Preventing Artificial Avoidance of PE Status in International Business: Case Studies & Exemptions
Explore case studies on Agency PE and Preparatory/Auxiliary Services, along with PE exemptions for specific activities to prevent the artificial avoidance of Permanent Establishment status in the global tax landscape.
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BEPS Action Plan -7 Preventing the Artificial Avoidance of PE Status 1 28 April 2018
2 Agency PE
Agency PE Case Study I 3 Mechanics FCO sells various products and services worldwide through its websites. FCO and ICO are related enterprise. FCO Outside India ICO s employees habitually send emails, make telephone calls to or visit large organizations in order to convince them to buy FCO s products. Service Fees India Remuneration of ICO s employees is partially based on the revenues derived by FCO. ICO Online sale of goods/services Facilitation of sales without formal conclusion of contracts ICO s employees indicate the price that will be payable for the goods/services and contract will be concluded online with FCO. Customers ICO s employees also provide the customers with standard terms and conditions and convince the customer to purchase the goods/service without material modifications in terms of arrangement.
Agency PE Case Study II 4 Mechanics FCO sells various products and services worldwide. FCO ICO who is an independent enterprise engaged in agency business. Outside India Commission ICO plays the principal role which leads to conclusion of contracts for FCO. India Alternatively, ICO is a closely related enterprise. ICO Sale of goods/services Customers
5 PE exemption for specific activities
Preparatory and Auxiliary Services Case Study I 6 Mechanics FCO sells products in different parts of the world. FCO FCO is the buyer of the product from India and maintains purchase office in India. Outside India The employees who work at purchase office have special knowledge of the product and visit producers in India to determine the type/quality of the products according to international standards. India FCO s Purchasing office
Preparatory and Auxiliary Services Case Study II 7 Mechanics FCO is an investment fund. FCO FCO has an office in India. Outside India Office in India is engaged in collecting information on possible investment and also preparing reports, plans etc. on the particular fund. India FCO s Office
Preparatory and Auxiliary Services Case Study III Mechanics 8 FCO is engaged in selling of goods online and conclude contracts with customers online. FCO FCO through its employees, maintains a warehouse in India for delivery purposes. Outside India India There is no other business operations of FCO in India. Customer Warehouse* Delivery * Warehouse maintained by FCO or alternatively warehouse belongs to third party
9 Anti-Fragmentation Rule
Fragmentation of Activities Case Study I 10 Mechanics FCO a bank has a number of branches in India which constitute permanent establishments. FCO Outside India It also has a separate office in India where a few employees verify information provided by clients that have made loan applications at these different branches. India The results of the verifications done by the employees are forwarded to the headquarters of FCO where other employees information included in the loan applications and provide reports to the branches where the decisions to grant the loans are made. Document Verification office Branch analyze the
Fragmentation of Activities Case Study II 11 Mechanics FCO FCO and ICO are closely related enterprises. (manufacturer and seller) FCO maintains a small warehouse in India and performs delivery of goods sold by FCO to ICO. Outside India ICO is engaged in selling goods in India and ICO buy goods from FCO. India 100% Items stored in FCO s warehouse are identical to some of the items displayed in the store owned by ICO. F CO s small warehouse Customer I CO (Seller)
12 Splitting of contracts
Splitting of contracts Case Study I 13 Mechanics FCO1 FCO 100% FCO and FCO1 are closely related enterprises. FCO is awarded contract for the construction of power plant for ICO. The contract period is 22 months. Outside India India During the negotiation of the contract, the project is divided into 2 different contracts each lasting 11 months and concluded with FCO and FCO1. ICO FCO would be contractually liable for the entire contract with ICO.
Splitting of contracts Case Study II 14 Mechanics FCO and ICO are closely related enterprises. FCO FCO submits bid for the construction of power plant for ICO1. The contract period is 22 months. Outside India During the negotiation of the contract, the project is divided into 2 different parts onshore work allotted to ICO and offshore work allotted to FCO, each lasting for 11 months. India 100% I CO1 I CO FCO would be contractually liable for the entire contract with ICO1.
