A new article published by Hanrick Curran’s international alliance (Alliott Group), outlines the general principles of permanent establishment and the associated risks, and how short and long term staff assignments trigger a PE problem for companies and individuals.
Permanent establishment, or ‘PE’, is one of the fundamental principles used by local tax authorities to claim jurisdiction over a company doing business on their territory, which is thus perceived to have created a taxable presence. It is a slightly grey area and misjudging how and where it applies can be a costly mistake.
Recent tax reforms have empowered local tax authorities to investigate corporate structures and to re-categorise what some companies may dress up as auxiliary employee activities as direct sales employee activities that are therefore liable to local taxation.
To add to the uncertainty, what constitutes a permanent establishment under local tax rules will vary from country to country. In general however, PE is judged to exist if an activity carried out by a business in a country results in revenue being generated or value created.
In a recent interview on PE Jamie Towers, Hanrick Curran Tax Partner and Chairman of Alliott Group’s Asia Pacific regional membership provided his view on PE saying, “The Australian Government taxes foreign residents on Australian sourced income. However, tax treaties override domestic law and limit the ability of the Government to tax a foreign company only to income derived in Australia through a PE. Tax treaty definitions of a PE vary from treaty to treaty, although they largely follow the OECD model, so it is critical to understand which activities create a PE in each case.
Employee and ‘agent’ activity in a host country needs to be closely scrutinised to understand whether a PE is created. The OECD is current focusing on artificial avoidance of PE status and is considering tightening up its definition of a PE to catch more employee / agent activities. Australia has strongly supported and implemented the OECD’s recommendations around BEPS and now has some of the strongest multinational anti-avoidance laws in the world.”
In view of the varying definitions of what constitutes a PE and the definitions and exemptions held in tax treaties between countries, it is important to get good professional tax advice. Many of these issues can be resolved or mitigated through the correct planning and documentation.
For more information on PE including how PE is determined, the situations that trigger a PE, and those that can avoid it click here
Hanrick Curran has a strong international business capability, advising many Australian clients with investments and business interests outside of Australia.
For assistance in understanding more about permanent establishment and what activities to avoid that might result in a PE, speak with your usual Hanrick Curran adviser or alternatively, contact Hanrick Curran Tax Partner, Jamie Towers on 07 3218 3900.
Please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice.