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
Eurasian Research Centre for Comparative and International Tax Lawhttp://eurasiatax.com
• 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
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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)
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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
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Copesul Case (Case RE 1.161.467 - RS, 17 May 2012):
Taxpayer Tax authorities
Court
Brazil (continue)
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Influence of Copesul Case?Brazil (continue)
Russia
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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)
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“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
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• 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)
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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
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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
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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)
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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)
Eurasian Research Centre for Comparative and International Tax Lawhttp://eurasiatax.com
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
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• 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
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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
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• 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