In this contemporary world, initiation of globalization has lubricated great technological advancement. All this has facilitated easy access as well as real-time communication among various countries notwithstanding the physical distance. Currently, the world is a ‘global hub’ where no destination is secluded. Subsequently, corporates around the world have become global in their operations and have been expanding their businesses beyond the boundaries of their countries into new markets in their quest to achieve growth and economies of scale.
Over time, two type of cross border transactions have emerged
- Conducting business activities with a country – Residents of a country transacting business with foreign companies without setting up the business presence in the other country.
- Conducting business in a country – Business activities are undertaken in the foreign country by establishing a formal presence in it.
This difference in establishment of companies leads to varied tax implications. This is where Article 5 (1) of the double tax avoidance agreement (DTAA) provides that for the purpose of this tax concept of PE comes in action. Any fixed place of conducting business through which the business operations of an enterprise are carried on by foreign companies, wholly or partly is termed as permanent establishment.
This concept determines the right of a country to tax the profits of a company that is the resident of another country. They lay down the principles and factors to be considered for the constitution of a PE, and the consequent profit attribution methods and the taxation mechanisms it should use to avoid double taxation. The PE concept is recognized by most countries and has been incorporated by them in their domestic tax provisions and international tax treaties.
|Inclusions in PE||Exclusions from PE|
|Place of management||A fixed place for the purpose of advertising|
|Branch||For preparatory and auxiliary activities|
|Office||For purchase of goods and merchandise|
|Sales outlet||Purchasing or information gathering exercise|
|Mine, quarry, oil or gas well or any other place of extraction of natural resources|
Mandatory requirements for PEs in India:
- Maintenance of books of accounts and other documents in accordance with the provisions
- Auditing of accounts by an accountant and a duly signed and verified audit report obtained in the prescribed format before the due date of filing the return of income
- Taxation of profits attributable to a PE in India at the rate of 40% (plus applicable surcharge and cess) on a net basis, subject to domestic tax provisions
- Mandatory permanent account number (PAN) , tax deduction and collection account number (TAN) and indirect tax registrations
- Filing of return of income in India
- Deduction of expenses incurred, such as salary cost of employees, from income attributable to a PE, subject to its compliance with withholding tax provisions under domestic tax provisions
- Mandatory compliance with withholding tax requirements – withholding tax on payments made, filing of withholding tax returns, issue of tax withholding certificates, etc.
- Payment of indirect tax and compliance with its related rules
- Mandatory personal taxation of employees of foreign companies in India
The concept of permanent establishment is one of the most important concepts in international taxation. The existence of a PE or otherwise, would in most cases determine the exposure to domestic tax liability in the country of source. It is, therefore, imperative to understand the concept fully before embarking on the structuring of activities in another jurisdiction. Attribution of profits to a Permanent Establishment has also been one of the major issues both for taxpayer as well as tax advisers.
If you are looking to establish your PE in India, our team of professionals can assist you in complying with all the mandatory requirements and compliances as prescribed by law. We can provide assistance in registration under indirect taxation, acquisition of PAN and TAN, auditing services, payroll processing services, etc.
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