The concept of Permanent Establishment (PE) is the very basis on which the MNCs are taxed across the globe. The concept is highly elusive and no single definition and understanding can completely cover whole concept.
In order to comprehend the concept, let us explore relevant provisions of UN Model/OECD Model/DTAA/ Domestic Tax provisions.
As per Article 7 of UN Model, Permanent Establishment in source state (India) is taxable to the extent of profit attributable to the PE in that State.
As per Article 5 (1) of the UN Model, PE is a fixed place of business though which the business of the enterprise is wholly or partly carried on. This basic rule has five ingredients:
1. There must be a place of the business (place of business test)
2. The place of business must be located at a certain area (location test)
3. The taxpayer must have a certain right to use the place of business (right to use test)
4. The use of the place of business must last for a certain period of time (permanence test)
5. The activities performed through the place of business must be a business activity as per treaty or domestic law (business activity test)
Each of the above has its own criteria to prove that.
Article 5 (2) talks of the specific inclusions like place of management, branch, office, factory, workshop, mine, oil well.
Service PE: It means rendering of services in the source state through employees for 90 days in 12 months or for related enterprises.( as per India-US Treaty)
Article 5 (3)(b): Supervisory PE as per UN Model means supervisory activities with building site or construction or installation for more than 6 months.
There are other Articles for agency PE.
As per BEPS Action Plan 7, there are mechanism for artificial avoidance of PE definition, that needs to plugged. As per India’s view, the DAPE (Dependent Agent PE) may give rise to a PE.
Let us enumerate the relevant provision of Indian domestic tax law. Section 5(2) talks about the total income of Non-Resident; Section 9 deals with income deemed to accrue or arise in India; Business connection is defined in Explanation 2 of Section 9 (1); MLI aligns with agency business connection; Significant Economic Presence (BEP) criteria for digital platforms.
Above all, Section 92F (iiia) defines with concept of Permanent Establishment as “it includes a fixed place of business through which the business of the enterprise is wholly or partly carried on.”
Indian tax authorities undertakes the functional and factual analysis of each activity and then legal provision and judicial precedents, before concluding presence of a PE. The authorities examine the business models, actual transactions, invoices, business strategies, employees, offices, warranties etc.
The above is the capsule version of concept of Permanent Establishment, which is subject matter of big tax disputes of multinational companies in so many jurisdictions. Recently, the Chinese solar companies have come under the scanner of Indian tax authorities. Unless the enterprises are proved to be PE, no tax can be levied on their income in India.
In case you have any concern or need any clarity regarding the International Taxation/DTAA, you may like to contact us.
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Abhinarayan Mishra, FCA, FCS, LL.B, IP, RV;
Managing Partner, KPAM & Associates, Chartered Accountants +9910744992, ca.abhimishra@gmail.com
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