The Permanent Establishment In A Post BEPS World
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The BEPS Project has led to unprecedented changes in international taxation rules. In this respect, the recent changes made to the definition of permanent establishment (PE) under BEPS Action 7 target aggressive tax structures used by multinationals enterprises (MNEs). Due to the narrow scope of Article 5(5) and 5(6), taxpayers easily managed to escape the existing definition of PE with the use of tax avoidance strategies, such as commissionaire arrangements. Therefore, some revisions of Action 7 particularly concern the PE threshold provided by Article 5(5) with respect to commissionaire arrangements.
The changes to the permanent establishment definitions were integrated in the 2017 OECD Model Tax Convention and in Part IV of the MLI (Articles 12 to 15). The Multilateral Instrument (MLI) is a flexible instrument that allows jurisdictions to adopt BEPS treaty-related measures to counter BEPS and strengthen their treaty network. The MLI was signed by nearly 90 jurisdictions and about half of the MLI Signatories have so far adopted the MLI articles that implement the permanent establishment changes.
This chapter evaluates the recent OECD Base Erosion and Profit Shifting (BEPS) initiative directed at global digital income, and concludes that tax planning will not be inhibited by any significant extent. Tax planners and academics nevertheless should take into account prospective reforms surrounding permanent establishments, hybrid entities, treaty shopping, transfer pricing and controlled foreign corporations, which may challenge certain practices.
Tom Kwon and Steve Minhoo Kim, of Lee & Ko, discuss recent trends in permanent establishment in the post-BEPS era, and how the South Korean government has tried to address and keep pace with the recent OECD developments and practices, in the midst of an era of unprecedented global change on the international tax scene.
On 5 October 2015, the OECD issued a final report under BEPS Action 7 in relation to preventing the artificial avoidance of permanent establishment (PE) status. This report introduces changes to the OECD Model Tax Convention with the purpose of addressing what the OECD considers as strategies used to avoid having a taxable presence in a country under tax treaties.
As the subject of permanent establishment (PE) becomes more controversial amid the ever-changing rules, multinationals (MNEs) should have a proactive partnership relationship with their global mobility service provider, whether in-sourced or outsourced.
The measures proposed in Action 7 for example are selective by design. Countries can choose whether or not to adopt the updated treaty provisions and commentary when ratifying the multilateral instrument (MLI). Although this selectivity should not directly result in an increase in disputes, it may do so indirectly by increasing the instances in which treaty relief is claimed by a resident of a treaty country that has not adopted the new lower threshold of taxation provided for under Action 7. For example, where a country which adopts the Action 7 proposal when ratifying the MLI (Country A) extends the new understanding of permanent establishment into domestic law. In such circumstances, non-resident enterprises would exceed the threshold for taxation under domestic law in Country A more frequently which could result in greater reliance on the existing (pre-BEPS) permanent establishment provisions.
A permanent establishment (PE) is when a business has an ongoing and stable presence in a country or state outside of its home base and is therefore liable to taxes imposed by that jurisdiction. In short, a PE is a corporation that creates a taxable presence outside of its territory. If a business creates a PE in a country by doing business there that creates local revenue, then the host country can impose local corporate tax rates.
This is an important concept for any corporation that does business in foreign countries to understand. It ultimately decides how much tax you are charged for each country you do business in. Failing to understand permanent establishment can leave taxes unpaid and cause legal issues later.
A service PE includes situations where a company provides managerial technical services to an entity outside of its own home country. This will create a permanent establishment without a physical location in the foreign country.
There are many rewards for companies that create a permanent establishment, but like any reward, risks are also present. Being aware of permanent establishment risk is an important part of global expansion, as it helps avoid mistakes. Below are some permanent establishment risks to be aware of when going global.
Oftentimes, the best thing to do before creating a PE in another country is to talk with a professional. Tax professionals are very knowledgeable about permanent establishments in other countries and can help you make the best decision before you decide to expand your business.
Does the concept of a PE seem familiar No need to hit the panic button. Taking a few steps to legitimize your foreign entity can keep you out of hot water. These steps will also help manage the risks that having a PE carries. These simple considerations are typical next steps upon discovering you have a permanent establishment:
Permanent establishment is caused by a company having a fixed place of business creating revenue in a territory outside of their home country. The business is creating taxable revenue in a country, so they are a permanent establishment that the host country can tax and regulate.
Yes. An individual can have a permanent establishment if they are a dependent agent completing work in another country. When this individual frequently enters into contracts in the name of a company, they are considered a fixed presence of the company in that country.
It is best to get professional advice upon expanding into foreign countries to help determine if your company has created a permanent establishment. This will give you peace of mind, as well as help you manage the risks of creating one. As long as you manage your entities well, your business is likely to thrive even with permanent establishment.
The main aim of this contribution is to make a review and assess the application of BEPS Action 7 recommendations by the tax administration in Poland when determining whether a non-resident enterprise operating in Poland should be considered to have a permanent establishment (PE). The creation of a PE is crucial for taxable presence in Poland and for identifying the scope of the allocated revenues and expenses (taxable income). Changes to the OECD Model have a genuine practical impact on multinational enterprises and tax administrations and thus they need to be closely examined. The considerations serve to prove the hypothesis that Polish tax authorities apply the recommendations of BEPS Action 7 despite the fact that Poland lodged reservations concerning the non-application of Art. 12-14 of the MLI in its entirety. Beyond the legal-dogmatic research the contribution refers directly to the results of an empirical study carried out by the authors in the course of which 88 individual tax rulings issued by the Polish tax authorities were identified and examined.
To add to the uncertainty, what constitutes a permanent establishment under local tax rules will vary from country to country. In general however, PE is judged to exist if an activity carried out by a business in a country results in revenue being generated or value created.
There will also be greater challenges in determining the correct effective tax rate for a portfolio company to be included in the deal model as a result of BEPS. PE managers eager to protect their investments should look to engage with their multi-national portfolio companies to help them to navigate the greater risk and uncertainty in a post-BEPS world. Further, PE managers should be aware that there may potentially be a greater risk of unrecorded liabilities in target companies as a result of potential future BEPS related challenges.
The Cyprus Parliament on June 30 approved the long-awaited amendments to the Cyprus Income Tax Law and new Regulations to introduce Transfer Pricing (TP) documentation compliance obligations (Master File, Cyprus Local File, Summary Table) for Cyprus tax resident persons, and permanent establishments of non-Cyprus tax resident persons situated in Cyprus, that engage in transactions with related parties (Controlled Transactions). A formal Advance Pricing Agreement (APA) procedure has also been introduced. Specific penalties for non-compliance with the new obligations are now in place by an amendment to the Assessment and Collection of Taxes Law. The law amendments and Regulations are effective from the tax year 2022 onwards.
The United States and other countries would benefit by gaining revenues from reductions in base erosion and profit shifting which, according to Action Item 11 on measuring and monitoring BEPS, costs between 4% and 10% of global corporate tax revenues. There have, however, been concerns that the United States risks losing some revenue and companies paying additional taxes if other countries inappropriately increase their taxation of U.S. firms, eventually generating foreign-tax credits that offset U.S. income tax. These effects might occur through changes in the definition of permanent establishment and through the use of CbC data to move to an effective formula-based approach to taxation, which could produce double taxation. At the same time, a uniform set of standards and reporting requirements may be beneficial, as many countries were proceeding to enact unilateral changes and reporting requirements prior to the OECD project.
In addition, some are concerned about the permanent establishment (which generally determines whether a country has any right to tax any profits under an income tax) issues in Action Item 7 and the use of an expanded permane