International activities often start small—a research project that was only going to take a few weeks, or an internship program to see if students would be interested, or even informal recruiting efforts in a target foreign country. Program success leads to growth of activities, which may also increase compliance and regulatory considerations for the university, in addition to the risks which may have been present upon commencement if the activity was not adequately planned to address compliance risks.
The determination of taxation and reporting responsibilities in a foreign country is generally defined by a concept called Permanent Establishment (PE). A PE and resulting taxable presence is most commonly triggered when an organization is engaged in activity in that country that gives rise to revenue, such as executive education and possibly on-line learning, but is not limited to revenue activity. In many situations, the threshold for the evaluation of activities is set forth in a tax treaty entered into between the home country and a foreign country. While each treaty will have unique language which must be considered, there are general elements of international activities that equate to the presence of a PE. The term PE is typically defined in the relevant double tax treaty, however, non-treaty countries often look to the general aspects of PE concepts outlined below. This list is not intended to be comprehensive and is provided for illustrative purposes only:
A PE will generally not be deemed to be created where the activity performed is truly “representative” in nature – for example, when undertaking a marketing activity (eg; student recruitment) where no direct or indirect revenue can be attributed.
In many situations, the University will be entitled to certain benefits under the prevailing tax treaty that may provide for either not-for-profit status or an exclusion from the typical PE rules governing commercial operations. However, this does not always obviate the need to register in a foreign jurisdiction and meet certain compliance requirements. Failure to do so puts the University at great financial and reputational risk or could put the future of the international program in jeopardy. Due to the current economic climate, many countries have focused on regulating foreign entities operating within their borders as a source of additional revenue from unpaid taxes and penalties for violation of local registration, tax and compliance requirements.
(Please note: this memo is intended to only address elements of legal and permanent establishment risk. There are many other types of compliance which are not addressed in this memo, such as (not an exhaustive list): employment compliance, sponsored research compliance, VAT compliance, etc.)