Strategizing International Tax Best Practices – by Keith Brockman

Saudi Arabia: Virtual PE

Saudi Arabia’s Department of Zakat and Income Tax (DZIT) has issued internal guidelines defining a creative concept of Permanent Establishment (PE) that is not aligned with its legislated tax law, double tax treaties, OECD or UN Model Conventions.

This new approach may affect treaty-based withholding tax exemptions, as well as refunds.  Saudi Arabian customers may apply the domestic withholding tax rate as a result, thereby requiring the non-resident to apply for a tax refund.

EY’s Global Tax Alert provides additional details about this latest development:

http://www.ey.com/Publication/vwLUAssets/Saudi_Arabian_tax_authorities_introduce_Virtual_Service_PE_concept/$FILE/2015G_CM5642_Saudi%20Arabian%20tax%20authorities%20introduce%20Virtual%20Service%20PE%20concept.pdf

The PE definition, and related legislative thresholds, are being aggressively contested by various countries in an effort to capture additional taxes that have been paid in other jurisdictions.  However, such provisions usually have no offsetting adjustment for simultaneous relief from double taxation.  It is expected to see this trend continue, at least partially incentivized by OECD’s BEPS Acton Plans that have yet to be finalized.

The PE pursuits should be closely monitored, with the expectation that assessments will be issued and further appeals will be necessary to fairly address the issue within the intended legal context of that jurisdiction.

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