EY Africa Tax Conference - United States

1 Permanent establishments risk in Africa EY Africa Tax Conference September 2014. Panel Moderator Panel Charles Makola Justin Liebenberg Chinyere Ike International Tax International Tax EY Nigeria EY South Africa EY South Africa Christopher Kirathe Josephine Banda EY Kenya EY Botswana Page 2 Permanent establishments risk in Africa Agenda Global focus on PEs is increasing General PE and Global perspective Provision of services Business travelers or seconded employees Sales through agents and commissionaires Arrangements involving sub-contractors Construction assembly or installation projects Toll or contract manufacturing arrangements Other Way forward Page 3 Permanent establishments risk in Africa Tax risk and controversy survey EY 2014 Tax risk and controversy survey Reputation risk BEPS and legislative risk Enforcement risk Operational risk Page 4 Permanent establishments risk in Africa EY presence in Africa EY.

2 EY office office No No EY. EY office, office, but but support support available available Page 5 Permanent establishments risk in Africa General PE and global perspective Page 6 Permanent establishments risk in Africa Permanent Establishment (PE). Art. 7(1) of the OECD and UN Model Conventions The business profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein.. Art. 5(1) of the OECD and UN Model Conventions .. a fixed place of business through which the business of an enterprise is wholly or partly carried on.. OECD and UN Model Convention Commentaries on Art. 5(1). Three requirements for the existence of a PE. 1. Fixed 2. Place of business 3. Business carried on through that fixed place of business Page 7 Permanent establishments risk in Africa The PE concept Structure of PE rule under OECD MC.

3 Basic rule a fixed place of business through which the business of the Foreign Enterprise(FE) is wholly or partly carried on Construction rule a building site, construction or installation project which exceeds 12 months Agency rule dependent agents having authority to habitually conclude contracts Services rule option provided to countries to include the rule in 2010 update Exclusion Subsidiary Exclusion for certain activities which have a Subsidiary, per se, not a PE unless it satisfies preparatory or auxiliary character any of the specified rules Fixed place used for storage, display, delivery of goods, fixed place used for purchase of goods and collection of information Page 8 Permanent establishments risk in Africa The PE concept Greater emphasis on Source State taxation UN Model Convention Lower activity threshold for constituting PE. (UN MC). Additional rule relating to Services PE.

4 Construction PE threshold reduced to 6 months Additional rule to cover dependent agent maintaining stock of goods for delivery Preparatory or auxiliary exclusion restricted to use of fixed place for storage or Key deviations in UN MC display Page 9 Permanent establishments risk in Africa OECD developments OECD revised discussion draft on PE (published in October 2012): Potential broadening of the PE concept Interpretation of at the disposal . PE through use of subcontractors an enterprise can carry on business activities in another state, even where such activities are carried on entirely or partly through a subcontractor Proposals not reflected in 2014 update of the OECD Model Tax Convention(OECD MC). BEPS Action Plan: Action 7 proposes to develop changes to the definition of PE to prevent the artificial avoidance of PE status in relation to BEPS, including through the use of commissionaire arrangements and under the exceptions for preparatory and ancillary activities target date: September 2015.

5 G20 Development Working Group on the Impact of BEPS in Low Income Countries, July 2014. Page 10 Permanent establishments risk in Africa What is the relevance of changes to the OECD or UN. Commentary? Page 11 Permanent establishments risk in Africa How to read PE survey results Beware! The in-betweens . Looks okay , but the light may change EY PE Survey conducted by EY South Africa Office, 2013. Page 12 Permanent establishments risk in Africa PE survey results Static vs dynamic approach Africa Rest of the world Botswana Austria Ghana Belgium Kenya Canada Mauritius Finland Mozambique Germany Namibia Greece Nigeria Norway Dynamic Static South Africa Turkey Unclear Tanzania UK. EY PE Survey conducted by EY South Africa Office, 2012. Page 13 Permanent establishments risk in Africa Arrangements that frequently give rise to PE challenges Bases for permanent establishment assertions (global parent companies).

6 Provision of services 57%. Sales through agents and commissionaires 31%. Business travelers or seconded employees 25%. Arrangements involving sub-contractors 16%. Construction assembly or installation projects 24%. Toll or contract manufacturing arrangements 8%. Other 11%. Page 14 Permanent establishments risk in Africa Services PEs Which situations? Country A Country B. Fly-in . consultant Page 15 Permanent establishments risk in Africa Services under the OECD Model Optional provision OECD commentary paragaph (optional provision). Notwithstanding the provisions of paragraphs 1, 2 and 3, where an enterprise of a contracting state performs services in the other contracting state: a) Through an individual who is present in that other state for a period or periods exceeding in the aggregate 183 days in any twelve month period, and more than 50 per cent of the gross revenues attributable to active business activities of the enterprise during this period or periods are derived from the services performed in that other state through that individual.

7 Or b) For a period or periods exceeding in the aggregate 183 days in any 12 month period, and these services are performed for the same project or for connected projects through one or more individuals who are present and performing such services in that other state the activities carried on in that other state in performing these services shall be deemed to be carried on through a permanent establishment of the enterprise situated in that other state. Page 16 Permanent establishments risk in Africa Subcontracting of services OECD vs UN any differences? Country A Subcontracting agreement Company A Company B. Country B. Customer 140 days 60 days Services PE? OECD: subcontracting explicitly carved out, unless subcontractor's personnel is supervised, controlled or given directions by the main contractor UN: no such explicit provision; reference to furnishing of services by employees or other personnel.

8 Page 17 Permanent establishments risk in Africa Statistics Services PEs in recent tax treaties Scope: 1,586 tax treaties concluded between 1 January 1997 and 1 January 2011. Treaties between Treaties between Treaties between Total two UN countries a UN and OECD two OECD. country countries UN model services provision (399 of 691) (242 of 694) (30 of 201) (671 of 1,586). Optional OECD. services provision (0 of 691) (4 of 694) (5 of 201) (9 of 1,586). Source: Bulletin for International Taxation, 1/2012. Page 18 Permanent establishments risk in Africa Arrangements that frequently give rise to PE challenges Bases for permanent establishment assertions (global parent companies). Provision of services 57%. Sales through agents and commissionaires 31%. Business travelers or seconded employees 25%. Arrangements involving sub-contractors 16%. Construction assembly or installation projects 24%. Toll or contract manufacturing arrangements 8%.

9 Other 11%. Page 19 Permanent establishments risk in Africa The discussion draft Dependent agent PEs (commissionaire). The working party has failed to reach a common conclusion on the Zimmer and (lower court) Dell cases However, the discussion draft proposes to add a new example to Para. of the commentary on Art. 5, which provides that: [ ] in some countries an enterprise would be bound, in certain cases, by a contract concluded with a third party by a person acting on behalf of the enterprise, even if the person did not formally disclose that it was acting for the enterprise and the name of the enterprise was not referred to in the contract.. Norwegian Supreme Court decision on Dell (2 December 2011): Commissionaire ( , Dell Norway) does not constitute a PE of Dell Ireland in Norway Contracts concluded by Dell Norway were not legally binding on Dell Ireland Decision in line with the Zimmer case Page 20 Permanent establishments risk in Africa Example Contract manufacturers and dependent agent PEs (DSM, Spain, 2008).

10 DSM DSM Switzerland and Roche Spain entered into Switzerland a contract manufacturing and marketing and Determines Supplies goods and promotion agreement quantities, performs marketing Roche Spain produces to order, based on design, etc. functions, but no authority instructions of DSM Switzerland to conclude contracts DSM Switzerland leases from Roche Spain a Roche Spain small warehouse for temporary storage of goods Findings of the Spanish National Court: Fixed place of business (warehouse), but no PE of itself, as storage is treated as an auxiliary activity No authority to conclude contracts under the marketing and promotion agreement, and thus no dependent agent PE under that agreement alone But DSM Switzerland had a dependent agent PE under the contract manufacturing agreement: The dependent agent clause operates not just when the agent has the authority to contract in the name of the foreign principal, but also when, given the nature of the activity, the agent involves the principal in the business activities of the domestic market.