- Permanent establishment
The concept of permanent establishment ("PE") is one of the most important issues in international double tax treaty law. Virtually all modern tax treaties use PE as the main instrument to establish taxing
jurisdictionover a foreigner's unincorporated business activities.
The UN model tax treaty is very different from the OECD model and USA model on the treatment of permanent establishment. In the UN model tax treaty the definition of permanent establishment is narrower thereby allowing host countries to have more chances to tax. The US model tax treaty requires 12 months for a building site to acquire permanent establishment status. [US model tax treaty, Article 5(3).] Meanwhile, UN model tax treaty allows 6 months for permanent establishment, which allows for more situations than the US model tax treaty for the source country to have an opportunity to tax the source income. Comparing the UN model tax treaty to the OECD model tax treaty, permanent establishment excludes maintenance of stock of goods solely for storage, display or delivery while the UN model tax treaty the delivery option is included. [OECD model tax treaty, Article 5.]
OECD model treaty
The foreign enterprise's profits are taxable in the country where the activity takes place if the enterprise is deemed to constitute a PE. The
OECDmodel treaty sets forth the general definition of a PE as follows:
* "'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on".
* "The term includes a place of
management, a branch, an officeand a factory."
* "It does not include some activities which carried out by foreign enterprise if they continue for a period of less than certain months, say half year." [OECD model tax treaty, Article 5.]
A firm is deemed to have a permanent establishment in a country even if it employs an
agent, other than an independent agent, to regularly act for it and conclude contracts there. [OECD model tax treaty, Article 5.]
European Union Value Added Tax
In additional to tax treaties the concept of permanent establishment helps determine the source of income produced by services in the
European Union Value Added Tax("EU VAT"). The general rule in the EU VAT is the VATis charged at the place of the permanent establishment of the service provider. [Recast 6th Directive, Council Directive 2006/112/EC, Title V, Chapter 3.]
Permanent establishment allows the taxation authorities to roughly coordinate the exercise of their power by relying on a guide to determine which authority has the jurisdictional competence to tax the produced income. This helps eliminate double taxation and provides a standard upon which taxpayers may rely. This has a particularly strong impact on international taxation through tax treaties. However, in the EU VAT, the numerous exceptions to the general rule [Recast 6th Directive, Council Directive 2006/112/EC, Title V, Chapter 3.] limit the impact of permanent establishment in determining which tax authority has the jurisdictional competence to tax the income produced by the taxpayer.
* Double taxation agreement
* [http://www.opsi.gov.uk/acts/acts2003/ukpga_20030014_en_12#pt7-pb2-l1g148 UK Finance Act 2003 section 148(1)]
* [http://www.oecd.org/dataoecd/52/34/1914467.pdf OECD model tax treaty]
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