The OECD has published additional guidance on attributing profits to a Permanent Establishment (PE).
The main takeaway from the guidance is the excerpts as follows: The proposed analysis of the examples included in the Report is governed by the authorized OECD approach (AOA) contained in the 2010 version of Article 7. However, the Report is not intended to extend the application of the AOA to countries that have not adopted that approach in their treaties or domestic legislation.
Approx. 13 treaties have this provision, although countries may try to adopt such guidance notwithstanding their legal incapacity to enforce such mechanism.
EY’s Global Tax Alert highlights this significant development, as PE will almost certainly lead to double taxation assuming that Competent Authority will not be filed for or given.
The UN has published the second edition (First edition in 2013) of a transfer pricing manual for developing countries.
The world has changed considerably since 2013, notably affected by BEPS and the OECD’s actions, including collaborating with developing countries. However, the UN notes developing countries may not have the sophistication as other developed countries, and this manual provides valuable insight into the trends in this area.
The transfer pricing practices of Mexico, China and Brazil are also summarized in this edition.
The TP Manual is a “must read” for international tax practitioners to fully understand today’s complex dynamics that do not lead to global consistency or simplification.
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.
Global mobility generally reports through the HR function, thus a silo approach may result without the proactive ability of the tax function to create a cohesive team. The concepts of legal employer, economic employer, intercompany allocations, foreign reporting relationships, contractual arrangements, intercompany agreements, etc. all need to be vetted and challenged for every assignment that may have adverse consequences for the employee and/or the company.
Countries are taking a more aggressive PE approach, thus a standard assignment template and / or agreement may not work in today’s post-BEPS world. India, for example, has very specific rules that dictate a PE without special attention to the control and payment arrangements of the assignment. Assessments may take years to resolve requiring additional cost and time, including the necessity of external advisors.
The organizational structure of significant functions that may cause consequences for a MNE’s tax organization should be reviewed, possibly adding dotted line relationships for global mobility, customs, external communications, etc. At the very least, these related functions should be discussing these potential issues on a regular basis, while forming a mini-university for learning.
As the subject suggests, the organizational structure and reporting relationships should not follow the same-as-last-year approach due to the BEPS evolution around the world.
The EU Anti-Tax Avoidance Package included a Commission recommendation on the implementation of measures against tax treaty abuse. Specifically, this statement was issued to address artificial avoidance of permanent establishment status as stated in BEPS Action 7 Action Plan.
Re: tax treaties of Member States that include a “principal purpose test” (PPT) based general anti-avoidance rule, the following modification is encouraged to be inserted:
“Notwithstanding the other provisions of this Convention, a benefit under this Convention shall not be granted in respect of an item of income or capita l if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that it reflects a genuine economic activity or that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this Convention.”
This subjective phrase, that applies notwithstanding other provisions of the Convention, has already been used in new treaties and will proliferate as new treaties are drafted by a Member State, not necessarily with another Member State. Thereby, it is important to draft supporting documentation that will provide support for transactions against which it is aimed. This phrase will elicit additional appeals and court cases as to its meaning and / or intent for which non-consistent answers will be provided.
Questions that may be asked re: this statement:
Who is concluding on the reasonableness? What facts are used for such determination?
Which facts and circumstances are relevant?
What are all of the principal purposes of the arrangement or transaction?
How is a benefit measured, directly or indirectly?
What is a genuine, vs. non-genuine, economic activity?
How do you determine if such arrangement is in accordance with the object and purpose of the “relevant provisions” of the Convention?
The phrase is purposefully vague, and thereby subject to inconsistent interpretation.
It is hopeful that tax administrations will use this statement wisely to address egregious transactions rather than ordinary business transactions for which the clear intent was not an evasion of tax. This subjectivity will be important to monitor going forward to further understand subjective enforcement interpretations around the world.
In an ever-increasing tidal wave of transparency proposals, the South African Revenue Service (SARS) issued a draft notice on Reportable Arrangements.
The proposals provides that a Reportable Arrangement must be reported to SARS with 45 business days if:
A nonresident renders technical, managerial or consultancy services (non-defined terms) to a resident, and
The nonresident, its employees, agents or representatives were or will be physically present in S. Africa in rendering such services, and
The expenditure will exceed R10M (approx. $823k) in the aggregate.
Penalties for non-disclosure are applicable, and SARS may use this new mechanism to determine if the non-resident company is registered for income tax or VAT in S. Africa and if there is a permanent establishment (PE) for profit attribution.
This proposal is important to monitor, as it highlights different methodologies for determining what services are being provided by non-resident companies, and if such activities could be designated as a PE with some profits subject to tax.
The UK’s Diverted Profits Tax, Australia’s follow the leader implementation in its General Anti-Avoidance Rules (GAAR) and this disclosure present different processes that tax administrations are looking to capture additional taxes for fiscal growth, incentived by the OECD BEPS Guidelines and objectives, although such Guidelines are not yet finalized.
Tax Executives Institute, Inc. (TEI) has provided comments in response to OECD’s BEPS Action 7: Preventing the Artificial Avoidance of PE Status.
Changes to the definition of a Permanent Establishment (PE) are more welcome in the Model Convention, as recommended, rather than modifying the official commentary.
Continued focus on physical presence in the general definition of a PE is commended.
“The Discussion Draft generally views commissionaires as structured “primarily” to permit MNEs to erode the tax base of the State of sale.” However, there is no mention of the legitimate arrangements for which they are used.
Four amendments are proposed, each of which would likely eliminate the commissionnaire arrangement and increase uncertainty.
The new paragraph 6, broadening the definition of an independent agent, is vague and problematic. This change may result in a subsidiary being a dependent agent of the parent in a limited risk distributor situation, resulting in PE of the parent.
The proposed anti-fragmentation rules for a PE exception are subjective and increase uncertainty.
The Authorized OECD Approach (AOA) for determining a PE’s profits are complex and uncertain.
There are no transition periods or grandfathering provisions for implementation of the new PE definition.
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.
Cooperative compliance is an initiative that is being used more regularly to further efforts by tax administrations for tax transparency. (Refer to 13 June, 2013 post: OECD: A Framework for Co-operative Compliance)
The referenced PwC Tax Policy Bulletin highlights the use of this popular technique for Global Mobility compliance and Best Practices. The Bulletin provides a primer for processes of global mobility compliance and integration of a cooperative compliance approach, including the relevant benefits and risks.
Many countries have the potential to immediately negotiate an agreement to streamline mobile employee compliance.
There is an opportunity to minimize/control risks due to global talent shifts, short-term business travelers / assignees, targeted tax audits, administrative complexity, Permanent Establishment (PE) exposure, etc.
Tax control framework methodologies should be in place for review by tax authorities to review internal processes.
This initiative should be in synergy with the global / regional / country tax strategy for alignment.
This important initiative should be supported by tax expertise for the global mobility function via internal and/or external resources. Accordingly, the impetus of tax transparency, complexity and corporate accountability may provide perfect timing to review the organizational structure of the global mobility function and inherent tax expertise provided, resulting in a Best Practice methodology as part of the global tax risk framework.