Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘permanent establishment’

OECD: PE guidance

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.

Click to access 2018G_01843-181Gbl_OECD%20guidance%20on%20attribution%20of%20profits%20to%20PE%20under%20BEPS%20Action%207.pdf

Category:

OECD

Tagged with:

UN: TP Manual for Developing Countries

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.

Click to access UN-2017-Manual-TP.pdf

 

Category:

OECD / UN

Tagged with:

PE & Global Mobility partner

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.  

 

 

Category:

Tax Risk Management

Tagged with:

EU Anti-Tax Avoidance Package: PPT

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.  

 

 

Category:

OECD

Tagged with:

S. Africa: Draft notice on “reportable arrangements”

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.

Click to access 2015G_CM5521_South%20Africa%20issues%20draft%20notice%20on%20reportable%20arrangements.pdf

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.

Category:

Transfer Pricing

Tagged with:

BEPS Action 7 / PE: TEI’s comments

Tax Executives Institute, Inc. (TEI) has provided comments in response to OECD’s BEPS Action 7: Preventing the Artificial Avoidance of PE Status.

Click to access TEI%20Comments%20-%20OECD%20BEPS%20Action%207%20PE%20-%20FINAL%20to%20OECD%2023%20December%202014.pdf

Key observations:

  • 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.

Category:

OECD / UN, PE, Transfer Pricing

Tagged with:

Cooperative Compliance: Best Practices re: Global Mobility

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.

Click to access pwc-cooperative-compliance-global-mobility-tax-policy.pdf

Key observations:

  • 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.

Category:

Tax Risk Management

Tagged with:

PE Best Practices Risk Review: BEPS Action Plan, OECD & UN Model Conventions

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:

  • Documenting potential significant PE risks by legal entity, with specific reference to the PE attribute that attracts such risk, such as a fixed place of business or dependent agent.
  • Outlining availability of the preparatory or auxiliary character exception for potential risks.
  • Inclusion of objective and subjective evidence that provides defense for a potential PE determination, including wording from the applicable Convention and Commentaries.
  • Tools available to reduce double taxation upon determination of a PE, such as the Mutual Agreement Procedure (MAP).

The above Best Practices should be combined with Best Practice ideas in former posts:

  • 14 April PE Risks: Best Practices for Awareness & Planning
  • 14 July: PwC PE survey: Trends & Challenges

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.

Category:

OECD / UN, PE, Tax Risk Management, Transfer Pricing

Tagged with:

PwC PE survey: Trends & Challenges

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:

  • 86% cite increased mobility as a significant trend in triggering PE risk.
  • Difficulty in monitoring business activities, after PE guidance is provided.
  • Do’s and Don’ts provisions are hard to manage.
  • Audit readiness checks should be conducted to reduce PE risk.
  • Tax authorities are exhibiting more aggressiveness in assertions of PE, primarily focused in Europe.
  • Site visits and employee interviews are techniques used more often by tax authorities to identify risks.

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:

  • Confirmation of PE awareness and controls annually by CFO’s / Business Leaders, including Branches and emerging markets
  • PE template to facilitate audit readiness checks
  • PE internal reference guide
  • PE workshops with Internal Audit, Global Mobility and Business Leaders discussing examples of PE and addressing adequacy of controls
  • Discussion of PE cases in the media with regional and global tax teams to accurately and timely inform business leaders

PE risk is still increasing, thus additional focus should be directed to minimize this risk and integrate controls into the Tax Risk Framework.

Category:

PE, Tax Risk Management

Tagged with:

Global Mobility & International Tax: Alignment for Best Practices

Attached for reference is an informative Global Mobility presentation, inclusive of tax risk components.

Apart from Permanent Establishment (PE) risk, among others, I want to focus on the integration of International Tax and Global Mobility, with the following thoughts:

  • Are the International Tax and Global Mobility functions aligned to address tax risks and opportunities?  Are there regular meetings, information sharing and discussions of strategies, risks and opportunities?
  • Are PE and related tax risks explained and discussed with Global Mobility in recurring training programs?
  • Are International Tax personnel familiar with legal vs. economic employer concepts and other related mobility risks?
  •  Should there be dotted line and/or direct reporting structures?
  • Are there red flags/alerts upon assignments/transfers of Regional/Global Sales personnel to ensure PE is not created?
  • Are the legal entities to which personnel are assigned in existence?
  • Should someone with international tax expertise be placed on the Global Mobility Team to minimize potential risks?
  • How is Global Mobility aware of new trends, risks and opportunities, especially re: international tax?
  • Is Secondment and utilization of Double Tax Treaty benefits aligned?
  • How are assignments to new markets executed?  Is International Tax involved in the beginning prior to execution?
  • Are there specific contacts in Legal, International Tax and Global Mobility to communicate potential issues?
  • Are there cross-functional training programs to highlight new issues, discuss risk gaps and Best Practices?

I welcome your ideas.

Category:

Tax Risk Management

Tagged with:

PE Risks: Best Practices for Awareness & Planning

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:

  • Coordination of employee transfers/assignments to understand new roles and responsibilities, legal entities, etc.
  • PE global training to increase awareness, collaborating with the Human Resource function.
  • Review tax treaties for all business changes to understand PE triggers and exceptions.
  • Utilizing special purpose entities to centralize, or isolate, potential risks.
  • Developing a Do’s and Don’ts list to discuss with the business; attach to Job Descriptions, as applicable.
  • Formal PE technical training, at least annually, for all employees having international tax responsibilities.
  • If consideration of PE risk is coordinated by external advisors, develop a collaboration plan to review regularly.
  • “Presence” test PE safe harbor, dependent on treaty: Who is counting the days and coordinating related steps of a project?
  • “Preparatory & Auxiliary” PE treaty exception: review Form vs. Substance on a recurring basis.
  • Develop PE expertise and clarify roles of internal staff and external advisors.
  • Proactive vs. reactive PE determinations, understand when a proactive PE determination may be beneficial.
  • Follow PE trends of aggressive jurisdictions with scenario planning.
  • Collaborate with the business to understand upcoming strategies that may introduce new PE risks.
  • Review “Branch” activities annually to determine if they exceed allowable actions in the respective countries.
  • Establish a collaborative process for entry into new countries to ensure tax coordination and risk identification.
  • Ensure a communication protocol is established for response to PE allegations that are made public.
  • Following current events for OECD and UN model conventions, as well as related commentaries
  • Identification, with mitigating controls, in tax risk  and ERM framework

Category:

PE

Tagged with:

%d bloggers like this: