With the globalization of world economies,
the concept of Permanent Establishment (PE) has gained significant magnitude both
in
PE
may be defined as a fixed place
of business through which activities of an organization are wholly or partially
carried on. This fixed place of business should be the place
of business of foreign entity itself (at the disposal of such foreign entity) and
not the local entity. Thus the maintenance of fixed place of business only for preparatory
and auxiliary activities has been specifically excluded fr
Types of PE
Even though the basic concept of PE revolves
around the fixed place of business, it may also extend to include an agent who is
legally separate fr
°
Fixed
°
Agency PE
°
In order to determine the type of permanent
establishment, the transaction has to be classified within any of the below mentioned
requisites:
Type of PE |
Requisites |
Fixed |
°
Fixed place of business
°
Business of the foreign enterprise is wholly or partly
carried on through such place
°
Degree of permanence |
|
Agency PE |
°
Authority to conclude contracts on behalf of Foreign
enterprises
°
Secures orders wholly or almost wholly on behalf of
foreign enterprise
°
Regularly delivers goods fr |
|
|
°
Foreign enterprise furnishes or performs services in
°
Through employees or other personnel for specified period. |
Even if the transaction can be classified
in one of the above requisites, certain peculiar transactions can still not be classified
to constitute a PE. For the purpose of removal of such ambiguities, in addition
to the requisites stated above, certain qualifying tests have been defined to ascertain
the correct type of PE with reasonable finality:
Type of PE |
Tests required |
Remark |
Fixed
|
Geographic Test |
Building, premises, installation in
|
Right of usage |
The access and usage of place must
be at the sole discretion and disposal of the foreign enterprise. |
|
|
|
|
Agency PE |
Dependency Test |
It includes legal and econ |
Binding Test |
If the action of an agent who is a
dependent agent legally binds the foreign enterprise and the final decision
to perform a contract does not lie with such foreign enterprise, the binding
test would be satisfied. |
S
Since the law governing the concept of PE
has not been clearly defined, in order to have a precise understanding of taxation
of a foreign entity operating in
The term business
connection is of colossal significance in the concept of PE. If there is no business
connection between a non resident entity and a resident entity, the resident entity
may not be a PE of the non-resident entity, and the resident entity would have to
be assessed to inc
Business connection
is an expression of wide and indefinite import and is different from the expression
business as defined under the Act .Hence the term was being interpreted differently
by different authorities under different circumstances and had been the subject
matter of judicial interpretations by various authorities.
S
°
Maintaining a branch office in
°
Appointing an agent in
°
Erecting a factory in
°
Forming a local subsidiary c
°
Having financial association between a resident and a non-resident
c
Attribution of
profits
Currently, the international tax principles
for attributing profits to a PE are provided in the OECD Model tax treaty; however
a number of bilateral tax treaties adopt features of UN Model Convention. The models
have been briefly discussed in the paragraphs below:
OECD Model
This model provides that only so much of the
profits of an enterprise as are attributable to a PE in a country may be taxed
in that country. It also secures taxing rights of a host country so that profits
of a non-resident enterprise that are not attributable to the permanent establishment
cannot be subject to tax. Working Hypothesis is developed as a preferred approach
for the attribution of profits by the OECD. It has examined the feasibility of treating
a PE as a hypothetical distinct and separate enterprise and has reviewed ways in
which transfer pricing principles could be applied in order to attribute profits
to a PE in accordance with the arm's length principle.
UN Model generally follows the similar principles,
however, the major difference between the two models is that the UN Model extends
source country taxing rights beyond the strict attribution of profit to a PE and
grants a host country the right to tax profits attributable to sales made by the
non-resident enterprise in the countrys territory of goods or merchandise of the
same or similar kind as those sold through that PE.
(Kapil Nayyar is a Fellow member of the Institute and a Partner with Nayyar Maniar & Associates. He has more than 8 years of post qualification experience in Direct Taxes and International Taxation. Kapil is also a Lead Advisor to Promaynov (www.promaynov.com), a firm engaged in providing exclusive practical training programmes to CAs and Lawyers in Direct Tax, Indirect Tax, Audit, M&A and Soft skills.)