1. 2 SUBSIDIARY as PE INTRODUCTION Foreign Enterprise doing business in another country – Options ...

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SUBSIDIARY as PESUBSIDIARY as PEINTRODUCTION

Foreign Enterprise doing business in another Foreign Enterprise doing business in another country – Optionscountry – Options

Direct Supply of products / rendering Direct Supply of products / rendering servicesservices

Construct SubsidiaryConstruct Subsidiary Establishing its own place of businessEstablishing its own place of business

Subsidiary Subsidiary per seper se not PE – Protection Clause not PE – Protection Clause 1943 – Mexico Model1943 – Mexico Model

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SUBSIDIARY as PESUBSIDIARY as PE

INTRODUCTION

Non tax situationsNon tax situations US Supreme Court – Environmental case US Supreme Court – Environmental case

– – Best Foods 66 USLW 4439 (US) (1998)Best Foods 66 USLW 4439 (US) (1998)

Controlling interest – Controlling interest – Agency -Avotus Agency -Avotus Corp V Canada (2007) DTC 215 (TCC)Corp V Canada (2007) DTC 215 (TCC)

Lifting the corporate veilLifting the corporate veil

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SUBSIDIARY as PESUBSIDIARY as PEINTRODUCTION

Subsidiary may constitute PE of the parent ifSubsidiary may constitute PE of the parent if Parent carries on business from subsidiary officeParent carries on business from subsidiary office

Subsidiary as agent of the parentSubsidiary as agent of the parent

Construction work – Subsidiary concluding contract – Construction work – Subsidiary concluding contract – While parent performs part of workWhile parent performs part of work

Among the above agency PE – popular and relevantAmong the above agency PE – popular and relevant

Issue – burning topic in Europe Issue – burning topic in Europe

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SUBSIDIARY as PESUBSIDIARY as PEBasic Rule PE – Art. 5(1)

Place – permanently used by the parentPlace – permanently used by the parent Power of disposition – EmployeePower of disposition – Employee

Tangible asset – sufficientTangible asset – sufficient

Bank note, Postal address, e-mail address Bank note, Postal address, e-mail address / website – not PE/ website – not PE

Capital assets, shares, patents, rights / Capital assets, shares, patents, rights / software – not PE software – not PE

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Fixed Place

Fixed PlaceFixed Place duration – immaterialduration – immaterial

Actual fixing on the soil not requiredActual fixing on the soil not required

Coherent whole – commercially and Coherent whole – commercially and geographicallygeographically

Fixed geographical point not requiredFixed geographical point not required

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Fixed Place

Duration test – certain degree of Duration test – certain degree of permanencypermanency

Right to use test – parent’s own businessRight to use test – parent’s own business

If preparatory of auxiliary activities – no If preparatory of auxiliary activities – no PE PE

Parent managing subsidiary’s business – Parent managing subsidiary’s business – no PE for parentno PE for parent

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Agency Rule PE – Art. 5 (5)Agency Rule PE – Art. 5 (5)

Agent different from enterprise itselfAgent different from enterprise itself

Acting on behalf of enterprise – in its own activitiesActing on behalf of enterprise – in its own activities

Subsidiary concluding contracts of parentSubsidiary concluding contracts of parent repeatedly – not isolatedrepeatedly – not isolated certain duration certain duration

Legal and economic transactionsLegal and economic transactions

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Agency Rule PEAgency Rule PE

Preparatory/ Auxiliary – do not trigger PEPreparatory/ Auxiliary – do not trigger PE

Exercise of rights to conclude contractsExercise of rights to conclude contracts

Dependent agent – instructions of parentDependent agent – instructions of parent

Independent agent – not PE Independent agent – not PE excess activities – may trigger PEexcess activities – may trigger PE

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Agency Rule PEAgency Rule PE

Legally & economically dependent on Legally & economically dependent on parentparent

Economic independence of subsidiary Economic independence of subsidiary essential for no PE statusessential for no PE status

Subsidiary – own business not dependent Subsidiary – own business not dependent agentagent

Renowned scholars views.Renowned scholars views.

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Foreign casesForeign cases

Inver world Inc 71 TCM (CCH) 3231 (1996)Inver world Inc 71 TCM (CCH) 3231 (1996)

Taisei Fire & Marine Insurance Co. Ltd 104 TC Taisei Fire & Marine Insurance Co. Ltd 104 TC 535 (1995)535 (1995)

OECD MC – Authority to conclude contracts – OECD MC – Authority to conclude contracts – Main activityMain activity

Philip Morris GmbH 4 ITLR Part 6 (2002)903 – Philip Morris GmbH 4 ITLR Part 6 (2002)903 – Italian Supreme Court Italian Supreme Court

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Attribution of profits – Subsidiary PEAttribution of profits – Subsidiary PE

Subsidiary if PE, has to file two Income Tax Subsidiary if PE, has to file two Income Tax ReturnsReturns

FAR analysis for attribution of profitsFAR analysis for attribution of profits

Transfer Pricing analysis paramountTransfer Pricing analysis paramount

Subsidiary’s own business and activity on behalf Subsidiary’s own business and activity on behalf of parentof parent

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SUBSIDIARY as PESUBSIDIARY as PEAttribution of profits – subsidiary PEAttribution of profits – subsidiary PE

PE Concept and Transfer Pricing analysis – PE Concept and Transfer Pricing analysis – Interdependent in this contextInterdependent in this context

Interhome AG – French Supreme Court (2003)Interhome AG – French Supreme Court (2003) CE June 03 no.224407 sect.min.CCE June 03 no.224407 sect.min.C

OECD Report – Attribution – PE –July 2008OECD Report – Attribution – PE –July 2008

PE – functionally distinct & separate entityPE – functionally distinct & separate entity

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Attribution of profits – subsidiary PEAttribution of profits – subsidiary PE

Profit attribution - FAR analysis – Transfer Pricing Profit attribution - FAR analysis – Transfer Pricing Principles Principles

Real challenge attribution of functions & risks to Real challenge attribution of functions & risks to PEPE

PE & TP challenges – Tax payer & Tax PE & TP challenges – Tax payer & Tax administratoradministrator

Tax authorities raise the issue of treating Tax authorities raise the issue of treating subsidiary as PEsubsidiary as PE

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SUBSIDIARY as PESUBSIDIARY as PEAttribution of profits – subsidiary PEAttribution of profits – subsidiary PE

Foreign parent to defend itself if no PE existsForeign parent to defend itself if no PE exists

TP adjustments – in the hands of subsidiaryTP adjustments – in the hands of subsidiary

Subsidiary as PE – foreign parent assessment in Subsidiary as PE – foreign parent assessment in state of sourcestate of source

Situations where PEs do not trigger to be borne Situations where PEs do not trigger to be borne in mindin mind

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Situations not triggering PESituations not triggering PE

Brokerage / Commissionaire agreements – Civil Brokerage / Commissionaire agreements – Civil Law Jurisdiction / Common Law JurisdictionLaw Jurisdiction / Common Law Jurisdiction

A toll manufacturing agreementA toll manufacturing agreement

Distribution agreement Distribution agreement Where distributor keeps its role – trader with minimum Where distributor keeps its role – trader with minimum

risksrisks

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Attribution – Transfer Pricing PrinciplesAttribution – Transfer Pricing Principles

Invoking PE by the Revenue is not a straight propositionInvoking PE by the Revenue is not a straight proposition

Assessee having lost on the earlier ground needs to Assessee having lost on the earlier ground needs to focus on attribution of profits to PEfocus on attribution of profits to PE

Authorized OECD approach (AOA) for attribution to be Authorized OECD approach (AOA) for attribution to be followedfollowed

TP Study very criticalTP Study very critical

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Other Foreign Cases :Other Foreign Cases :

Houle V Candadian National bank (1990) 3 SCR 122, Houle V Candadian National bank (1990) 3 SCR 122,

Dominion Bridge Co. Ltd. V The Queen, 75 DTC 5150 Dominion Bridge Co. Ltd. V The Queen, 75 DTC 5150 (FCTD): affirmed 77 DTC 5367 (FCA)(FCTD): affirmed 77 DTC 5367 (FCA)

The North West Life Assurance Company of Canada V The North West Life Assurance Company of Canada V Commissioner of Internal Revenue 107 TC 363 (1996)Commissioner of Internal Revenue 107 TC 363 (1996)

Panama Affiliate – Italy Supreme Court case 17206 / 06Panama Affiliate – Italy Supreme Court case 17206 / 06

Italy’s Estate tax – Supreme Court case No. 13579 / 07Italy’s Estate tax – Supreme Court case No. 13579 / 07

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Supreme Court – Italy case no. 17206 / 06Supreme Court – Italy case no. 17206 / 06

SUBSIDIARY -ITALY

PANAMA- AFFILIATE

TWO INDIVIDUALS COMMON SHARE HOLDER / DIRECTOR WORKED IN ITALY

1. REPRESENTATIVES AT ITALY OFFICE.2. BOOKS & RECORDS MAINTAINED AT ITALY OFFICE.3. BUSINESS OF PARENT CONDUCTED

Reaffirmed Philip Morris GmbH (2002) - Case

PE

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FORTRESSAGENT

TAISEI - JAPAN

UNAFFILIATEDNO PE

USA

REINSURANCE BUSINESS

LEGAL INDEPENDENCE

ECONOMIC INDEPENDENCE

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Indian Judicial rulingsIndian Judicial rulings

SET Satellite 106 ITD 175 (Mum) (2007)-SET Satellite 106 ITD 175 (Mum) (2007)-reversed – ITA no:944 0f 2007-dt.22 Aug’08reversed – ITA no:944 0f 2007-dt.22 Aug’08

Rolls Royce Plc (2008) 19 SOT 42 (Del)Rolls Royce Plc (2008) 19 SOT 42 (Del)

Galileo International Inc (2008) 19 SOT 257 Galileo International Inc (2008) 19 SOT 257 (Del)(Del)

Morgan Stanley &Morgan Stanley & Co. (2007) 292 ITR 416 (SC) Co. (2007) 292 ITR 416 (SC)

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ROLLS ROYCE PLC

UK

RRIL INDIA

PE - RRPLC

SUPPORT SERVICES

OFFICE OF RRIL AT THE DISPOSAL

INDIAN CLIENTS

SOLICITING & RECEIVING ORDERS WHOLLY & EXCLUSIVELY FOR RRLC

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Rolls Royce PlcRolls Royce Plc

RR Plc – employees frequently visited India – RR Plc – employees frequently visited India – used RRILs premisesused RRILs premises

Cost of maintaining office reimbursed to RRILCost of maintaining office reimbursed to RRIL

RR Plc deemed to have PE in India – Art. RR Plc deemed to have PE in India – Art. 5(1)5(1)

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Rolls Royce PlcRolls Royce Plc

RRIL canvassed business – wholly & RRIL canvassed business – wholly & exclusively – Agency PEexclusively – Agency PE

35% of the global profits attributed – 35% of the global profits attributed – marketing – Indiamarketing – India

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Galileo International Inc

TRAVEL AGENT (TA)

DISTRIBUTORGALILEO INC.

TELECOM SERVICE PROVIDER

Services of Distributor

Fees Payment

Does not charge feesProvides

support services and Equipments

Does not charge fees

PASSENGERS

INDIA USA

PAYMENTPAYMENT

AIRLINES

SERVER

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SUBSIDIARY as PESUBSIDIARY as PEGalileo International Inc

CRS –Telecom Network – Fixed place- PE – CRS –Telecom Network – Fixed place- PE – Art. 5(1)Art. 5(1)

Indian distributor –Dependent agentIndian distributor –Dependent agent

15% of the revenue attributable to Indian PE15% of the revenue attributable to Indian PE

As distributor was paid 33% no further As distributor was paid 33% no further attribution requiredattribution required

E-Commerce transactions – New approachE-Commerce transactions – New approach

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MSAS

INDIA

UNITED STATES

INTRA – COMPANY FLOW OF TRANSACTIONS

ARM’S LENGTH CONSIDERATION

EMPLOYEES – FOR

SECONDMENT & STEWARDSHIP

FUNCTIONS

BACK- OFFICE OPERATIONS

MORGAN STANLEY & CO (MSCo)

PROVISION OF SERVICES

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Morgan Stanley & Co

MSAS – back office services – Preparatory / MSAS – back office services – Preparatory / Auxiliary – No PEAuxiliary – No PE

MSAS – did not conclude any contracts – No MSAS – did not conclude any contracts – No Agency PEAgency PE

Stewardship services by employees of MSCo to Stewardship services by employees of MSCo to MSAS – Quality assurance – No PEMSAS – Quality assurance – No PE

Economic nexus – New conceptEconomic nexus – New concept

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Morgan Stanley & Co

Deputation of employees by MSCo – key Deputation of employees by MSCo – key managerial functions of MSAS – Service PEmanagerial functions of MSAS – Service PE

As MSAS was remunerated – ALP – No further As MSAS was remunerated – ALP – No further attribution attribution

MSAS – Service provider – also service PEMSAS – Service provider – also service PE

FAR analysis critical – cannot be generalizedFAR analysis critical – cannot be generalized

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UN MC – Force of Attraction

Art.7(1) – UN MCArt.7(1) – UN MC

Profits on direct sales also to be attributed to Profits on direct sales also to be attributed to PEPE

Art.7(3) – certain restrictions – ExpensesArt.7(3) – certain restrictions – Expenses

DTAAs – USA, Canada & Italy etc,.DTAAs – USA, Canada & Italy etc,.

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SUBSIDIARY as PESUBSIDIARY as PECONCLUSION

TRIGGER POINTSTRIGGER POINTS

Conduct of subsidiaryConduct of subsidiary

Legal & economic independenceLegal & economic independence

Representing the parentRepresenting the parent

Internal documentationInternal documentation

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