Permanent establishment risk review – what it means for you?

The permanent establishment (PE) threshold test is contained in many countries’ domestic tax laws and double tax treaties. It determines whether a business has sufficient activity in another territory to create a taxable presence in that other territory from a corporate tax perspective.

While multinational groups may have found that PE issues were not a key area of focus for many tax authorities in the past, this position is now changing in light of the OECD’s proposals outlined in Action 7 of the Base Erosion and Profit Shifting (BEPS) project, which relates to addressing the perceived artificial avoidance of PEs by multinational corporations.

Why action should be taken now • Dependent agent test – An enterprise has a PE in another territory where a person (other than an The increased interest in PE rules as a result of the independent agent) is acting on its behalf, and OECD’s proposals, coupled with the pace of change habitually exercises an authority to conclude in the complexity of global business models and with contracts in its name, in that other territory. increasing numbers of internationally mobile staff. Is expected to lead to tax authorities across the globe In addition to the above, some double tax treaties focusing resources on mounting more effective PE include the concept of a services PE, which can be challenges. created where an enterprise in one territory performs services in another territory through one or more The risk of inadvertently creating a PE is therefore a individuals over a defined period of time. In practice, key risk area for multinational corporations and the this type of PE is less common but should still be effective control of PE risk, including a PE risk considered for the purpose of managing PE risk. review, can form an essential part of a multinational corporation’s wider tax control framework. What are the benefits of getting this right? What are the indicators of PE risk? Pro-actively managing PE risk can provide the following: Under the current treaty definition of PE, the threshold of activity of an enterprise in one territory • comfort on a potentially high-profile area of that results in the creation of a PE in another challenge; territory is determined by two forms of presence as • reduce the risk of unexpected tax payments by follows. minimising the risk of errors, including penalties • Fixed place of business test – An enterprise has and interest charges; a PE in another territory if it has a fixed place of • identification of opportunities for tax efficiencies business there through which it carries on its and/or improvements to the internal control business, subject to a number of specific activity framework; and exemptions. • the ability to make appropriate disclosures to tax authorities showing that reasonable care has been taken to manage PE issues, reducing the risk of challenge and penalties. What happens if a PE is not managed correctly? • Full scope reviews – Interviews and discussions with relevant individuals, alongside desktop reviews, are used A PE risk that is not correctly managed can result in: to drill down into the operational practice of documented • damage to reputation; policies and procedures and to assess and challenge the • unfunded and corporate tax liabilities; methodology of each business unit and the approach to governance of operational risk against current tax • potential indirect tax cost in a territory if appropriate VAT standards applied by the business. registrations have not been made; • increased audits from tax authorities resulting in increased • Desktop review – Where the level of PE risk is considered management time and cost being incurred; to be low, a full scope review may not be the most cost- effective option. Sufficient coverage could instead be • penalties and interest charges; provided through a rules-based desktop review of the • long unprovided for issues can lead to the requirement to policies, procedures and processes applied in each territory restate financial accounts; and business line, and benchmark these against central • employer reporting obligations, including payroll and governance requirements and those of the local territory. social security; • Focussed scope – For areas where the level of PE risk is • immigration considerations for employees; and perceived to be moderate, the focussed scope review • regulatory issues (for certain industries). replaces detailed interviews with the use of standard questionnaires/surveys of key personnel, alongside a Some practical steps you can take now desktop review of the policies and procedures applied by Ensuring you are able to maximise value in a cost-effective the business to manage PE risk. manner according to factors such as territory and/or business An alternative focussed scope option is to adopt the full scope line complexity, known issues and the perceived level of risk is approach, but limit the detailed analysis of risks identified to a important. We can help you to ensure your specific needs smaller, pre-agreed set of risks. across the relevant markets and territories are met by the following.

Find out more Please contact one of the team below or your local PwC contact:

Sonia Watson Partner T: +44 (0)20 7804 2253 E: [email protected]

Richard Collier Partner T: +44 (0)20 7212 3395 E: [email protected]

Michael Cooper Director T: +44 (0)20 7213 5212 E: [email protected]

Ian Rae Director T: +44 (0)20 7213 3033 E: [email protected]

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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