Our recent webinar International Taxation: What to Expect encouraged a lot of discussion. There were several interesting questions from attendees for HSP's tax experts; here are some of the highlights, and answers:
If you do have a permanent establishment how do the authorities typically work out the profit that's attributable to the PE?
They will treat the PE as if it were an independent entity operating on an arms-length basis, with the group it forms part of and with any third parties. This will mean that transactions entered into between related parties will be treated as if they were third parties and, if appropriate, be subject to transfer pricing adjustments.
Is it possible to get advance comfort from HMRC on whether a permanent establishment is created in given situations?
In the U.K., it would be possible to obtain a ruling on whether an activity constituted a PE. However, before approaching the tax authorities, it would be advisable to consult with your normal advisers obtain a view on whether such an approach is recommended.
How long does an activity have to have been carried on for in order for it to be considered a permanent establishment?
There is no common rule which applies, as it is dependent on the nature of the activities and the intentions of parties. However, there is some guidance under the OECD commentary which says that where an activity has been undertaken for greater than six months, then it can acquire a degree of permanency and so if the other conditions for a PE are met, then a fixed PE could be established. This would be on the basis that the actual activity itself does not qualify as an exempt activity by virtue of the particular treaty concerned.
Is there a list of countries that have adopted the service PE concept?
There is not a formal list prepared of such countries, as treaties entered into by the same country may have different conditions for what constitutes a PE. It would therefore be necessary to review the specific treaty between the relevant countries to confirm whether a service PE is adopted.
If one has a fixed place of business, but employees cannot sign binding contracts or negotiate prices, does this still lead to PE by virtue of the office?
In simple terms, if there is a fixed place of business through which the business of the overseas company is carried out, it will constitute a PE, unless it is exempted under the treaty because of its activities being preparatory or auxiliary. It does not matter that employees cannot bind the contract. This latter point is only relevant if there is no fixed place of business, but instead there is an employee who acts on behalf of the company and habitually exercises an authority to conclude contracts which are binding. In this case a dependent agency PE would be created.
What's the difference between a commission agent versus a commissionaire?
A commission agent is one who acts as a disclosed agent on behalf of a principal. A commissionaire is an undisclosed agent. The difference in tax terms is probably more relevant for continental countries rather than the U.K.