Sweden may have, as of 1/1/2021 new economic employer rules vs. the current rules of legal employer. If the legislation is passed as proposed, there will be an increased governance role, and complexity, for employees visiting Sweden for which the local business may derive benefits therefrom.
ey-tax-alert-2020-2241-eyg006367.pdf
India’s Central Board of Direct Taxes has published a report for comments, due by May 18th.
The Committee has recommended a mixed or balanced approach (“fractional apportionment”) that allocates profits between the jurisdiction where sales take place and the jurisdiction where supply is undertaken. India’s position is that such approach is acceptable in other tax treaties. However, the risk of double taxation is present if this approach is not adopted by other countries. Additionally, the approach differs from the OECD approach, which then introduces more complexity for all multinationals with Indian operations.
India is known for its long appeals, and different approaches to its fisc. Accordingly this report should be reviewed, with a possibility to comment, prior to further actions. This report, and methodologies, will also be closely followed by other countries in this complex and subjective area of PE profit allocations.
EY’s Global Tax Alert provides additional details, for reference.
The Italian Budget has enacted a 3% web tax, and a new PE definition based on economic, vs. physical, presence.
The Tax is due by the buyers of the above services unless the supplier declares in the invoice that it has not reached the threshold of 3,000 transactions in the calendar year.
The PE definition goes beyond the OECD’s intent, and will certainly lead to additional disputes in Italy and other countries developing such a subjective measure that also attracts double taxation.
EY’s global tax alert provides additional details as reference.
Click to access 2017G_07179-171Gbl_Italy%20enacts%20Web%20Tax%20and%20new%20PE%20definition.pdf
India’s Ministry of Finance has issued draft guiding principles for determining the place of effective management (POEM). The Finance Act of 2015 contained provisions providing for the significant change in determining POEM, to be effective April 2016. The guidelines have a comment period until 2 January 2016; a link to the guidelines is provided:
Click to access POEM-note-for-uploading.pdf
The guidelines present subjective determinations of determining POEM based on substance over form and a recurring annual test. There are presumptions, such as location for a majority of Board meetings, with exceptions based on facts and circumstances.
As drafted, the new guidelines present increased uncertainty for multinationals having any operations or services with Indian residents, thus this latest report should merit high priority due to the April 2016 effective date, as well as brief period provided for comments.
Kuwait’s Department of Inspections and Tax Claims (DIT) has introduced its interpretation of a Virtual Service PE, notwithstanding its nonconformity with the physical presence standard and its double tax treaties in accordance with OECD’s Model Convention.
Unfortunately, this concept is not new in the Middle East and it is hoped that other countries will not follow this breakaway interpretation.
EY’s Global Tax Alert provides additional details into this development:
Key observations:
The immediate implication of the DIT’s current approach to a “Virtual Service PE” is that the applicability of tax treaty-based income tax exemptions with respect to cross-border services has become highly uncertain.
Accordingly, all legal agreements and provision for services to Kuwait (disregarding the physical standard) should be reviewed for potential disputes based on a Virtual Services PE argument. Practically, it may also be difficult to obtain tax treaty relief from double taxation.
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:
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.
The European Commission published a package of tax transparency measures on 18 March 2015. The press release and other documents, linked herein for reference, include a tax transparency communication, Council Directive re: automatic exchange of information and Q and A’s of the comprehensive package. Significant initiatives are included in this package addressing corporate tax avoidance and harmful tax competition in the EU, key components of which are highlighted. http://europa.eu/rapid/press-release_IP-15-4610_en.htm http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transparency/com_2015_136_en.pdf http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transparency/com_2015_135_en.pdf http://europa.eu/rapid/press-release_MEMO-15-4609_en.htm Press release:
Tax Transparency proposal:
Council Directive (amending Directive 2011/16/EU) re: automatic exchange of information:
Q and A’s:
The EU Tax Transparency Package is required reading for all MNE’s and other interested parties, as it is an ambitious effort to provide globally consistent procedures for the exchange of tax rulings/APAs. Additionally, it is interesting to note the EU’s aggressive actions and timing in its efforts to align, as well as expand, the OECD’s efforts to address BEPS Action Items. These actions are also intended to be a standard for global setting in the new era of international tax transparency. As a Best Practice, the 10-year look-back provision for rulings implies that MNE’s should have a similar central database for prior, and future, cross-border rulings. Additionally, this automatic exchange is another element of consideration prior to formally requesting a tax ruling.
Tax Executives Institute, Inc. (TEI) has provided comments in response to OECD’s BEPS Action 7: Preventing the Artificial Avoidance of PE Status.
Key observations:
TEI’s commentary is well written and poses practical arguments that should be considered by the OECD. Accordingly, it is a document that should be required reading for all tax practitioners involved in transfer pricing. The proposed changes will also affect other aspects of transfer pricing and BEPS Actions that will be finalized this year.
OECD has published the “only” response received for its work on BEPS Action 7 (Artificial Avoidance of PE Status) from a Chartered Accountant in India, outlining strategies that may result in the artificial avoidance of PE status re: base erosion and profit shifting. The comment discusses a few measures generally adopted by multinationals to avoid PE in the source jurisdiction. The link is provided herein for reference:
The examples, and short references to the comments, detail the following “artificial measures” to avoid PE:
As PE is a hot topic that is being undertaken by the OECD, this comment should be reviewed, especially due to the fact that it is the only response received.
A Permanent Establishment (PE) risk review is an integral component of a global Tax Risk Framework, increasing in importance with issuance of the OECD Base Erosion and Profit Shifting (BEPS) Action Plan. The PE risk review should be monitored on a recurring basis against the backdrop of current and future developments. The OECD and UN Model Conventions, with related Commentaries, provide insight into the development and current state of international PE guidelines. The Conventions provide a useful framework to document specific PE criteria, and exceptions thereto, for risk analysis.
Action 6 (Prevent Treaty Abuse) of the BEPS Action Plan states that the definition of PE must be updated to prevent abuses. Action 7 (Prevent the artificial avoidance of PE status) provides additional PE initiatives. Actions 6 and 7 are designed to implemented by September 2014 and September 2015, respectively. It will be paramount to note any changes in the “preparatory or auxiliary” exception. A link to the BEPS Action Plan is hereby provided for reference: http://www.oecd.org/ctp/BEPSActionPlan.pdf
Article 5 of the OECD Model Convention provides an outline for PE determination, including a “fixed place of business” standard, building site or installation project criteria, the “preparatory or auxiliary character” exception, dependent agent rules and further exceptions for activities of an independent agent and related entities. The OECD Model Convention can be accessed at: http://www.oecd.org/tax/treaties/oecdmtcavailableproducts.htm
The OECD Commentaries are required reading to fully comprehend the history, and intended meaning, of Article 5. Paragraph 2 of the Commentary provides an outline for determination of a “fixed place of business,” consisting of (i) the existence of a “place of business,” (ii) this place of business must be “fixed,” and (iii) the carrying on of the business through this fixed place of business. Paragraph 24 of the Commentary states that , for application of the “fixed place of business” rule, “the decisive criterion is whether or not the activity of the fixed place of business in itself forms an essential and significant part of the activity of the enterprise as a whole.” Paragraph 33 further provides that “the authority to conclude contracts must cover contracts relating to operations which constitute the business proper of the enterprise.”
The attached reference provides access to the UN Model Convention, Letter from India (13 Aug 2012), revised commentary on existing Article 5 and definition of PE for comprehensive understanding of the current PE Article. The UN Model Convention contains an Introduction, Part One (including the Articles), and Part Two with Commentaries. Paragraph 20 of the Commentaries states that the Commentaries on the Articles are regarded as part of the UN Model Convention, along with the Articles themselves. Most importantly, Part Two cites differences of the UN and OECD Model Conventions, such as the UN inclusion of a services standard, exceeding 183 days in any 12-month period, that is not within the OECD guidelines. http://www.un.org/esa/ffd/tax/unmodel.htm
Best Practice ideas for outlining PE risk include:
The above Best Practices should be combined with Best Practice ideas in former posts:
PE determination is increasing in importance in today’s changing tax world, thus a detailed risk matrix is essential to determine current potential risk areas, as well as provide valuable information to assess proposed changes by the OECD and/or UN.
http://www.pwc.com/gx/en/tax/publications/permanent-establishments.jhtml
PwC has published results from a survey of more than 200 multinationals in Europe and the U.S., focused on Permanent Establishment (PE) challenges and trends.
Survey results include the following:
My prior posts encompassing PE trends and Best Practices should be reviewed, including 14 April PE Risks and Best Practices, 24 April Global Mobility Alignment, 11 May and 20 May Branch activity risks.
Examples of Best Practices:
PE risk is still increasing, thus additional focus should be directed to minimize this risk and integrate controls into the Tax Risk Framework.
http://www.reuters.com/article/2013/05/16/us-google-britain-tax-idUSBRE94E0WL20130516
In continuing verbal encounters by Google UK before the Parliament’s Public Accounts Committee (PAC), it is interesting to note the following in the above article, supplemented by similar language in the related articles cited below:
This arduous lesson in reputational risk reinforces the need to ensure Best Practices are in place for PE, as posted in a prior blog.
It is a very interesting point that LinkedIn profiles were reviewed to further examine potential sales activities carried out in the UK. A company cannot control the social network profiles of its employees, although it should be very clear in everyone’s job description what is, and is not, allowable for marketing or sales activities. The Do’s and Don’ts List should be signed annually as a reminder to employees of their responsibilities and limitations in scope.
A company with significant Branch activities should be reviewing how written statements, including emails, are communicated in discussions of sales, market support or promotional activities.
The statement “We are selling, but not closing” brings a substance vs. form argument into the subjective definition of PE, an argument that is not helpful in forming objective arguments by the company or tax authorities. Therefore, a company should examine its Best Practices to increase its objective PE evidence, in substance and form, in preparation for controversy.
Does your Tax Risk Policy include any statements re: whistleblower activity, and how such activity should be addressed?
Finally, a company should conduct an annual audit of its significant Branch activities, in possible coordination with internal audit, to further minimize its PE (and reputational) risk on an annual basis.
http://news.yahoo.com/uk-lawmakers-set-date-google-ernst-young-tax-155316417.html
As this news has been widely reported, this controversy highlights the need to aggressively govern the activities of significant Branches worldwide. This issue is a reminder in today’s tax environment of the necessity for diligence and governance for Branch operations. The following ideas are presented for review and comment.
It will be interesting to track the activities of this controversy and analyze how to further minimize risks for Branch activities.
Permanent Establishment (PE) risk is receiving increased visibility around the world, in established countries and emerging markets. Therefore, have you increased your focus to strategize Best Practices to minimize this risk? The following ideas are presented for consideration:
Strategizing Multinational Tax Risks 