The Hindu Business Line : Understanding PE

The concept of PE or permanent establishment is relatively new to India, says Mr Rajiv Anand, Executive Director, PricewaterhouseCoopers. “There are situations where no guidance is available on what constitutes a PE. Till our courts decide such issues, one can expect litigation on complex PE issues,” he adds, during a recent e-mail exchange with Business Line.

Excerpts from the interview:

First, a simple explanation of the PE concept, and its relevance to income-tax law.

Broadly, a PE is an office of a foreign enterprise located in another jurisdiction through which it carries out business operations in that jurisdiction. This office is controlled by the foreign enterprise through employees.

In the Indian context, a PE would typically include a branch or project office set up to carry on business.

The relevance of PE is that normally income earned by a foreign enterprise from its business cannot be taxed in another jurisdiction unless it has a PE in that jurisdiction.

Where a PE exists, the tax authorities of the other jurisdiction get a right to collect taxes on profits earned from the operations carried out through the PE.

Are there any exceptions to the above definition of PE?

Deeming PE situation, for instance. This would normally include an agent of foreign enterprise who is either concluding contracts or securing orders on its behalf.

Here, even though the office of the Indian agent would normally not qualify as the office of the foreign enterprise (and hence not a PE in terms of above), a PE may still be deemed to exist.

Can there be instances where a PE is deemed not to exist?

Yes. For example, there could be situations where a foreign enterprise may have an office in other jurisdiction, but the level of activities conducted through that office when compared with the overall business are insignificant or not essential.
In such cases, the tax treaties would generally deem that no PE exists. This is to encourage international trade.

On PE versus business connection.

PE is a concept in tax treaties India has entered into with other countries.

Under domestic law, there is a somewhat similar concept called business connection. This concept is generally wider in scope compared to PE. Foreign enterprises are permitted to invoke the tax treaty or the domestic law, whichever is more favourable.

Your views on the way the Indian tax authorities have been interpreting the PE concept.

Generally the Indian authorities have been interpreting PE widely. For example, sometimes a view is sought to be taken that an Indian subsidiary of foreign enterprise is an office of the foreign parent and hence a PE of the parent.

This is on the ground that since the Indian agent is a subsidiary of the foreign enterprise, de facto and in substance, the premises of the Indian entity belong to the foreign enterprise.

Though existence of such facts in a given case cannot be ruled out altogether, generally from a factual perspective, the premises and so on of the Indian entity do not belong to the parent and hence no PE.

And on the way the courts have been interpreting…
The tax tribunal and even the High Courts have had the opportunity of interpreting PE. It is heartening to note that the courts have been adopting international guidelines on what constitutes a PE in the Indian context too.
Are there differences between tax treaties that India has entered into, and those executed by the developed countries?
There are. For instance, an important difference with regard to PE is that under Indian treaties, while an agent engaged merely in securing orders (but not concluding contracts) could constitute a PE in India, treaties of developed countries assume a PE only when the agent is concluding contracts.
Under the securing orders concept, virtually every transaction beyond a simple shipment of goods may lead to a PE.
Do Indian companies making remittances to foreign companies need to be aware of the PE position of these foreign entities?
An Indian company making overseas remittance is required to deduct tax if the payment is taxable in the foreign recipient’s hands. One way of such taxation is if the payee has a PE in India.
It may be advisable for Indian companies to obtain a certificate from the tax authorities seeking determination of the quantum of tax to be deducted. This would avoid allegation of the payer having defaulted in its TDS obligation.
What do you see as the most important aspect of PE in times to come?
Many times there is a fine line of distinction between whether or not a PE exists. Hence the issue of the quantum of profits attributable to the PE becomes relevant. It is important to ascertain what profits can be taxed where a PE is held to exist. Sometimes the profits attributable to a PE may be negligible or nil. This aspect would be an important factor for PE analysis.
Bio: Mr Anand, who has been with PwC for over 15 years, is a member of the Institute of Chartered Accountants of India and also the Institute of Cost and Works Accountants of India. He specialises in domestic and international corporate taxation matters, including litigation and cross-border restructuring. Mr Anand’s experience includes expertise in handling telecom matters (both domestic and international); tax due diligence for acquisitions and investments; in-depth analysis and strategic planning keeping in view the tax regime, double taxation avoidance agreements and exchange control regulations connected with cross-border transactions. He also advises clients on various regulatory and tax aspects of mergers and acquisitions and capital restructuring, and in implementing schemes through the Court process.

D. MURALI
http://InterviewsInsights.blogspot.com

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