Creating accidental permanent establishments

Creating accidental permanent establishments

KPMG’s Tax Value Chain Management partners, Tim Sarson and Amanda Tickel, advise on the issue of creating accidental permanent establishments


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In July, an Indian Tax Tribunal used LinkedIn profiles of a Fortune 100 company’s employees as evidence to establish the presence of a Permanent Establishment (PE) in India. The profiles contained details of the employee’s activities in India which were not seen to be of preparatory or auxiliary character, but constituted a PE.

India is not the first country to use social media as a tool for tax collection. In its quest to find and audit ‘tax dodgers’, the US Internal Revenue Service (“IRS”) uses online activity trackers to sift through the massive amounts of data available on the Internet. This data is then added to the information already collected such as Social Security numbers, health records, banking statements, and property.

So much for the importance of social media, but this case has a bigger story to tell about today’s multinationals and their workforces. The fact is that this company, like many others, operates matrix management. Its workforce is mobile, and global. In this environment it is quite possible that someone in India could be making a big contribution to a project led thousands of miles away.

In the developing world in particular, sending in project teams or secondees from outside the country, even for a short period, can trigger costly PE and payroll tax audits. This can make life difficult for rapidly growing businesses that want to deploy mobile talent when and where it is needed. Evidenced by a recent finding against a FTSE 100 company.

Despite the employees in the India case being subject to the control and supervision of the subsidiary, it was held that a PE was created since the employees continued to be the employees of the overseas entity and the services being rendered were for a subsidiary of the overseas entity.

Similarly, in recent years, China’s tax authorities have tightened the tax administration of expatriate secondment arrangements, whereby overseas parent companies may be challenged that their actions constitute provision of services to their China subsidiary and hence result in the creation of a Service PE in China.

So how should you manage your company’s PE risk?

The BEPS Action Plan is intended to help governments and companies navigate this complex global marketplace. The Country-by-Country reporting and Masterfile proposals force companies to identify where activities take place; the revised guidance on intangibles, one of a number of actions intended to “align Transfer Pricing with Value Creation”, allows them to attribute value across multiple locations, based on where value is actively created. But this is where matrix management, flat hierarchies and cross-border collaboration really makes things complicated from a tax perspective. It’s one thing to attack a structure where software rights sit in Bermuda but all the development happens in London. But what about a project where dozens of home workers collaborate virtually across 5 or 6 countries?

What happens if an engineering team moves on-site half way through a project, and then goes back again. Where was the intangible created? 

A confluence of tax and business changes is forcing MNCs to take a closer, real time, look at what the workforce is doing and where. Looser management hierarchies mean power is no longer as concentrated as it was. International tax changes push companies to reflect this new reality in their transfer pricing models. And the proliferation of social media gives us, and tax authorities, first hand evidence of what is going on.

Our advice to tax directors is this: take time to understand your workforce and what they really do; don’t assume that your transfer pricing documentation tells the whole story; take a look at what your company’s data is telling you; recognise that people and ideas move; and take note of what your employees are telling the world on Linkedin!

If you would like to discuss the issues raised as well as the data tools and risk management strategies available, please do not hesitate to contact us.

This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.

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