Permanent establishments - EY

1 Permanent establishments Recent trends and developments Page 2 Moderator Panel Tom Philibert Albena Todorova Catherine Mbogo Partner EY Senegal Partner EY Mozambique East Region Tax Leader EY Kenya Ide Louw Akinbiyi Abudu Director EY South Africa Partner EY Nigeria Panel Africa Tax Conference 2015 Page 3 Action 7 overview Revised Permanent establishment proposals Profit attribution Updates from across the African continent What should you do next? Africa Tax Conference 2015 Agenda Page 4 Action 7 overview Africa Tax Conference 2015 Page 5 Article 7 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.

2 Article 5(1) .. the term Permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on. Article 5(3) A building site or construction or installation project constitutes a Permanent establishment only if it lasts more than twelve months. Article 5(4) Exemption for specific activities ( , storage, display or delivery of goods) and activities that are preparatory or auxiliary in nature. Article 5(5) Where a person, other than an independent agent, has, and habitually exercises, in a Contracting State an authority to conclude contracts in the name of the enterprise, the enterprise is deemed to have a Permanent establishment in that State.

3 Background Permanent establishment (PE) concepts Africa Tax Conference 2015 Page 6 Organization for economic cooperation and development (OECD) concern about potential for companies to engage in Base erosion and profit shifting (BEPS) activity by entering into arrangements that artificially avoid the occurrence of Permanent establishments (PE s). Aim of Action 7 Develop changes to the PE definition to prevent the artificial avoidance of PE status in relation to BEPS, including through the use of commissionaire arrangements and specific activity exemptions. Work on these issues will also address related profit attribution issues.

4 Coordination required with work on: Action 4 (interest deduction) Action 8 (intangibles) and Action 9 (risk and capital) Consider profit attribution when changing PE definition. Background Action 7 overview Africa Tax Conference 2015 Page 7 Action 7 overview Time line Stage 1: Drafting, discussion, consultation and publishing final deliverable with changes to Article 5 of the OECD Model Treaty and Commentary Stage 2: Adoption by countries in one of the following ways * Attribution of profits: work will continue and guidance is expected to be issued before the end of 2016.

5 Africa Tax Conference 2015 2014 2015 Discussion draft 31 Oct 2014 Public consultation Jan 2015 Revised discussion draft May 2015 Expected final deliverable Sept 2015* Changes adopted through a treaty Bilaterally Multilaterally When does it come into force? Depends on the length of time to negotiate the bilateral agreement and subsequent domestic law procedures to ratify the treaty so that it enters into force in each country. When does it come into force? Depends on the length of time to negotiate the multilateral instrument and subsequent domestic law procedures to ratify the treaty so that it enters into force in each country (note Action 15).

6 Page 8 Action 7 overview Overview of revised discussion draft Areas of focus Significant changes 1 Commissionaire (and similar arrangements) Expansion of Art. 5(5) by lowering the threshold for finding PE and tightening independence criteria in Art. 5(6) 2 Specific activity exemptions Narrowing scope of PE exemptions in Art. 5(4) 3 Fragmentation of activities Anti-fragmentation provision whereby preparatory or auxiliary exemptions would not apply to a place of business maintained by the enterprise or a connected enterprise in specific circumstances 4 Splitting up of contracts (projects where activities are carried out by several connected entities) Application of general anti-abuse rules or, alternatively, aggregation of time spent on connected activities (to be included in the commentary) 5 Insurance Addressed through more general changes proposed to Art.

7 5(5) and Art. 5(6) Africa Tax Conference 2015 Page 9 Revised Permanent establishment proposals Commissionaire and similar arrangements Africa Tax Conference 2015 Page 10 Commissionaire is a commercial structure in civil law jurisdictions: Commissionaire acts in its own name, but on behalf of the principal What is the OECD s stated concern? Example in the Revised Discussion Draft illustrates a case involving a business restructuring: Prior to the restructuring, products were sold in State Y by a company resident in State Y and a member of the same multinational group as the principal Lack of a PE means that profits from sales in State Y are taxed where the principal is resident ( , State X), whereas the commissionaire is taxed on the difference between the commission fee received and its expenses in State Y The Revised Discussion Draft proposes to modify Article 5(5) and Article 5(6)

8 , effectively lowering the PE threshold Africa Tax Conference 2015 Revised Permanent establishment proposals Commissionaire and similar arrangements X Co Principal Commissionaire Customer Commissionaire contract Sales contract Commission fee State X State Y Page 11 Changes to Art. 5(5) will lower the threshold for creating a PE by expanding the scope as follows: Revised Permanent establishment proposals Commissionaire and similar arrangements Art. 5(5) In the name of the enterprise For the transfer of ownership of or granting of right to use property owned by the enterprise, or that the enterprise has the right to use AFTER Enterprise deemed to have a PE when a person acting on behalf of the enterprise habitually concludes contracts or negotiates material elements of contracts BEFORE Actual conclusion of contracts required to create a PE For the provision of services Person acting on behalf of an enterprise habitually concludes contracts.

9 Or negotiates the material elements of contracts that are Africa Tax Conference 2015 Page 12 Proposed commentary elaborates on the meaning of the phrase concludes contracts: Contracts may be concluded without any active negotiation of the terms where standard terms of a contract are accepted Contracts may be concluded in a state even if signed outside that state Proposed commentary elaborates on the meaning of the phrase negotiates material elements of contracts: Aimed at situations where contracts are essentially negotiated in a given state but are subject to formal conclusion, or possibly further approval, outside that state For example.

10 Solicitation and receipt of orders that are sent directly to a warehouse from which goods are delivered and where the enterprise routinely approves these transactions May treat the contract as concluded in a state if the key ingredients of the contract have been determined in that state Material elements may vary but would include price, nature and quantity of the goods and services Revised Permanent establishment proposals Commissionaire and similar arrangements Africa Tax Conference 2015 Page 13 Article 5(5) also applies to contracts that create obligations that will effectively be performed by the foreign enterprise rather than the person contractually obliged to do so.