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January 13, 2022
PE Watch: Latest developments and trends, January 2022
Model Rules on the Pillar Two Global Minimum Tax
On 20 December 2021, the Organisation for Economic Co-operation and Development (OECD) released the Pillar Two Model Rules as part of the two-pillar solution to address the tax challenges arising from the digitalization of the economy.
Pillar Two includes two interlocking rules that together comprise the Global Anti-Base Erosion (GloBE) rules: (i) the Income Inclusion Rule; and (ii) the Undertaxed Payment Rule. According to the Model Rules, a Permanent Establishment (PE) is in-scope of the GloBE rules if the head office is part of a Multinational Enterprise (MNE) group subject to the GloBE rules. For GloBE purposes, a PE covers a place of business (including a deemed place of business) that meets one of the following conditions:
a) That is treated as a PE in accordance with an applicable tax treaty and taxed in accordance with a provision similar to Article 7 of the OECD Model Tax Convention.
b) Where the income attributable to it is taxed under a jurisdiction’s domestic tax law on a net basis.
c) Situated in a jurisdiction that has no corporate tax income system, if it would be treated as a PE under the OECD Model Tax Convention and taxed on the income attributable to it under Article 7 of that model.
d) If not described in (a)-(c), through which operations are conducted outside the jurisdiction of the head office, provided that the jurisdiction exempts the income attributable to those operations.
In addition, the Model Rules include specific rules applicable to the allocation of income or loss between a PE and its head office. For example, the net income or loss of a PE generally will not be included in the GloBE income or loss of the head office.
See EY Global Tax Alert, OECD releases Model Rules on the Pillar Two Global Minimum Tax: Detailed review, dated 22 December 2021.
Seychelles deposits instrument of ratification of the MLI
On 14 December 2021, Seychelles deposited its instrument of ratification of the Multilateral Instrument (MLI) with the OECD. Seychelles confirmed its preliminary positions regarding the PE provisions. Accordingly, it chose not to apply any of the PE provisions of the MLI. The MLI will enter into force for Seychelles on 1 April 2022.
Update to transfer pricing country profiles
On 13 December 2021, the OECD published updated transfer pricing (TP) country profiles reflecting the current TP legislation and practices of 21 jurisdictions. In this update, 3 new jurisdictions were added (Albania, Kenya, Maldives) and 18 jurisdictions were updated (Austria, Belgium, Bulgaria, France, Georgia, Germany, Indonesia, Ireland, Italy, Latvia, Malaysia, Mexico, Peru, Poland, Seychelles, Singapore, South Africa, and Sweden). Similar to the previous update, the TP country profiles include two questions in relation to PEs, namely: (i) whether the jurisdiction follows the Authorized OECD Approach (AOA) for the attribution of profits to a PE; and (ii) whether the jurisdiction follows another approach for the attribution of profits to a PE.
Currently, the TP country profiles cover 63 jurisdictions and the OECD expects to conduct further updates in the first half of 2022.
PE case law
Finland: Decision from the Supreme Administrative Court on preparatory and auxiliary activities
On 3 December 2021, the Finnish Supreme Administrative Court ruled on the case KHO: 2021: 171 to overrule the decision by the Finnish Administrative Court on the existence of a PE in Finland based on domestic law and the Nordic Multilateral Tax Treaty. In the case at hand, a nonresident company had three employees in Finland whose task was to present the company's pharmaceutical products in Finland to doctors and other pharmaceutical experts. The purpose of the meetings was to make the company's products known in Finland by sharing information about the company's products and the results of related research. The employees did not have the right to act or sign any contract on behalf of the nonresident company, receive orders or negotiate the sale price or other terms of the contract set by the company for the products. Also, the nonresident company did not have an office in Finland, and the employees worked from their homes and kept some equipment at home. Further, employees reported their activities to the Nordic Sales Manager in Sweden. The nonresident company did not assign them a separate office in Finland, and the nonresident company was considered to require them to work from their home office. Finally, all sales to Finnish market was managed through a third-party distributor.
The Finnish Supreme Administrative Court annulled the decision of the Finnish Administrative Court determining the existence of a PE in Finland. According to the Finnish Supreme Administrative Court, the nonresident company has a fixed place of business in Finland since the three employees were required to work from their home and thus such places are at the disposal of the nonresident company. However, the nonresident company’s core business is not the presentation of products and the activities carried on did not accrue income directly from the presentation of products in Finland and therefore such activities are auxiliary by nature within the meaning of Article 5 of the relevant tax treaty. As a result, the nonresident company should not be considered to have a PE in Finland.
France: Court of appeals clarifies taxation of PE
On 8 December 2021, the French Administrative Court of Appeals ruled on the taxpayer’s appeal following the decision issued by the French Administrative Supreme Court (Conseil d’Etat) in December 2020 (See PE Watch January 2021). In the case at hand, the question on the existence of a PE had already been answered by the Conseil d’Etat and the Administrative Court of Appeals only addressed the applicable method for a direct profit assessment of the PE by French tax authorities and applicable penalties associated with the non-disclosure of the PE (concealed activity).
As for the profit assessment, the Administrative Court of Appeals confirmed the methodology applied by the French tax authorities in the absence of accounting books and records, i.e., flat rate method to calculate profits based on bank receipts.
Generally, the non-disclosure of a PE in France may lead to: (i) 80% penalties; (ii) a 10-year statute of limitations; and (iii) now (although it was not applicable at the time) a direct referral of the case to the national prosecutor for financial crimes if the taxpayer was carrying on a “concealed activity” in France. However, based on previous case law, there is no concealed activity if the taxpayer made a mistake when assessing its tax liabilities in France and it had met its compliance obligations with another State with a similar tax rate and with which France has signed an administrative exchange treaty. This case law was not directly applicable due to the tax rate difference between Ireland and France but the Administrative Court of Appeals still held that the taxpayer made a mistake in assessing the existence of a PE and therefore did not carry on a concealed activity in France. This is because at the time of the financial years in dispute, there was still uncertainty on how to interpret the PE definition with respect to activities in the digital economy since the decision by the Supreme Court is considered as a significant deviation from previous decisions.
PE tax rulings
Denmark: Binding tax ruling on sales activities
On 13 December 2021, the Danish Tax Board (DTB) published binding tax ruling SKM2021.670.SR analyzing whether a German company would create a PE in Denmark. In this case, an affiliated Danish company changed its business model from selling and distributing goods in Denmark in its own name to be a sales agent for the German group company. The Danish company did not have the authority to conclude contracts on behalf of the Germany company but it was generally able to negotiate prices and other contract terms based on some guidelines provided by the German company. The Danish company also prepared the contracts to be signed by customers and was able accept orders from customers in Denmark on behalf of the German company.
The DTB concluded that the German company had a (agent) PE in Denmark due to the role of the affiliated Danish company. The reasoning for this was that Danish company plays a principal role leading to the conclusion of contracts that are routinely concluded without material modification by the German company. Also, the DTB found that the Danish company has been granted with such broad powers to negotiate and act on behalf of the German company that such powers have to be equated with a power of attorney to conclude contracts on behalf of the German company.
PE developments in response to COVID-19
Germany: Extension to the mutual agreement on frontier workers with Austria and Switzerland
On 1 and 20 December 2021, the German Ministry of Finance published an update to the mutual agreement with Switzerland and Austria, respectively, on frontier workers. Both mutual agreements include a section with respect to home office PEs. Accordingly, employees carrying out their activity in their home office in their country of residence solely as a result of the COVID-19 pandemic will generally not constitute a home office PE for their employers. The current updates extend the application for both mutual agreements to 31 March 2022. Other than the extension of the period of application, the content of the mutual agreements remains the same.
Ireland: Extension of concessional treatment for PE purposes due to COVID-19
On 23 December 2021, the Irish Revenue Commissioners (Irish Revenue) updated its guidance covering temporary concessional treatment for Corporation Tax purposes for individuals who may have been restricted from travel between countries because of the COVID-19 pandemic. In this update, the temporary treatment has been extended until 31 January 2022 and the Irish Revenue will keep under review this period to determine whether any further extension is required. Other than the extension of the temporary treatment, the content of the guidance remains the same.
Malaysia: Update to FAQs on international tax issues due to COVID-19
On 24 December 2021, the Inland Revenue Board of Malaysia published an update of its Frequently Asked Questions (FAQs) document on international tax issues due to the COVID-19 travel restrictions. The previous and current version of the FAQs clarify that the temporary presence of employees or personnel in Malaysia due to the COVID-19 travel restrictions would not result in the creation of a PE in Malaysia, provided that certain requirements are met. According to the current FAQs, in view of the reopening of international borders and travel restrictions being lifted, the tax concessions (including with respect to PE issues) will not be extended after 31 December 2021. Foreign businesses with employees present in Malaysia on a temporary or long-term basis should assess the impact of the cessation of the relevant concessions.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Belastingadviseurs LLP, Rotterdam
Ernst & Young Belastingadviseurs LLP, Amsterdam
Ernst & Young Solutions LLP, Singapore
Ernst & Young LLP (United States), Global Tax Desk Network, New York