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Permanent Establishment

Permanent Establishment

Permanent Establishment tax India - Service permanent establishment (P.E.) is an international tax concept under which services provided by a non-resident may give rise to a P.E. in the source country if the services are provided beyond a certain period. The concept was first inserted in the U.N. Model Tax Convention in 1980, and while tax authorities across the world remain split on whether a Service P.E. requires a fixed place of business in the source country. The Indian tax authorities recently introduced a new dimension that is further baffling the tax world.

What is a Permanent Establishment?

A Permanent Establishment tax in India is a permanent place of business, wholly or partly conducted by a foreign company operating in India. Such permanent place of the corporate can be a branch office, a place of management, a factory, a warehouse, a workshop, etc. Though the meaning of permanent establishment differs in each tax treaty. Taxation of permanent establishment also differs in treaties accordingly.

Types of Permanent Establishment

  • Fixed Place Permanent Establishment Office which includes the place of business, equipment, etc.
  • Service Permanent Establishment which includes Employees visiting India to render services
  • Agency Permanent Establishment which includes Securing and concluding orders in India Machinery installation and
  • Installation Permanent which includes Establishment / Supervisory Permanent Establishment, Machinery installation and supervision

IS physical presence of employees mandatory for imposing a tax?

India Holds that Physical Presence of Employees Not Required. Recently, an Indian Income Tax Appellate Tribunal (the “Tribunal”) presided over a matter that addressed whether a Service Permanent Establishment existed in India about a business carried on by a U.A.E. L.L.C., ABB FZ.

A company was engaged in the business of providing regional services to a related party in India. The employees of the L.L.C. were present in India for 25 days, during which services were provided. However, the employees continued to render services regularly from the U.A.E. through emails, video conferencing, and other electronic modes for more than nine months within 12 months.

The rationale behind the Tribunal’s decision appears to be contrary to the concept of tax neutrality between a sale of goods and provision of services. Under Service Permanent Establishment physical presence of employees is no longer a precondition for imposing the tax.

What is Taxation of Permanent Establishment?

Globally, two basic principles of taxation are adopted i.e. the residence focused taxation and the source focused taxation. In most of the countries, including India, services permanent establishment tax checklist includes tax which their residents pay on their international income under residence-based taxation. They tax non-residents on their salary sourced in that country under cause-based taxation.

When a citizen of one country earns income from a cause in another country, the possibility of double taxation arises because one country may tax that income on the source belief whereas the other country may tax it on the residence principle. Taxation of Permanent Establishment tax is usually, adopting the source-based taxation, and the Source Country is allocated the right to tax the income rising therein. While the Residence Country also taxes the income succeeding the residence-based taxation. The Residence Country alleviates the effect of double taxation either by way of tax exemption or by way of a tax credit.

Impact of the changes in Permanent Establishment India

The existence of a PE does not mean a material rise in tax exposure, especially where the local place of the industry already receives arm’s length payment. In most cases, payment based on costs earned by the Permanent Establishment India should be appropriate, though there may be situations in which remuneration based on the contract would be more appropriate.

Permanent Establishment tax in India might apply in particular when a local unit either accomplishes contracts with suppliers or plays the major role leading to the assumption of contracts that are then regularly concluded without material alteration by the company. Selection of the suitable method of profit ascription to the Permanent Establishment, as well as determining whether or not a given place of business constitutes a PE, are the areas where there is heightened risk of a dispute with tax authorities. This translates into vagueness and better compliance costs, and may also end in double taxation.

Permanent Establishment & Transfer Pricing

The concept of Permanent Establishment India was included in domestic tax laws as a part of Transfer Pricing (TP) laws, wherein an inclusive definition has been delivered, which covers various types of Permanent Establishments. Furthermore, concerning to the countries with which India has tax treaties, the provisions of the applicable treaties 6 Section 90 of the Act or the Act, whichever are more favorable for the foreign company, will apply. Consequently, based on the comprehensive definition of Permanent Establishment tax and the conception of a business connection under the Act, in most cases, the requirements of the tax treaties are favorable and therefore applicable for eligible foreign companies.

The relevance of Permanent Establishments:

Foreign companies get tax reduction under Double Taxation Evasion Treaties and they pay taxes in their home countries. But if they have PEs in India, they should pay taxes for the income they have created in India. Thus, PE makes foreign companies’ Indian income taxable in India.

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