Nexus Flashcards
Pay rule
his relates to the connecting status of the person (individual or company) who is making the payment. If he or she is connected by way of residence or some other defined factor (eg domicile or incorporation), that state may claim withholding tax on the payment.
Use Rule
This relates to the connecting status of the underlying asset out of which the income arises or is associated. For example, a patent might be registered in a particular state and therefore any income arising is regarded as sourced in that state. The connecting factors here broadly include the situs of the asset or where it is used
Circumstance test to determine residence
The ownership or availability for use of a property (whether permanent, habitual or otherwise)
* The location of close relations
* Habitual or substantial visits to the state
* The location of substantive wealth and possessions
* Performing certain business or employments
Objective numerical test to determine residence
- physical presence of 6 months + in a tax year
- average numbr of days physically present over a span of a number of years
what are the two tests to determine the residence of a company?
- The incorporation test – under whose law is the company incorporated.
- Where the business is essentially managed from – this is more subjective and looks at the facts and circumstances of each case. Such tests can be based on where the board of directors meet (central management and control test) or where the operational management of the company takes place (seat)
Where a company changes its residence status and migrates to a new country, there are a number of issues that need to be considered. What types of issues are at stake?
- sales taxes or stamp duty, registration charges on the sale and purchase of assets
- compliance costs to get approval from the tax authorities - guarantee may be required
- requirement to obtain consent from the ministry of finance
- exit charges
- legal requirement to acquire resident migration (the law might not allow)
- inbound issues for a new resident (e.g., basis problems)
- anti-avoidance legislation
Causes of international double taxation
- source - source conflict
- residence - residence conflict
- source - residence conflict
- conflict of qualifications
what is BEFIT? (2021)
business in Europe framework for income taxation’ - single CIT rulebook to allocate profits between member states
- consultation doc was released in oct 22, a directive proposal is yet to be made - expected in 2023
Imputation System
does take account of the fact that corporation tax has been paid on
the profits that are used to pay dividends. Generally only applies to domestic
shareholdings in local resident companies and effectively imputes the corporate tax, or part of it, as a tax credit to the shareholder.
Capital Export Neutrality (CEN)
CEN requires that the seller/investor faces the same tax rate wherever he sells his
goods/invests capital, thus maximizing the choice of outbound investment opportunities.
CEN is attained in the market place where the company faces the same effective tax rate
in whatever location it may wish to invest its capital
Capital Import Neutrality (CIN)
CIN requires sellers/investors in a particular location to face the same tax rate no matter
where they are located, thus maximising the choice of inbound suppliers for consumers,
and inbound capital investment (savers). It could be said that CIN is based on the ‘source’
principle of taxation.
National Neutrality
From a national perspective the best approach is to tax foreign income (so apply worldwide taxation) but to allow a deduction for foreign taxes against taxable profits (rather than giving a credit or allowing exemption of income).
This would mean that investors would be neutral when considering the pre-tax return on domestic investments, as compared to the return on foreign investments after paying foreign taxes.
Effective Tax Rate Equalisation
the product of the tax rates and tax bases in each
country should produce the same tax burden for a particular taxpayer in relation to a particular economic outcome.
what is anti-fragmentation rule?
Under the anti-fragmentation rule the specific activity and preparatory or auxiliary exceptions will not be available where there is either an existing PE in the local state, or where the collective activities carried on by all the group companies in the local territory (by way of presence in that state, or by residence in that state) are not of a preparatory or auxiliary nature. The 2017 commentary notes at paragraph 79 that in order for this rule to apply at least one of the places where the activities are carried out must constitute a PE, or where this is not the case, the overall activity resulting from the combination of the relevant activities must go beyond what is just preparatory or auxiliary.
Agency PE
added: updated in 2017 such that an enterprise is treated as having a PE where a person habitually concludes contracts on behalf of an enterprise, or where the intermediary ‘habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification’ by the overseas company.
commisionnaire arrangements and PE
In December 2011 a judgement by the Norwegian Supreme Court, in the Dell Products Ireland case (Dell Products v. Staten v/Skatt øst, Case HR-2011-02245-A) found that the Norwegian company (Dell AS) acting as commissionaire did not create a PE for the non-resident principal company (Dell Ireland). Per the facts, the
commissionaire arrangements entered into between Dell AS in its own name (with
clients) did not legally bind the principal. Therefore Dell AS could not be said to
have the authority to conclude contracts in the name of the Irish company.
The Norwegian court referred to the 2010 French Supreme Court case, Zimmer
(France V Zimmer Ltd CE 31/3/2010 304715). Under this case the French Court had held that ‘something additional’ had to be present in the arrangement between the commissionaire and the principal, beyond an ordinary commissionaire agreement, for the principal to be bound legally towards a third party. This was held to be the case in Zimmer regardless of the fact the commissionaire is dependent on the principal.
French subsidiary was considered as a dependeng agent PE of Irish shareholder company
It is notable that a recent French case also looked at the possible position of an
Agency PE, but on an examination of the facts, did decide there was a PE
created by the activities of the ‘agent’ in France. The case Minister for Public
Action and Accounts v Société Conversant International Ltd (24 ITLR 232)
(December 2020) involved an Irish company, which was wholly owned by an
American company. The Irish company carried on digital marketing services in all
markets other than North America. In France it operated through a French
subsidiary company. The French company contracted with the Irish company to
provide a wide range of marketing services in France including identifying
potential clients, concluding contracts which were routinely approved by the Irish
company, and providing support services. The French company employed fifty or
more staff to provide these services while the Irish company only employed five to
seven people to conduct its almost world-wide operations. The French company
was paid 108% of its costs for providing these services. The French tax authorities
considered that the Irish company was conducting business in France through a
PE in the form of the French company. The taxpayer appealed successfully to the
Administrative Court of Appeal and the tax authorities then appealed to the
Conseil d’Etat.
The Conseil d’Etat agreed with the tax authorities and found that the French
subsidiary was a PE under the Ireland-France double tax treaty. A French
company had to be regarded as exercising powers allowing it to commit the
foreign company to commercial relations where it habitually decided on
transactions, even though it did not formally conclude contracts in the name of
the foreign company and that the foreign company was limited to approving and
that, when approved, committed it. On the evidence, the choice of concluding a
contract with an advertiser and all the tasks necessary for its conclusion fell within
the sphere of the employees of the French company, with the foreign company
limited to approving the agreement by a signature that was automatic in
character.
The Editor of the ITLR notes that there are various points of significance in this case.
Firstly, the Conseil d’Etat concluded that the Irish company had a PE in France
through the activities of its French subsidiary. In so doing, a realistic approach was
taken to the facts in that the staff of the French subsidiary were in practice
concluding the contracts with their customers, which were routinely rubberstamped
by the employees in Ireland. It is noted that this is not inconsistent with
the Zimmer case (where the principal was not bound into a contract with the
customer by the commissionaire contracting in their own name). The Public
Reporter suggested that the Irish company could also have a fixed place of
business in France, notwithstanding they had a contractual arrangement with the
French company, based on the facts and that the French employees undertook
the business of the Irish company, but the Conseil d’Etat appears to have focused
on a dependent agency permanent establishment. It was also notable that the
French Conseil d’Etat referred to a later version of the OECD Commentary in its
analysis (both the 2003 and 2005 commentary), even though the treaty in question
was signed in 1968. As noted by the ITLR Editor, this is not the first time the French
Conseil d’Etat has referred to later Commentary added subsequent to the
conclusion of a treaty, but this is a clear example of the decision of the Conseil to
move away from its former practice of not referring to later Commentary. See
further the later chapter on treaty interpretation which discussed the ambulatory
approach for use of material such as the OECD commentary.
who is not an independent agent?
Article 5(6) states that an enterprise is not deemed to have a PE where it carries on
business in a state through an independent agent provided that such persons are
acting in the ordinary course of their business.
The 2017 OECD MTC notes that when ‘a person acts exclusively or almost exclusively on behalf
of one or more enterprises to which it is closely related’ then that person cannot
be considered an independent agent. This can generally be taken to mean
where more than 90% of an agent’s sales are on behalf of related parties (see
paragraph 112 of the commentary to Article 5).
Enterprises are ‘closely related’
when, based on all the facts and circumstances, one enterprise has control of the
other or both are under the control of the same person/ enterprise.
The commentary to Article 5 also notes that a person acting almost exclusively for
one enterprise or related enterprises over an extended period of time is unlikely to
fall within the definition of an independent agent (see paragraph 111 of the
commentary to Article 5).
subsidiary not of itself give rise to a PE
Article 5(7) acknowledges that where one company in one state controls another
in the other state, the fact that there is control shall not of itself give rise to a PE in
either state.
Thus a parent company may have a PE in the state of a subsidiary, by virtue of the
fact that space owned by a subsidiary is at the disposal of the parent company
and is used by it to carry on part of its own business in that state. A subsidiary can
also act as a dependent agent (under Article 5(5)) of a parent company. Similarly,
the same comments can be made generally in relation to related companies in a
multinational group.
Website PE
2012 Dell case
(ruling of Mar.15.2012, Central Tax Court), reflected the reservation noted by Spain
in previous versions of the commentary. In line with Spain’s position on software
driven PEs, the Spanish Court ruled that an Irish Company had a Spanish PE, as the
online store (the website through which Spanish sales were made) could qualify as
an ‘online PE’, even though the server was situated outside Spain. Whilst the server
was not located in Spain, and there were no employees of the Irish company in
Spain, the Spanish subsidiary company did employ people to translate the
website, review the contents and administer the site, which was considered a
factor. In addition, the Court noted the observations on the commentary made by
Spain in the 2003 and 2005 versions, which stated that Spain had a number of
reservations on the OECD approach.
However, it is notable that on appeal, the Spanish National Appellate Court
(decision of June 2015) and the Supreme Court (in June 2016) decided the matter
with regard to the fixed place of business PE and the agency PE concept (Dell
Spain acted as commissionaire and Dell Ireland was bound by the contracts under
Spanish law), without referring to the creation of a ‘virtual PE’.
the Appellate Court did comment that according to the OECD commentary to
the Model Treaty, an online website does not in itself have a location that can
constitute a PE, although the place where the server is located could constitute
one. The Supreme Court confirmed the point as to the commissionaire
arrangement, which is the issue of most importance in this case. In so concluding
the Spanish Court differs from courts in France and Norway which have concluded
that commissionaire arrangements do not give rise to PEs. However, such
conclusions have been overtaken by the changes to the Agency PE definition in
the treaty as discussed above.
Roche Vitamins [2012] STS 201/2012 - subsidiary is both a dependent agent and a fixed place of business PE
- Up to 1999 the Spanish subsidiary Roche Vitamins SA performed the functions
of manufacturing, import and distribution of goods (as a fully-fledged
distributor). - In 1999 the group undertook a restructuring and the Spanish activity was
changed.
Roche Vitamins SA concluded two contracts with its related party Roche Vitamins
Europe Ltd, a Swiss company:
i. A manufacturing contract, whereby Roche Vitamins SA committed to
produce and package, in their facilities, the products ordered by Roche
Vitamins Europe. Such products would be sold at cost-plus with a mark-up of
3.3%.
ii. An ‘agency contract’, where Roche Vitamins SA was designated by Roche
Vitamins Europe as its ‘Spanish agent’ to promote the sale of particular
products. The Spanish subsidiary committed to ‘represent, protect and
promote’ the other party’s interests, receiving in consideration an amount
equal to 2% of the total sales promoted in Spain.
Therefore, after the restructuring operation, the Spanish subsidiary became, at
least from a contractual point of view, a contract manufacturer and sales
commission agent, whose profits are considerably lower than those received by a
fully-fledged distributor.
The Supreme Court confirmed, on appeal, the existence of a Spanish PE of Roche
Vitamins Europe, as a result of the activities carried on by the Spanish subsidiary. In
particular, the Court considered that the Spanish subsidiary operated as a
dependent agent of the Swiss entity, as it carried on, under the two contracts, the
activity which could have been done directly through a fixed place of business
(being the sale and distribution of the goods produced).
The fact that Roche Vitamins SA had no capacity to contract or negotiate on
behalf of Roche Vitamins Europe did not exclude the application of the dependent agency clause of the double tax treaty, as interpreted under the
commentaries to the OECD Model Treaty (1997 version). In particular, under the
‘Agency Contract’ the Spanish subsidiary was obliged to promote the goods that
were sold by Roche Vitamins Europe, which function was considered by the Court
as a greater involvement in the Spanish market. It was a key element leading to
the conclusion that Roche Vitamins SA was not merely processing purchase orders
issued by the Swiss company.
The Supreme Court also considered the general PE clause found at Article 5(1) of
the treaty and held that the Spanish Subsidiary (Roche Vitamins SA) constituted a
‘fixed place of business’ of Roche Vitamins Europe. The Supreme Court upheld the
position of the tax authorities in that the Subsidiary was held to constitute a fixed
place of business of the foreign related company on the basis that all the activity
of the Spanish company was directed, organised and managed by the Swiss
Company (Roche Vitamins Europe). Some commentators consider the decision in
this case to be controversial.
Director of Income Tax v e-Funds IT Solutions [2017] SLP No 27494 of 2017 - indirect) Indian subsidiary of a US
company was not a PE, notwithstanding the close association between the US
company and the Indian company
As the Indian Revenue was not able to
prove the ‘right to use’ test and having space at ‘the disposal’ of the company
test were satisfied, no fixed PE was found to exist. Similarly in the absence of any
evidence that employees of the Indian subsidiary were under the control or
supervision of the US parent and providing services on behalf of the US company,
or that the Indian employees were participating in negotiations with customers, no
service PE or agency PE were found to exist either.
As noted above, care needs to be taken with regard to employees, in particular
with regard to a subsidiary’s employees that might be taken (on the facts) to be
economic employees of the parent company or group. If they are, this may result
in the parent group having a PE in the foreign jurisdiction, perhaps through an
agency PE (if they fulfil the criteria for entering into contracts on behalf of the
parent entity) or as a services PE (where the treaty in question has included the
services PE wording) or perhaps through a physical PE if the premises where the
employees work falls within the requirements needed to create such a PE for the
parent group.
GE Energy Parts Inc v ADIT [2017] ITA No. 671/Del/2011 - Linkedin pages can be taken into consideration as a proof for PE
In 2014 the ITAT (Indian tax tribunal) held that the
LinkedIn profiles of the employees of the GE group submitted by the tax authorities
were admissible as evidence in determining the existence of a PE in India. The
tribunal’s view was that the LinkedIn profiles were not hearsay, but were akin to
admissions made by a person; and they had considerable bearing on the subject
matter of this appeal. However, the taxpayer is free to rebut the information
contained in their LinkedIn profile by bringing on record contrary facts to dislodge
AB LLC and BD Holdings LLC v SARS [2015] ZATC 2 -
The Court held that a PE had been created, on two counts. Firstly, on the basis the
US company employees had been in South Africa for over 183 days. The Court
considered that the wording of the second paragraph of Article 5 in the treaty,
which is preceded by the words ‘includes especially’, creates a standalone
definition of a PE by way of an extension to the first paragraph of the article.
Secondly, it found there was in any event a fixed place of business created by the
use of the boardroom (it had exclusive use during relevant working hours). The US
company was liable for tax on the profits attributable to the services rendered. In
addition the Court held that the penalties imposed by the tax authorities (100% of
the tax) were not disproportionately punitive and that the US company had been
negligent in not considering the tax consequences of the agreement it had
entered into. The company had argued that it did not deliberately ignore South
African law, but just misunderstood it. Interestingly the Court commented that the
enterprise had a global reach and that it was ‘not a novice in the area of tax
liability’, and therefore should accept responsibility for its own error.
Al Hayat Publishing Co Ltd [2014] No 360890
This French case relates to the collection of information and whether it is core to
the business, or merely preparatory and auxiliary. The French Conseil d’Etat
considered the application of Article 5(4) in the France-UK treaty. Al Hayat UK
publishes the Arabic language daily, Dar Al Hayat. Its Paris bureau researches
French current affairs and writes articles for publication in the newspaper. The
Court held that the bureau’s activities were not core to Al Hayat’s business and so
did not constitute a taxable PE in France. The core activity of the business was the
editing and commercialisation of the business, rather than the writing of articles.
The bureau’s activities were confined to the collection of news and its transmission
to the UK head office. The decision is in line with paragraph 22 of the OECD
commentary on Article 5.
Aska Gmbh [2017] SKM2017.213.SR
In this case, a Scandinavian sales manager was required under the terms of his
contract to work from home in Denmark. Although he spent the majority of his
employment duties travelling and visiting clients, the Danish tax board ruled that
the manager’s use of a home office for administrative work (for which he was not
reimbursed) constituted a PE of his German employer. It was held to be irrelevant
whether the home office was owned or rented or in any other way made
available to the foreign corporation. As long as the business of the non-resident
entity was carried out effectively and habitually (and these activities were not
preparatory), then a PE was in existence. It was also emphasised that there must
be recurring work from the home office not just sporadic or occasional. The Danish
tax board determined that the administrative work was directly related to the
main business of the company and could not be said to be non-core or
preparatory.
treatment of IP created by a PE
profits attributable to the IP developed by the staff of the PE should be attributable to the PE
economic ownership of the assets?
who made the decisions to develop the assets? if they are the employees of the PE, profits should be attributed to this PE
Taxation of interest payments from a PE
PE is not a resident of a state - how can this interest be taxed? it is not business profits
Cases on interest payments by a PE
- 2017 BNP Paribas case - BNP France made loans to branches in china, india and philipines, thailand. they charged a wht on the payments. the bank wanted to claim a credit for the tax withheld against its taxation in France, Rev. rrejected.
- 2019 - Irish Bank Resolution Corporation v HMRC: interest paid by PEs were deemed non-deductible
In relation to business profits and PEs, what are the OECD’s two principal aims and what is the key concept underpinning the 2010 Report on the Attribution of Profits to Permanent Establishments?
- To develop a methodology of attributing profits to a PE so as to minimise the incidence of double taxation.
- To achieve a degree of harmonisation on the taxation of PEs worldwide.
A PE should be considered as if it is a separate (and independent) legal entity from the enterprise of which it is a PE.
Paragraph 20 of the Treaty commentary to Article 7 contains a two step approach to the attribution of profits. What is the two step approach?
Firstly, the activities carried on through the PE need to be identified, which is done through a functional and factual analysis.
Secondly, any transactions with associated enterprises and dealings with the ‘head office’ enterprise are priced in accordance with the OECD TP Guidelines.
Paragraph 21 of the same states that the first step undertaken will lead to identification of certain information. What will be identified?
- the attribution to the PE, as appropriate, of the rights and obligations arising out of transactions between the enterprise of which the PE is a part and separate enterprises;
2.the identification of significant people functions relevant to the attribution of economic ownership of assets to the PE
3.significant people functions relevant to the assumption of risks and the attribution of risks to the PE
4.the identification of other functions of the PE
- the recognition and determination of the nature of those dealings between the PE and other parts of the same enterprise that can appropriately be recognised
- the attribution of capital based on the assets and risks attributed to the PE
