The term "permanent establishment" shall not be deemed to include: -

Transcription

1 RMANENT ESTABLISHMENT With the globalization of world economies, the concept of Permanent Establishment () has gained significant magnitude both in India and worldwide due to its direct impact on the tax revenue generated by a Country. The concept is a measuring tool to determine the right of a country to tax the profits of an enterprise which is resident of another country and is generally used in parlance of cross border business and taxability of the income generated. The notion of a "permanent establishment," as embodied in tax treaties, is a crucial one. Where the concept is applicable, one treaty partner relinquishes its jurisdiction to tax the business profits of residents of the other treaty partner unless local activities rise to a certain threshold, i.e., unless they amount to a permanent establishment. Thus, the purpose of the permanent establishment concept is to define when a non-resident has established sufficient presence in a jurisdiction so as to warrant direct taxation of his business profits there. When a taxpayer s presence is not sufficient (i.e., when no permanent establishment exists), source-based taxation is ceded in favour of residence-based taxation. The concept of permanent establishment was originally developed under Prussian domestic legislation and developed a narrower meaning as the necessity of prevention of double taxation grew among German States Between 1927 and 1946, a number of draft tax treaties, which included variations of the permanent establishment principle, were introduced by the League of Nations but no commonly accepted definition of permanent establishment was established. In 1958, the Fiscal Committee of the Organisation for Economic Co-operation and Development (the "OECD") published its first report with a draft definition of permanent establishment. Meaning: - may be defined as a fixed place of business through which activities of an organization are wholly or partially carried on. This fixed place of business should be the place of business of foreign entity itself (at the disposal of such foreign entity) and not the local entity. Thus the maintenance of fixed place of business only for preparatory and auxiliary activities has been specifically excluded from the definition of. The term "permanent establishment" shall not be deemed to include: - a) the use of facilities solely for the purpose of storage and display of goods or merchandise belonging to the enterprise ; b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage and display ; c) the maintenance of stock of goods or merchandise belonging to the enterprise solely for the purpose, of processing by any other enterprise ; d) the maintenance, of a fixed place of business solely for the purpose of purchasing goods or merchandise, of for collecting information, for the enterprise ; e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for similar activities which have a preparatory or auxiliary character, for the enterprise.

2 TYS OF Even though the basic concept of revolves around the fixed place of business, it may also extend to include an agent who is legally separate from an enterprise and also rendering of services in India by a foreign entity. The Double Taxation Avoidance Agreements entered into by India recognizes the following main types of for a foreign enterprise in India: TYS OF RMANENT ESTABLISHMENT INSTALLATION AGENCY FIXED PLACE SERVICE Building site, construction installation or assembly project Dependent agent Independent agent An office is a fixed place Service by employee or other personnel Preparatory & auxiliary services Income generating activities if lasts greater than 6/12 months if certain conditions are satisfied if service last beyond specified period

3 FIXED PLACE CONCEPT There must be a fixed place of business (situs test); The fixed place of business must be located [in a] certain territorial area (locus test); The use of the fixed place of business must last for a certain period of time (tempus test); The taxpayer must have a certain right of use [over] the fixed place of business (ius test); The activities performed through the fixed place of business must be of a business character (business activity test) LOCUS TEST a) All three tests (locus, situs and business activity) must be satisfied b) Presence to be visible in the other contracting state c) Usually linked to a geographical location d) Covers premises as well as tangible assets used for carrying on business e) Movable places of business with a temporary fixed location meet the locus test f) Activities carried out within a defined geographical location could constitute a ; e.g., a diving offshore vessel functioning within a defined area, dealer selling merchandise from a mobile van TEMPUS TEST a) No minimum threshold under Indian law b) An isolated activity cannot lead to establishment of a fixed base as the ingredients of regularity, continuity and repetitiveness are essentially missing c) If a non-resident is carrying its activities through a place which is exclusively available to its business in India then that place will be deemed to be its fixed place even if the same is used for a day d) Interestingly, in a recent ruling, the AAR has held that conducting of golf tournament in India for a week s duration does not lead to existence of a fixed base in India. IUS TEST a) Place should be at the disposal of the foreign enterprise for the purpose of its business activities b) The foreign enterprise should have the ability to exercise some right or dominion or control c) The place may be owned, rented or leased; d) Legal right to use need not be the sole determinant; factual use or exercise of such right will have a greater bearing e) Even illegal occupation could constitute a BUSINESS ACTIVITY TEST a) The definition of requires that the business of the foreign enterprise, wholly or partly, ought to be carried out through the fixed place b) Place of business must serve the business activity and not be subject to it

4 c) The use of the premises by an agent for the purpose of the business of the principal may lead to the interpretation that such premises are at the disposal of the principal and therefore constitute a (Galileo International Inc) INSTALLATION MEANING a) Building site or construction or installation project including the construction of buildings, bridges or canals, excavating and dredging and the laying of pipelines b) Installation project means putting together or re-grouping of pre-fabricated elements such as the erection of steel scaffolding or units of production c) Final assembling of moveable objects (e.g. airplanes) also covered by the above term d) Planning and supervision covered only if carried on by the building contractor himself e) Delivery of materials to a construction or assembly project is not itself a construction or assembly project INSTALLATION TEMPUS TEST a) The permanence element of a is replaced by a test of minimum length of time b) The minimum period starts when the enterprise starts to perform business in connection with the building or construction or installation project c) Building works for different ordering parties mark the beginning of new periods even if they are operated at one and the same place India s Position/Observation India does not agree with the words the 12 month test applies to each individual site or project. It considers that a series of consecutive short term sites or projects operated by a contractor would give rise to the existence of a in the country concerned India has reserved its right to replace construction or installation project with construction, installation or assembly project or supervisory activities SERVICE - CONCEPT a) Furnishing of services by a non-resident in India through employees or other personnel may result in creation of Service, provided the duration of such services exceeds the specified period b) Services may be rendered to an associated enterprise of the service provider or a third party service recipient c) The permanence element of a is replaced by a test of minimum length of time in the case of Service as in case of Installation AGENCY CONCEPT a) Authority to conclude contracts on behalf of Foreign enterprises b) Secures orders wholly or almost wholly on behalf of foreign enterprise c) Regularly delivers goods from the stock of good maintained.

5 Person acting on behalf of enterprise? Authority to conclude contract exercised habitually? Legally and economically independent? Ordinary course of business. Some Important Concepts in Permanent Establishment Business Connection: - Income tax act has defined the term Business connection, thereby clarifying and restricting the scope of varied interpretation. Business connection is a long recognized mode of determining tax liability of non resident. A business connection involves a relation between a business carried on by a non-resident, which yields profits or gains and some activity in India that contributes to the earning of these profits or gains. A business connection may arise between a non-resident and a resident if both of them carry on business and if the non-resident earns income through such a connection. The term business connection is of colossal significance in the concept of. If there is no business connection between a non resident entity and a resident entity, the resident entity may not be a of the non-resident entity, and the resident entity would have to be assessed to income-tax as a separate entity. In such a case, the non-resident entity will not be liable to tax in India. Business connection is an expression of wide and indefinite import and is different from the expression business as defined under the Act.Hence the term was being interpreted differently by different authorities under different circumstances and had been the subject matter of judicial interpretations by various authorities.

6 WHAT IS STAMP DUTY? WHY SHOULD IT BE PAID AND BY WHEN? It is a tax and must be paid in full and on time. A delay attracts penalty at 2% per month, subject to maximum penalty of 200% of the deficit amount of stamp duty. Documents lodged with the sub-registrar/superintendent of stamps prior to any amnesty scheme attract a lump sum reduced penalty. Documents not properly stamped are not admitted in court as evidence. It is payable before execution of the document or on the day of execution of document or on the next working day. Execution of a document means putting signatures on the instrument by person s party to the document. ON WHAT INSTRUMENTS DOES STAMP DUTY HAVE TO BE PAID? Instruments include every document by which any right or liability is or purports to be created, transferred, limited, extended, extinguished or recorded but does not include a bill of exchange, cheque, promissory note, bill of lading, letter of credit, policy of insurance, transfer of shares, debentures proxy and receipt (which is charged under Indian Stamp Act, 1899). Except transfer by will (or by original nomination in a co-operative society) all transfer documents including agreements to sell, conveyance deed, gift deed, mortgage deed, exchange deed, deed of partition, power of attorneys, leave and licence agreement, agreement of tenancy, lease deeds, power of attorney to sell for consideration etc. have to be properly stamped. When a nominee transfers the flat subsequently in the name of legal heir, such transfer also requires stamp duty. VALUATION PROFESSIONALS Attaching a formal value to a privately held business is a technical and often complex process. This is especially true with smaller businesses in niche industries, where there may not be many other comparable firms to analyze. Thus, to determine the market value of business, most experts recommend hiring a certified or accredited professional to conduct a business valuation. Business valuation may be needed for a variety of reasons: the potential sale of the business; retirement, estate, or succession planning; the addition of new partners to the firm; the creation of an employee stock ownership plan or a buy-sell agreement; and bankruptcy or divorce litigation, to name a few. Using a variety of research tools at their disposal, valuation professionals look at every aspect of the business, including its financial performance, the strength of its management team, its market share, and the competitive environment in which the company operates. Value standards vary depending on a business s specific circumstances, and a valuation professional will know which standard to use and when. For example, the most common standard, fair market value, is used in most federal and state tax matters; but other standards, such as going concern, liquidation, and net book value, are more appropriate in other situations. VALUATION PROFESSIONALS ACCORDING TO US SCENARIO The certified public accountant or attorney may be able to help to choose the right valuation professional for a particular situation. Many CPAs even offer business valuation services, but not all CPAs are certified or accredited valuation professionals. Several organizations offer

7 credentials in business valuation, including the American Institute of Certified Public Accountants (ABV designation), the National Association of Certified Valuation Analysts (AVA), the National Association of Certified Valuation Analysts (CVA), and the Institute of Business Appraisers (CPA). Each organization s requirements for accreditation differ slightly, but all require extensive training, experience, and examination in business valuation practices and techniques. By choosing a certified or accredited valuation professional, one can be sure that he or she follows codes of ethics imposed by the accrediting organization. These codes require that specific standards of behaviour and performance be met, for example, not deliberately discounting the value of a business to get a low number for gifting or estate tax purposes. Finally, hiring an accredited valuation professional helps ensure the credibility of the business valuation if it were ever challenged in a court of law. An accredited professional can easily demonstrate that he or she possesses the specialized skill, knowledge, and experience required to truly qualify as a valuation expert. TYS OF BUSINESS VALUATION PROFESSIONALS There are a number of professions that offer business valuation services. In most areas there is no specific regulation of this profession. Business valuation services are not usually a primary source of revenue, so locating business valuation professionals can be difficult. Here are some types of professionals that commonly offer business valuation (BV) services. 1. CPAs: - Many CPAs offer BV services in addition to their normal accounting, auditing, and tax work. CPAs often have a combination of business, accounting, finance, and tax knowledge that is well suited for valuing businesses. 2. Financial Consultants (non-cpa): - Financial consultants have varying levels of expertise so their backgrounds should be checked carefully. 3. Business Brokers: - Brokers normally stick to valuing the businesses they have listed for sale. They tend to rely on quick and dirty methods that work well for determining asking prices, and are not intended to be formal valuations. 4. Commercial Real Estate Brokers/Agents: - Commercial real estate professionals sometimes value businesses they list for sale. They are good at appraising real estate, but typically lack the skills and experience to properly value intangible assets like goodwill.