Wednesday, February 15, 2012

The OECD Model Tax treaty; Permanent Establishment, Pt. II

Today I'm going to continue looking at the OECD model tax treaty's definition of permanent establishment.  Let me start with, Article 5, Section 2, which states:

2. The term “permanent establishment” includes especially:
a)  a place of management;
b)  a branch;
c)  an office;
d)  a factory;
e)  a workshop, and
f)  a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.

These are nothing more than specific terms which are used across jurisdictions which "can be regarded, prima facie, as constituting a permanent establishment."  While like most things legal the actual determination will be based on a specific cases facts and circumstances, it goes without saying that the above terms are commonly understood throughout the taxing world. 

Article 5, section three offers the following definition regarding construction sites: " A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months."

The commentaries provide important clarification.  For example:
This paragraph provides expressly that a building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months. Any of those items which does not meet this condition does not of itself constitute a permanent establishment, even if there is within it an installation, for instance an office or a workshop within the meaning of paragraph 2, associated with the construction activity. Where, however, such an office or workshop is used for a number of construction projects and the activities performed therein go beyond those mentioned in paragraph 4, it will be considered a permanent establishment if the conditions of the Article are otherwise met even if none of the projects involve a building site or construction or installation project that lasts more than 12 months.
It's standard practice to have a portable office on the work site.  However, having one does not in and of itself create a PE -- unless that office also manages other work sites.  This will be very difficult to deal with.  My recommendation would be for the parties involved to maintain immaculate records.  There would also need to be extremely strict rules regarding communications, especially with other work sites (if they exist).

Also consider the following:
The term "building site or construction or installation project" includes not only the construction of buildings but also the construction of roads, bridges or canals, the renovation (involving more than mere maintenance or redecoration) of buildings, roads, bridges or canals, the laying of pipe-lines and excavating and dredging. Additionally, the term "installation project" is not restricted to an installation related to a construction project; it also includes the installation of new equipment, such as a complex machine, in an existing building or outdoors.
While the first part of the commentary shouldn't come as a surprise, it's important to note the second part -- name, the installation of equipment.   For companies that sell heavy machinery who also service and install that machinery, this is a very important piece of information.

Finally, consider that under the UN model treaty, the length of time necessary to establish a permanent establishment is lowered to 6 months.


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