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November 10, 2022
PE Watch: Latest developments and trends, November 2022
PE domestic law
Colombia modifies proposal on Significant Economic Presence
On 6 October 2022, Colombia’s Senate and House of Representatives approved the tax reform bill submitted in August 2022. This bill was subject to changes, inter alia, it modifies the proposal on Significant Economic Presence (SEP). According to the new proposal, a nonresident entity with a SEP in Colombia would be subject to a 10% withholding tax. However, the nonresident entity may opt to assess its income tax liability at a 5% rate over gross income, subject to the nonresident entity filing an income tax return in Colombia.
According to the bill, the withholding tax agents would be credit and debit card issuers and prepaid card sellers, payment gateways and other entities. In addition, the bill would allow a tax treaty to prevail over the SEP provision when the relevant nonresident entity is a tax resident in a tax treaty jurisdiction.
In the case of a transfer of goods, a nonresident entity would trigger a SEP in Colombia when the following conditions are met:
In the case of digital services rendered from abroad, a SEP would be triggered regardless of whether the above criteria are met.
The updated bill will be discussed in second debate by the plenary of both houses before it can become law.
See EY Global Tax Alert, Colombia’s modified tax reform bill approved in first debate, dated 19 October 2022.
Rwanda updates PE definition
On 28 October 2022, Rwanda's new Income Tax Law (law no. 027/2022 of 20/10/2022) entered into force, replacing law no. 016/2018 of 13/04/2018. The new law introduces changes to the corporate tax system, inter alia, an update to the permanent establishment (PE) definition. In particular, an Agency PE would exist if a person played a principal role leading to the conclusion of contracts in Rwanda on behalf of a nonresident enterprise. In addition, the new Income Tax Law introduces an insurance PE for insurance companies collecting premiums or insuring risks in Rwanda.
PE case law
India: Reinsurance activities do not constitute a PE
On 31 October 2022, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) ruled on case ITA No. 6935/Mum/2018 on the issue of whether a reinsurance company has a PE in India. In this case, an Irish company is engaged in the business of providing reinsurance services to its clients in India. The Assessing Officer (AO) observed that the Irish entity has a group entity in India which has provided a spectrum of vital and primary business functions, i.e., actuarial and underwriting services, which are key functions in the insurance business. It was also noted that the draft underwriting proposal is generated by the entity in India and that there is little decision-making involved post such underwriting activity. Further, the entity in India performs support activities, including marketing support services, claims support services, data synopsis services and other administrative services. According to the AO, the entity in India constitutes a PE of the Irish company.
The ITAT noted that for a fixed place PE to be constituted, there must exist a fixed place of business in India to be at the disposal of the foreign company, through which the foreign company carries on business. The ITAT further noted that there is no specific finding of any fixed place of business that has been put at the disposal of the Irish entity and thus, the reinsurance company did not have a Fixed Place PE in India. According to the ITAT, the core reinsurance activity is the assumption of risk, and that assumption of risk has been done outside of India. Therefore, there is no need to attribute any reinsurance profit in India. The Irish entity has duly paid for any activities being carried out by the entity in India, and the transfer pricing assessment has accepted that position.
India: Purchase of extended warranty does not constitute a PE
On 26 September 2022, the Delhi Bench of the ITAT ruled on case ITA No. 9198/Del/2019 whereby it analyzed whether a contract for extended warranty could constitute a PE. In this case, an Indian company is the exclusive dealer of a manufacturer of luxury cars. The Indian company purchased an extended warranty from a unit of the manufacturer’s administrative services, which it further sold to customers in India.
The AO observed that the Indian company entered into contracts for an extended warranty with customers in India on behalf of the unit of the manufacturer’s administrative services. According to the AO, the Indian company was not authorized to enter into such contracts, and it was merely acting as a dependent agent of the manufacturer’s administrative services for providing extended warranty services.
The ITAT noted that that the extended warranty was an additional feature provided to customers in India which was not mandatory and the price of the extended warranty sold to customers in India was different from the price paid by the Indian company. In addition, the invoices to customers in India were issued under the name of the Indian company without any reference to the unit of the manufacturer’s administrative services. Thus, the relation between the parties recognized by law was only between the Indian company and the customers in India. Consequently, the ITAT concluded that the Indian company cannot be construed as a Dependent Agent PE of the nonresident.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Belastingadviseurs LLP, Rotterdam
Ernst & Young Solutions LLP, Singapore
Ernst & Young LLP (United States), Global Tax Desk Network, New York