is now in its implementation phase, 116 countries are involved, including a majority of developing countries. During two years, the package was developed by participating members on an equal footing, as well as widespread consultations with jurisdictions and stakeholders, including business, academics and civil society. And since 2016, the OECD/G20 Inclusive Framework on BEPS provides for its 137 members a platform to work on an equal footing to tackle BEPS, including through peer review of the BEPS minimum standards, and monitoring of implementation of the BEPS package as a whole.

Taxes has an important part in the Moroccan economy. The taxes are levied by the government and the organization responsible for tax policy on Morocco is called the “General Management of Taxes”.

References

  1. ↑ For example, Germany taxes non-German companies only on income from a PE.[ citation needed ]
  2. 1 2 3 4 Kobetsky, Michael (2011). "History of tax treaties and the permanent establishment concept". International Taxation of Permanent Establishments. pp. 106–151. doi:10.1017/cbo9780511977855.005. ISBN   9780511977855.
  3. 1 2 OECD (2014). Model Tax Convention on Income and on Capital: Condensed Version 2014. Model Tax Convention on Income and on Capital: Condensed Version. doi:10.1787/mtc_cond-2014-en. ISBN   9789264211155.
  4. ↑ "UN Model Tax Convention (2011)" (PDF).
  5. ↑ "Saudi Arabian tax authorities introduce Virtual Service PE concept". www.ey.com. Retrieved 2016-03-15.
  6. ↑ "About Base Erosion and Profit Shifting (BEPS) - OECD". www.oecd.org. Retrieved 2016-03-15.
  7. ↑ OECD (2015). OECD/G20 Base Erosion and Profit Shifting Project, Addressing the Tax Challenges of the Digital Economy, Action 1 - 2015 Final Report. OECD/G20 Base Erosion and Profit Shifting Project. doi:10.1787/9789264241046-en. ISBN   9789264241022.
  8. ↑ OECD (2014). Model Tax Convention on Income and on Capital: Condensed Version 2014. Model Tax Convention on Income and on Capital: Condensed Version. Article 5 and Commentary. doi:10.1787/mtc_cond-2014-en. ISBN   9789264211155.
  9. ↑ See, e.g., the U.S./UK treaty Archived 2010-05-27 at the Wayback Machine Article 5, which is virtually identical to the OECD Model Article 5. The Nigeria/South Africa treaty Archived 2011-06-29 at the Wayback Machine Article 5, is nearly identical to the OECD Model Article 5, with the addition of a provision clarifying that a fixed place of business used as a sales outlet is a PE, notwithstanding exclusions elsewhere in the article.
  10. ↑ OECD (2014). Model Tax Convention on Income and on Capital: Condensed Version 2014. Model Tax Convention on Income and on Capital: Condensed Version. Commentary 5-6 to Article 5. doi:10.1787/mtc_cond-2014-en. ISBN   9789264211155.
  11. ↑ OECD (2014). Model Tax Convention on Income and on Capital: Condensed Version 2014. Model Tax Convention on Income and on Capital: Condensed Version. Commentary 4 to Article 5. doi:10.1787/mtc_cond-2014-en. ISBN   9789264211155.
  12. ↑ OECD (2014). Model Tax Convention on Income and on Capital: Condensed Version 2014. Model Tax Convention on Income and on Capital: Condensed Version. Commentary 7 to Article 5. doi:10.1787/mtc_cond-2014-en. ISBN   9789264211155.
  13. ↑ OECD (2014). Model Tax Convention on Income and on Capital: Condensed Version 2014. Model Tax Convention on Income and on Capital: Condensed Version. Commentary 12 to Article 5. doi:10.1787/mtc_cond-2014-en. ISBN   9789264211155. This paragraph contains a list, by no means exhaustive, of examples, each of which can be regarded, prima facie, as constituting a PE. As these examples are to be seen against the background of the general definition given in paragraph 1, it is assumed that the Contracting States interpret the terms listed, a “place of management,” a “branch,” an “office” etc in such a way that such places of business constitute a PE only if they meet the requirements of paragraph 1.
  14. ↑ OECD (2014). Model Tax Convention on Income and on Capital: Condensed Version, Model Tax Convention on Income and on Capital: Condensed Version 2014. Model Tax Convention on Income and on Capital: Condensed Version. Article 4 and Commentary thereon. doi:10.1787/mtc_cond-2014-en. ISBN   9789264211155.
  15. ↑ For example, the Canada/Belgium treaty sets this limit as 12 months, as does the OECD Model. By contrast, the US/India treaty treats such a site, project or activities continuing for more than 120 days in any twelve-month period as a PE.
  16. ↑ See Agency (law) for a discussion of the essential characteristics of agent and principal.
  17. ↑ OECD (2014). Model Tax Convention on Income and on Capital: Condensed Version 2014. Model Tax Convention on Income and on Capital: Condensed Version. Paragraph 5 of Article 5 and Commentary 31 to Article 5. doi:10.1787/mtc_cond-2014-en. ISBN   9789264211155.
  18. ↑ OECD (2014). Model Tax Convention on Income and on Capital: Condensed Version 2014. Model Tax Convention on Income and on Capital: Condensed Version. Paragraph 7 of Article 5 and Commentary 40-41 to Article 5. doi:10.1787/mtc_cond-2014-en. ISBN   9789264211155.
  19. ↑ OECD (2014). Model Tax Convention on Income and on Capital: Condensed Version 2014. Model Tax Convention on Income and on Capital: Condensed Version. Paragraph 6 to Article 5 and Commentary 36-39. doi:10.1787/mtc_cond-2014-en. ISBN   9789264211155.
  20. ↑ See, e.g., the United Nations Model Tax Convention Article 5 paragraph 3(b).
  21. ↑ See, e.g., the US/India treaty, supra., Article 5 paragraph 2(l).
  22. ↑ OECD (2015). OECD/G20 Base Erosion and Profit Shifting Project, Developing a Multilateral Instrument to Modify Bilateral Tax Treaties, Action 15 - 2015 Final Report. OECD/G20 Base Erosion and Profit Shifting Project. doi:10.1787/9789264241688-en. ISBN   9789264241671.
  23. ↑ "Multilateral instrument for BEPS tax treaty measures: the Ad hoc Group - OECD". www.oecd.org. Retrieved 2016-03-15.
  24. ↑ "Preventing the Artificial Avoidance of Permanent Establishment Status, Action 7 - 2015 Final Report - en - OECD". www.oecd.org. Retrieved 2016-03-15.
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.