Eurasian Research Centre for Comparative and International Tax Law International tax and legal regulation of cross-border taxation.

Eurasian Research Centre for Comparative and International Tax Lawhttp://eurasiatax.com

International tax and legal regulation of cross-border taxation in BRICS countries

Procedural aspects of taxation of permanent establishments in BRICS countries

European-Asianlaw congress

ninth session

Eugene A. ZakharovYekaterinburg, June 18-19, 2015


• Domestic legislation does not have legal definition or clarification of the term “permanent establishment of foreign company” – it is used only in DTTs.

• To do business in Brazil, foreign company may open a branch or set up a domestic company.

Instruction № 81 (1999)

Federal level

State level

Brazil


Concept of “permanent establishment” is based on OECD Model Convention

“Source taxation” or “residence”?Source taxation – easy way

Permanent establishment:1. Activities within Brazil de-facto2. Activities through dependent agent

Service permanent establishment:Article 5 (Permanent establishment) – only in Brazil-China DTTArticles 7 (Business income), 12 (Royalties), 21 (Other income) (not available now)

Brazil (continue)

Brazil (continue)


Copesul Case (Case RE 1.161.467 - RS, 17 May 2012):

Germany

Copesul – CIA / Petroquímica do Sul

(Taxpayer)

Surface Engineering Products (Canadian entity)

Siemens Power Generation (German entity)

Canada

Brazil

Technical serviceswithout transfer of know-how

DTT Brazil-Canada: art. 7, 21DTT Brazil-Germany: art. 7, 22

Payment Payment


Copesul Case (Case RE 1.161.467 - RS, 17 May 2012):

Taxpayer Tax authorities

Court

Brazil (continue)


Influence of Copesul Case?Brazil (continue)

Russia


The presence or absence of a permanent establishment in the Russian Federation,foreign organizations determine on the basis of the provisions of the Tax Code, taking into account provisions of DTTs.

“Regular” activities - the Russian Tax Code approach“A certain degree of permanence and the absence of exceptional temporary nature of the activity” - OECD approach

Income of a permanent establishment Costs of a permanent establishment

Functions, risks, assets Economic feasibility

Source documents Source documents

Connection between source of income and PE Direct costs of PE should be incurred within RussiaAllocated costs on PE could be incurred anywhere

Necessity to establish methodology of income and costs determination

The calculation of the tax base separately for each PE/within the Group of PE

Russia (continue)


“Requalification” in permanent establishment“Oriflame Cosmetics” Case № А40-138879/14

“Oriflame Cosmetics” LLC (Russia)

• Royalties on subconcession agreements

• Royalties on subconcession agreements

Oriflame Kosmetiek B.V. (Netherlands)Oriflame Kosmetiek B.V. (Netherlands)

• Royalties on franchise agreements

• Royalties on franchise agreements

Oriflame Cosmetics S.A. (Luxembourg)

• “Oriflame Cosmetics” LLS is an “extension” of global Oriflame.• Legal status of Russian entity is not taken into account due to “piercing the

corporate vail”• The main purpose of payments was to obtain tax benefits

Court decisionCourt decision

India


• Concept of “business connection” in domestic legislation:“… all income accruing or arising, whether directly or indirectly, through or from any business connection

in India, or…» Section 9(1)(i) of Income Tax Act

• The expression "business connection" must denote something, which produces profits or gains and not a mere state or condition which is favorable to the making of profit. (CIT v Visalakshi Achi reported in [1937] 5 ITR 448)

• “Connection” between non-resident and business in India (CIT v National Mutual Life Association of Australia [1933] I ITR 350, 361 (Bom)

• There must be some element of continuity in the relationship between the parties (CIT v Metro Goldwyn Mayer (India) Ltd [1939] 7 ITR 176 (Bom)

• Existence of an agent is not necessary and where there is regularity and continuity of operations, there is a business connection. (Bikaner Textile Merchants Syndicate Ltd v CIT [1965] 58 ITR 169 (Raj)

• It is not the length of time during which the connection has subsisted but the nature of the connection which would determine whether a business connection has been established or not (Bikaner Textile Merchants Syndicate Ltd v CIT [1965] 58 ITR 169 (Raj); A P Damodara Shenoy v CIT [1954] 26 ITR 650 (Bom)

India (continue)


Testing components while determining PE status

Permanent establishment

FunctionsFunctions

SubjectiveSubjective ObjectiveObjective

• Place of doing business• Geographic criteria• Place of doing business• Geographic criteria

• Rights• Degree of permanence• Rights• Degree of permanence

• Commercial activity• Business connection• Commercial activity• Business connection


India (continue)Attribution of profits to PE

Rolls Royce Plc vs. ADIT (Delhi High Court)

Rolls Royce Plc (UK)

India

UK

Domestic customersDomestic customersRolls Royce Indian Limited (Local office)

Rolls Royce Indian Limited (Local office)

Provision of services

Sales of aircraft engines and spare

parts

Reception of requisition notes

Rolls Royce Indian Limited (UK)

Marketing services agreement and delivery services in India


Income was counted proportionally net of expenses for marketing services

Factually local office rendered services not for Rolls Royce Plc (UK) but for Rolls Royce Indian Limited (UK)Key responsibility of local office was to obtain requisition notes and securing delivery of goodsEmployees of Rolls Royce Plc (UK) often visited India and used local office premises for activitiesEmployees of Rolls Royce Indian Limited (UK) took part in meetings with clients, where strategic business decisions were made

India (continue)Attribution of profits to PE

Rolls Royce Plc vs. ADIT (Delhi High Court)


Attribution of profits to PE (continue)Centrica India Offshore Pvt. Ltd. v. CIT [W.P.(C) No. 6807/2012]

Centrica India Offshore Pvt. Ltd

British Gas Trading Ltd (UK)

Director Energy Marketing Ltd. (Canada)

UK

India

Back-office services agreement

Secondment of personnel

Centrica Plc (UK)

CanadaSecondment of personnel

India (continue)


India (continue)Attribution of profits to PE (continue)

Centrica India Offshore Pvt. Ltd. v. CIT [W.P.(C) No. 6807/2012] (continue)

Despite the fact that formal control and supervision of the seconded staff carried out in India, the actual location of such skilled staff deemed to create a permanent establishment in India

Despite the fact that payments for the services under the secondment contract were named “compensation”, this does not negate their nature as payment for services, even in the absence of margin.

Consequently, such “compensation” shall be deemed as a “profit” of foreign companies, obtained through a permanent establishment in India.

China


• In DTTs used both models: UN Model and OECD Model• Concept of “establishment” (“jigouchangsuo”) in domestic legislation• Interpretation of tax legislation – authority of State Administration Of Taxation of China.

(Guoshuifa [2010] № 75)

China (continue)Suzhou regulation


Hotel

Netherlands

Hong Kong

Managing companyManaging company

Management services Hiring

and control

Hong Kong bank account

Compensation in the amount of 2% of the company's profit + 5% gross profit

China

Service providersService providers

South Africa


• OECD Model is used• “Source taxation” approach• Residence on the “basis of origin” or “place of effective management”• Taxation of revenues but not income in accordance with domestic Income Tax Act


Thank you for your attention!

Eurasian Research Centre for Comparative and International Tax Law International tax and legal regulation of cross-border taxation.

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tax base

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