Sign up for tax alert emails    GTNU homepage    Tax newsroom    Email document    Print document    Download document

July 11, 2024
2024-1348

PE Watch | Latest developments and trends, July 2024

OECD developments

OECD releases fourth batch of Administrative Guidance, including new rules for allocating taxes to foreign PEs

On 17 June 2024, the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework released a fourth tranche of Administrative Guidance on the Pillar Two Global Anti-Base Erosion (GloBE) Rules. Among other items, the June 2024 Administrative Guidance provides new rules on how to allocate current and deferred taxes, including taxes that may be pushed down to a foreign Permanent Establishment (PE).

Regarding current taxes, the June 2024 Administrative Guidance provides a common mechanism to push down an amount of the taxpayer's current taxes to a PE, where the taxpayer's domestic tax regime allows for cross-crediting of foreign taxes. The pushdown mechanism follows a four-step allocation formula:

  1. Determine the taxpayer's foreign-source income
  2. Calculate Allocable Covered Taxes
  3. Calculate the Cross-Crediting Allocation Keys
  4. Allocate Allocable Covered Taxes using the Cross-Crediting Allocation Keys

For deferred taxes, the 2024 Administrative Guidance adopts a "branch accounting" mechanism to push down an amount of deferred tax that is reflected in the financial accounts of a Main Entity "with respect to the assets and liabilities" of a foreign PE. This follows a five-step formula.

The June 2024 Administrative Guidance permits making a Five-Year Election on a jurisdictional basis to exclude allocations of deferred tax expense. If the election is made, any allocable deferred tax expense or benefit is excluded from Covered Taxes of all Constituent Entities in the jurisdiction where the PE is located and from Covered Taxes of the Main Entity.

Additionally, the June 2024 Administrative Guidance extends earlier guidance on Substitute Loss Carry-forward Deferred Tax Assets (DTAs) to foreign PEs. As such, a Substitute Loss Carry-forward DTA is available where a Main Entity has a domestic tax loss that offsets foreign-source income attributable to a foreign PE.

See EY Global Tax Alert, OECD/G20 Inclusive Framework releases fourth tranche of Administrative Guidance on Pillar Two GloBE Rules , dated June 28 2024.

PE domestic law

Pakistan expands definition of "business connection" to include Significant Economic Presence

On 29 June 2024, Pakistan published the Finance Act 2024 in the Official Gazette, enacting measures proposed in the 2024–2025 Budget. Among these measures, the definition of "business connection" has been expanded to include "significant economic presence" in Pakistan. This amendment broadens the scope of what constitutes Pakistan-sourced income for nonresidents. Business income of a nonresident is considered Pakistan-sourced income to the extent it is directly or indirectly attributable to a "business connection" in Pakistan.

The criteria for establishing a significant economic presence, as enacted, include:

  • Engaging in transactions involving goods, services or property, including data or software downloads in Pakistan, that exceed a prescribed aggregate payment threshold during the tax year
  • Systematic and continuous solicitation of business activities or engagement in interaction with a prescribed number of users in Pakistan through digital means

The Federal Board of Revenue has yet to prescribe the thresholds for digital transactions or user engagements.

These criteria apply regardless of the location where the transaction agreement is signed, whether the nonresident has a presence or place of business in Pakistan, or whether the nonresident renders services in Pakistan. Only the income attributable to these specified activities will be considered to accrue or arise from a business connection in Pakistan.

These amendments do not affect nonresidents covered by a tax treaty, as treaty provisions override domestic tax laws, subject to certain anti-avoidance provisions.

The new rules became effective on 1 July 2024.

* * * * * * * * * *
Contact Information

For additional information concerning this Alert, please contact:

Ernst & Young Belastingadviseurs LLP (Netherlands)

Ernst & Young Solutions LLP (Singapore)

Ernst & Young LLP (United States)

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor
 
 

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

 

Copyright © 2024, Ernst & Young LLP.

 

All rights reserved. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP.

 

Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

 

"EY" refers to the global organisation, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

 

Privacy  |  Cookies  |  BCR  |  Legal  |  Global Code of Conduct Opt out of all email from EY Global Limited.

 


Cookie Settings

This site uses cookies to provide you with a personalized browsing experience and allows us to understand more about you. More information on the cookies we use can be found here. By clicking 'Yes, I accept' you agree and consent to our use of cookies. More information on what these cookies are and how we use them, including how you can manage them, is outlined in our Privacy Notice. Please note that your decision to decline the use of cookies is limited to this site only, and not in relation to other EY sites or ey.com. Please refer to the privacy notice/policy on these sites for more information.


Yes, I accept         Find out more