When Placing Overseas, can a TEAM Member Face a PE or a VPE Risk? Yes Indeed!
Although widely embraced by tax authorities everywhere, PE (Permanent Establishment) is not well-known among business people generally. This lack of understanding has resulted in many businesses facing demands from tax authorities for corporate tax (plus interest) on the profits made in their jurisdictions. Tax authorities can even demand employment taxes on the local salaries paid by the business. Indeed, tax authorities everywhere see PE assessments as an easy way to extract revenue from unwary foreign business in order to boost their country’s coffers.
PE is a proposition specified by a country’s tax laws and/or by their treaties with other countries. The OECD (Organisation for Economic Cooperation and Development) has defined PE as “a fixed place of business through which the business of the enterprise is wholly or partly carried out”. Importantly, that “place of business” usually gives rise to a tax liability in the country where it exists. Conversely, where there is no PE, neither the business nor the employees are locally taxed.
Cross-border e-commerce and digital transactions are at the heart of many Hi-Tech, Media and Communication clients of yours. Such businesses can generate revenue in countries where they have no physical presence. The OECD has been quick to pounce. It has expanded PE definitions by adding VPE (Virtual Permanent Establishment). Where a transaction or sale does not qualify under PE rules, the host country is able to withhold a business tax on any payments made locally. For example, the China authorities currently withhold between 5% and 10% on payments from Chinese companies.
Global e-commerce corporations are starting to be hit by higher tax rates for e-commerce and digital sales. The UK has sidestepped the intricate PE rules by levying an alternative business tax of 25% (higher than its corporate tax rate of 21%) on tech companies trading “virtually”. Since the UK agreed a settlement with Google for outstanding back-taxes, France is making a similar claim – but one which is 10-times the amount which Google paid to the UK.
TEAM Members should be aware tax offices here and abroad regularly surf the internet looking for fresh, tax-taking opportunities. If you have one or more virtual offices overseas, you need to be sure they are not building a tax debt in each of the countries where you have such offices.
Want to know more? As a TEAM Member you have free access to the TEAM International Helpline for a complimentary consultation to support your business. Either email TEAM@itsinternational.ltd.uk or call 020 7477 2660. We’re here to help you.