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The Concept of Permanent Establishment
The Concept of Permanent Establishment
6 May 2013
Page 1
The concept of PE
Business profits, under Article 7 of the treaty are taxable only if the non resident has a PE in India Concept of PE is used to determine the right of Source State to tax business profits of the foreign enterprise
Existence of PE also enables the Source State to tax capital gains, dividends, interest and royalties that are effectively connected/attributable to such PE
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The concept of PE
Page 3
The concept of PE
Location test
A PE can be constituted under Basic Rule only if all of above conditions are satisfied
Page 5
The concept of PE
The term place of business covers any premises, facilities or installations used for carrying on the business of the enterprise whether or not they are used exclusively for that purpose. Which of these are a place of business?
Residential premises/ Hotel accommodation Office of 3 metres by 6 metres Stall or pitch in the market A computer server located in India
Internet website
Page 6
The concept of PE
Place should be at the disposal of the foreign enterprise for the purpose of its business activities
The foreign enterprise should have the ability to exercise some right or dominion or control The place may be owned, rented or leased;
Legal right to use need not be the sole determinant; factual use or exercise of such right will have a greater bearing
Even illegal occupation could constitute a PE Which of these constitute a PE?
Possession of mailing address without an office, telephone listing or bank account Foreign training agency imparting training to Indian Cos employees in Indian Cos office at the behest of Indian Co Salesman visiting customers office regularly to collect orders
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The concept of PE
Presence to be 'visible' in the other contracting state Usually linked to a geographical location Covers premises as well as tangible assets used for carrying on business
Movable places of business with a temporary fixed location meet the location test
Activities carried on within a defined geographical location could constitute a PE; (eg, a diving offshore vessel functioning within a defined area, dealer selling merchandise from, a mobile van)
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The concept of PE
An isolated activity should not lead to establishment of a fixed base PE as the ingredients of regularity, continuity and repetitiveness are essentially missing
Where the activities are of a recurrent nature, each period during which the place is used needs to be considered in combination with the number of times during which that place is used (which may extend over a number of years)
A place of business may constitute a Fixed Place PE, even though it exists, in practice, only for a very short period of time, where the nature of the business is such that it will only be carried on for that short period of time
OECD Commentary PE normally have not been considered to exist in situations where a business had been carried on in a country through a place of business that was maintained for less than six months
The concept of PE
Page 9
A place of management A branch An office A factory A workshop A mine, an oil & gas well, a quarry or any other place of extraction of natural resources Whether inclusions in 5(2) independent of 5(1) ? Warehouse in relation to person providing storage facilities for others Treaties with Singapore, USA, Mauritius, Netherlands etc A store or premises used as a sales outlet Treaties with USA, Netherlands, Germany etc
Page 11
The concept of PE
Use of facilities solely for storage, display or delivery of goods Maintenance of stock of goods solely for storage, display or delivery Maintenance of stock of goods solely for purpose of processing by another enterprise Maintenance of fixed place of business solely for purpose of purchasing goods, or collecting information Maintenance of fixed place of business solely for purpose of carrying on any activity of a preparatory or auxiliary character solely for combination of any of the above
Page 13
The concept of PE
A fixed place of business which manages an enterprise cannot be preparatory or ancillary. This is true even if it only manages certain areas of operation
Page 14
The concept of PE
Building site or construction or installation project constitutes a PE only if it lasts more than twelve months Building site: not only construction of buildings but also construction of roads, bridges or canals etc, and renovation thereto Twelve month test applies to each individual site or project A building site should be regarded as a single unit, even if it is based on several contracts Site exists from date on which work begins, including any preparatory work It continues to exist until work is completed or permanently abandoned. Should not be regarded as ceasing to exist if work is temporarily discontinued Six month test applies to each individual site or project
The concept of PE
Duration
UN Model
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Type of Projects
Would include:
Construction of buildings Roads, bridges, canals Renovation (involving more than mere decorating) of buildings, roads, bridges, etc Laying of pipelines and excavating and dredging
Page 17
The concept of PE
perform the activity by itself; perform the activity through a separate legal entity; or consider outsourcing that same activity to an agent (resident or not in the host jurisdiction).
The mere absence of an Agency clause in a tax treaty would represent the possibility of avoiding source taxation just by interposing an agent between the foreign enterprise and the local customer
Page 19
The concept of PE
Should be a Person Agent other than an agent of independent status as per Article 5(6) Acting on behalf of an enterprise Has an authority to conclude contracts in a Contracting State
Page 20
The concept of PE
No
No
Yes
No
Yes
Independent Agent
Dependent Agent
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The concept of PE
Independent Agent
a broker,
general commission agent, or any other agent
of an INDEPENDENT status acting in the ordinary course of their business legal and economic independence
Page 22
The concept of PE
Has sufficient authority to bind foreign enterprise and decide final terms Can act independently, without control from the principal Is authorized to negotiate all elements and details of a contract Agency PE would be constituted where approval of contract by foreign enterprise is a mere formality Agent is required to conclude contracts relating to operations which constitute business proper of the enterprise Participation / attendance in mere negotiations of contracts not sufficient to trigger DAPE No signature but negotiation of all elements and details of the contract in a way binding on the enterprise
OECD Position
Signature
Page 23
The concept of PE
A person is regarded as an agent of independent status if he is legally and economically independent of the foreign principal Ordinarily an independent agent does not constitute a PE if he acts in the ordinary course of his business while acting for his principal Legal independence - Agent is not subject to significant control/ instruction by principal with respect to manner in which work is carried out Economic independence - Agent bears entrepreneurial risk associated with his business operations
Key terms
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The concept of PE
Page 25
The concept of PE
Service PE
India- US tax treaty: The furnishing of services, other than included services as defined in Article 12 (Royalties and fees for included services), within a Contracting State by an enterprise through employees or other personnel, but only if (a) activities of that nature continue within that State for a period or periods aggregating more than 90 days within any twelve-month period; or (b) the services are performed within that State for a related enterprise (within the meaning of paragraph 1 of Article 9 (Associated enterprises) Service PE - Conditions
Furnishing of services (other than covered by FTS clause) Within a contracting state Through employees, or other personnel For a period or periods aggregating more than 90 days within 12 month Period of stay or number of days when services are furnished?
Page 26
The concept of PE
Service PE
Most treaties specify a period of 90 days to constitute a Service PE (UAE has a specified period of 9 months); Special clause for Associated Enterprises in some treaties where lower time threshold necessary to constitute Service PE eg USA (1 day), UK(30 days), Singapore (30 days); The concept specifically excludes services covered by Fees for Technical Services (FTS)/ Fees for Included Services (FIS) Article
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The concept of PE
2.
3. 4.
2.
3. 4.
Page 28
The concept of PE
Combination of OECD and UN Model with emphasis on source based taxation consistent with the object and rationale of the UN MC Approach not uniform, differs form treaty to treaty
Service PE clause is found in treaties with USA, UK, Singapore etc but not in treaties with Mauritius, Germany, Netherlands etc Threshold for Service PE for services to related enterprises is 30 days for treaties with UK, Singapore etc; for USA even 1 day will trigger Service PE risk
Treaties with Australia, Germany, Singapore and UK contain securing orders clause and Associated Enterprise clause in their Agency PE definition, which is missing in Treaties with Netherlands, Mauritius etc.
Page 29
The concept of PE
Important principles
Indian Co to exercise full control over the activities of deputed employees Foreign Cos role limited to that of a recruitment agency
Foreign Cos role limited to making employees available to Indian Co does not tantamount to rendering of services by Foreign Co
Foreign Co not involved with details of the work of the employees
Page 31
The concept of PE
Foreign Cos principal business was to provide management and consultancy services to Indian Co and other global affiliates Employees were on the Foreign Co payroll
Page 32
The concept of PE
No revenue generating functions undertaken / significant market risks borne by BPO MS to send staff to India for stewardship activities including :
Briefing MS on standards of service Conducting training sessions for MS staff and Monitoring overall outsourcing operations of MS
Staff of MS not involved in day-to-day management & continue as employees of MS MS to depute staff (on request), to work under BPOs control & supervision Salary of deputed staff to be borne by MS initially
No fixed place of business with a degree of permanence Business of MS not carried on through BPO BPO is an agent of MS carries on activities in India on behalf of MS Legally & economically dependent on MS However, no Agency PE is constituted as:
No agency PE:
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The concept of PE
Salary reimbursed by BPO for MS staff engaged in stewardship activities constitute almost 50 percent of salary costs of BPO
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The concept of PE
Case study
Case studies on PE
Facts
A US Co carrying on business of rendering money transfer services across international borders appoints agents in India for paying the monies to beneficiaries after making identity / credit checks. The agents premises had to display on a board that they are agents of US Co. US Co provides its software to the agents which affords access to the agents to US Cos mainframe computers in USA. Does US Co have a PE in India?
Issue
Page 37
The concept of PE
Case studies on PE
Facts
F co is a company incorporated in UK It was engaged in supplying aero engines and spare parts to India customers F co entered into support service agreement (includes organising events, conferences, business development, maintaining media relations, providing administrative support and co-ordinating technical support) with its wholly owned subsidiary in UK. This wholly owned subsidiary had offices in India (I co) F co reimbursed the entire cost relating to provision of services to I co and also paid service fees to I co Employees of F co frequently visited I co and occupied the premises of I co during such visits Whether F co has PE in India ?
Issues
Page 38
The concept of PE
Case studies on PE
Facts
X Ltd., a company incorporated in Singapore, has established a liaison office in India. LO undertakes following activities for a group company, Y Ltd. (also incorporated in Singapore)
collection of market information and intelligence; meeting potential clients and distributors of products; and promoting companys products.
Issue
Page 39
The concept of PE
Case studies on PE
Facts
F co, a company incorporated in Singapore, engaged in business of promoting golf by organizing golf tournaments in different countries
F co, organized golf tournament in India and paid fees to I co for using the golf course
The golf tournament was organized by hiring independent third parties, i.e. contractors and suppliers Does F co constitute a PE in India
Issues
Page 40
The concept of PE
Case studies on PE
Facts
UK company carrying on business of publishing magazines Indian Co. acting as advertisement concessionaire for a UK company Indian Co. gets 15% commission on gross value of invoices raised by UK company on the Indian client Indian Co. authorized to collect advertisement charged from Indian clients, convert into foreign currency and remit to UK company.
Indian Co. earns around 80% of commission income from UK company and balance from the other clients
Whether Indian Co. constitutes PE of UK company in India under India-UK DTAA?
Issue
Page 41
The concept of PE
Case studies on PE
Facts
A US co is in the business of providing technical services It has a subsidiary in India rendering similar technical services It renders certain services directly to an Indian company from US Whether income would be taxable as per the provisions of Article 7
Issue
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The concept of PE
Thank You
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The concept of PE