We are delighted to welcome Chris Hall as a Guest Author. Chris is the Managing Director for Global Tax Network in New York. GTN is an award-winning firm that assists clients with expatriate tax matters headquartered in Minneapolis, Minnesota. He is a Chartered Tax Advisor with over twelve years of experience. Chris has worked in the UK, Canada and the US. Before joining GTN, he held positions with Arthur Andersen and Deloitte.
The concept of Permanent Establishment (PE) is one of the fundamental principles used by taxing authorities to claim jurisdiction over a corporate entity deemed to be doing business in their location. When sending people to work in overseas locations it is important to consider the impact the PE concept might have on the company as a whole.
When a company moves into a new location, it often has to register as a taxpayer or an employer or apply for some form of trading license. These are all traditional alerts to the tax authorities that a company is doing business in that jurisdiction. In addition, there are other factors that can create PE. The OECD Model Tax treaty defines the term as being “fixed place of business through which the business of an enterprise is wholly or partly carried on”. This is further defined to include a place of management, a branch, an office, a factory, a workshop and certain other locations.
With regard to these definitions, however, the terms “permanent” and “fixed” are only loosely defined. From an international mobility perspective, it is important to note that an individual (or a number of individuals) can create a PE problem, even in the absence of a true physical location.
The existence of a PE can have implications for both the company and its international assignees. For the company, a portion of their income could be attributable to the PE. This can naturally lead to potential additional tax costs, but will also create additional filing and reporting requirements, registrations and professional fees. A PE could also prevent a company’s short-term business travelers from qualifying for host country tax relief that may otherwise apply under a relevant income tax treaty. Additional personal tax costs and administrative complexity can again result, with companies often reimbursing employees for incremental costs on a grossed-up basis. These additional costs and administrative requirements can be arduous, particularly where the PE is created inadvertently.
For example, a US business transfers the CFO to their Canadian subsidiary, but the CFO retains some of his US-related duties while on assignment. In this scenario, the Canadian authorities could argue that the US business is actually conducting business in Canada (because the CFO is undertaking US business on Canadian territory) and claim taxing jurisdiction on both the Canadian subsidiary and the US parent. Some common areas that can create Permanent Establishment problems include:
- High level assignees retaining global responsibilities,
- Assignees or agents concluding contracts on behalf of their home country employer,
- Projects or contracts that continue or last for more than six months,
- Inter-company assignments without the proper secondment documentation,
- High numbers of short term assignees or business travelers into one location,
- Cross border remote workers (“e-commuters”), and
- Initial start up assignees or agents (ie. Advance sales forces).
Many of these issues can be resolved or mitigated by proper planning and documentation. However, it is important to note that each tax authority has their own definition of what constitutes a permanent establishment. In addition, tax treaties often provide for separate definitions and exemptions between different countries. As such, there is rarely a common solution and it is advisable to speak with your internal tax department and/or your expatriate tax advisor.
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About Global Tax Network
Global Tax Network provides international assignment tax compliance and consulting services for corporate global mobility programs, including program development, ongoing tax management, and special projects. The firm is recognized as a leader in consulting for emerging to mid-sized global mobility programs. GTN has six U.S. offices, with allied partners and resources in more than 100 countries to support assignee home and host tax requirements. For more information please contact us.