Taxation of Business Profits

&
The Concept of PE
IFM - FACULTY OF ECONOMICS AND
MANAGEMENT SCIENCES (FEMS)
Lecture Four
 Agenda
• Business Profits - Taxation
• Understanding PE
• Concept of PE
• Types of PE
• PE exemption
 Business Profits - Taxation
• Key aspects of taxing Business Profits of Non-
Resident in a Country
① Identifying Non-resident person carrying on
Business in the source country and a country in
which a particular non-resident is a resident.
② Tax treaty Framework for taxing Business profits
③ Whether the Non-resident taxpayer carries on
business through a PE in the Source Country.
④ Attribution of Profits to the PE.
⑤ Allocation and enforcement of taxes.
 Business Profits - Taxation
• Key Questions to taxing Business Profits of Non-
Resident in a Country - Information
① Which non-resident carrying on business in the
country?
② Is business carried on through PE?
③ Whether non-resident taxpayer carries on business
activities, meets the threshold for taxation, has
revenue and expenses connected to the PE
④ Whether the price charged for dealings between
the PE and the Non-resident enterprise reflects the
arms’ length principle.
 Taxation of Business Profits
Art. 7 of the TZ – SA DTAA (2005)
“The profits of an enterprise of a CS [SA]
shall be taxable only in that State [SA]
unless the enterprise carries on business in
the other CS [TZ] through a PE situated
therein. If the enterprise carries on
business as aforesaid, the profits of the
enterprise may be taxed in the other State
[TZ] but only so much of them as is
attributable to that PE”
Understanding PE

• PE refers to a non-resident’s business

presence in a particular country sufficiently to
justify that country’s taxation of the
attributable profits.
Understanding PE
For example, If F-Co
establishes a branch in
Dom and makes profits of
$X, then F-Co shall be
taxed in TZ in same way as
it was before it had a
branch (PE).

For example, if F-Co

makes global profits of
$X, then part of it is
contributed by F-Co in
India and part by the
operations in
Tanzania.
Concept of PE
• Under the Int. Law (Tax treaties), PE concept is
used to determine the right of a Contracting
State (CS) to tax the profits of an enterprise of
the other CS.
– i.e whenever source state wants to tax a foreign Cop.
There is a minimum requirement of permanence –
referred to as PE
– If there is a PE i.e. business profits of a F-co are
taxable in the source state
• “Art. 7… the profits that are attributable to the PE as if it
were a separate and independent enterprise, may taxed in
that other state”
Qn: How much of the profits should be taxed?
Concept of PE
Art. 5(1)
Domestic Situation
“For the purposes
of this Agreement,
the term Dar-HQ
"permanent Dom-
establishment" PE
means a fixed
place of business
through which the
business of an
enterprise is wholly
or partly carried
on.”
Concept of PE In international Situation
Art. 5(1)
“For the purposes of T-Co
this Agreement, the
term "permanent
establishment"
means a fixed place
of business through
SA-PE
which the business Ind-PE Can-PE

of an enterprise is
wholly or partly
carried on.”
...the profits of that are attributable to the PE,
as if it were a separate and independent
enterprise, may be taxed in that other state
Types of PE
• Fixed place of business
• Building or construction site and installation
project
• Agent PE
• Service PE
 Fixed Place of Business (1/4)
Conditions or thresholds of PE
• Place of business
– E.g. a facility such as premises or
machinery/equipment
• It must be fixed
– i.e. a distinct place with certain degree of
permanence
• Carrying on of business through it.
 Fixed Place of Business (1/3)
• A branch, an office, a factory, a workshop, a
mine, an oil well,
• Other places of extraction of natural resources
– be-it on-shore or off-shore
Note: what all these places have in common is
1. Place where business is carried on
2. They are fixed
Building or construction site and installation project
(2/4)
• E.g. construction of buildings, roads, brodges,
canal, pipelines, excavating dredging e.t.c
• Installation of complex machines
• On-site planning and supervisions
Note: the 12/6 months test applies to each
individual site or project
 Dependent Agent PE (3/4)
• Is a person acting in a CS on behalf of an
enterprise.
• Conditions:
– Such person has and habitually exercise an
authority to conclude contract on behalf of the
name of the enterprise. Such person’s activities
may constitute a PE in the state where the
activities are performed
 Service PE (4/4)
• Profits from services performed in a state
territory shall be taxable by that state b’se the
profits are sourced in that state regardless the
absence of a fixed place of business
• Conditions
– PE exists if the service provider exists more than
183 days or periods
 PE exemptions
• Auxiliary or Preparatory (Art. 5.4)
– An enterprise shall not have a PE in the other CS if
the activities of the fixed place or the dependent
agent is of preparatory character.
• E.g.
– use of facility soliry for the purpose of storage, display or
delivery of goods or merchandise belonging to the enterprise
– Maintenance of stock of goods or merchandise soliry for the
purpose of processing (raw material) by other enterprise
 Taxation of Business profits & PE
concept in Tanzania

Qn: How Tanzania tax treaty determine the

amount of taxable income of a foreign tax
payer taxable in Tanzania?
 Approach to the Qn
• Determine the way Tz TTs limit TZ tax on
business profits to tax on profits attributable
to a PE in TZ
• Find the meaning of b/profits under TZ-TTs
• Determination of the existence of a PE under
TZ TTs
• Attribution of B/profits to a PE in TZ