International Taxation - Permanent Establishment (PE) Evaluation.pdf

International Taxation - Permanent Establishment (PE) Evaluation

1. Concept of Permanent Establishment (PE),
Business Connection (BC) and
Significant Economic Presence (SEP)

2. Table of Contents
1.Chargeability of Non –residents
2.Business Connection -a broad overview
3.Permanent Establishment -a broad overview
4.BC Vs PE
5.Fixed place PE
6.Construction / installation PE
7.Agency PE
8.Service PE
9.Exclusions from PE
10.Implications of PE in India
11.Curative Measures
12.Risk mitigation strategies

3. Chargeability of Non
–Residents

4. •IfaCompanyisincorporatedinIndia,itsincomeistaxableinIndia.IndiahasrighttotaxglobalincomeofthisCompanybasedontheprincipal
of"Residentialbase"oftaxation.Indiaalsohasarighttotaxtheincomeoftheforeigncompanyornon-residenttotheextenttowhichthesourceofincome
issituatedinIndia.
•AspertheIndianIncomeTaxAct(TheAct),ifanyincomeofaforeigncompanyisreceivedordeemedtobereceivedinIndiaORisaccrued/arisedor
deemedtohaveaccrued/arisedinIndia,thesourceofsuchincomeissaidtobeinIndiaandbyvirtueofprincipalof"sourcebase"oftaxation,Indiahas
righttotaxsuchincome.
•ThereareonlycertaincategoriesofincomelikeRoyalties,Feesfortechnicalservices,interest,dividendetc.thatarecoveredbythissection.Suchtaxation
isgenerallyatareducedrateoftaxandongrossreceiptoftheforeigncompany/non-residents.
•However,iftheforeignCompanyornon-residententerprisehasextendedperiodofpresenceinIndiaforcarryingouttheirbusinessactivityinIndia,the
incomederivedbysuchforeignCompanytotheextentitisattributabletotheirpresenceinIndiawillbecometaxableinIndia.
•Fromthislogic,theconceptofPermanentEstablishment(PE)isderived.
•Article5onDoubleTaxAvoidanceAgreements(DTAA)thatIndiahassignedwithvariouscountriesthusdefinesthetermPEas"AFixedplaceofbusiness
throughwhichthebusinessofanenterpriseiswhollyorpartlycarriedon."
•AtthisjunctureitisimportanttounderstandthattheprovisionsofIndianIncome-taxlawswhichgovernthetaxationofthenon-residentinIndia.
Chargeability of Non –residents
Introduction

5. •Section 5 and section 9 of the Indian Income Tax Act,
1961 (‘the Act’) embody the ‘source rule’ of taxation in
India
•Significant from the perspective of taxation of Non –
residents [‘NR’] in India
•Sec9(1)oftheActencapsulatesthecaseswhere
incomeisdeemedtoaccrueorariseinIndia
-Creates a legal fiction
-“BusinessConnection”isdiscussedin
section9(1)(i)oftheAct
-Theconceptofbusinessconnectionis
generallyappliedwherenon-resident’s
countrydoesnothaveDTAAwithIndia
•NRsaretaxedinIndiainrespectof:
-incomereceivedordeemedtobereceived
inIndia;
-Incomethatisaccruedorarisingor
deemedtobeaccruedorarisinginIndia
•Noexhaustivedefinitionofbusinessconnection
undertheAct-muchwiderinconnotation
-usedeffectivelybytheTaxauthoritiestotax
incomeofNRinIndia
-However,theconceptofbusinessconnection
isoverriddenbytheArticle5oftheDTAAsto
providefortaxationonlyifthereexistsaPE.
Applicability of Provisions of the Act
Chargeability of Non –residents

6. Business Connection
-A broad overview

7. 7
Income deemed to accrue or arise in
India includes all income accruing or
arising, whether directly or indirectly,
through or from any business
connection in India
No income shall be deemed to have
accrued in India for NR from certain
activities:
Proportionate attribution -Income
attributable to the operations carried
out in India would be liable to tax, if all
activities are not carried out in India
•purchaseofgoodsinIndiafor
export;
•news publishingagency
collectingnews/viewsinIndiafor
transmissionoutofIndia
•Shootingofacinematographic
filminIndia(ifentityisnotowned
byIndiancitizens);
•Foreigncompanyengagedin
miningofdiamonds,displayof
uncutandunassorteddiamondin
CGapprovedspecialzone
Business Connection –A bird’s eye view

8. Business Connection -Agency
8
BusinessconnectionincludesbusinesscarriedoutthroughanagentwhoisactingonbehalfofaNR,
whensuchagent:
•hasandhabituallyexercisesauthoritytoconclude
contractonbehalfofNR,unlessactivitiesarelimitedto
purchaseofgoods/merchandizefortheNR;or
•habituallyconcludescontracts;or
•habituallyplaystheprincipalroleleadingtoconclusion
ofcontractsbythatNR
•Onlyifcontractis
-inthenameoftheNR;or
-forthetransferoftheownership/grantingright
touse,propertyowned/sub-letbyNR;or
-fortheprovisionofservicesbytheNR;
•habituallymaintainsinIndiaastockofgoodsfromwhichheregularlydeliversgoodsormerchandiseon
behalfoftheNR
•habituallysecuresordersinIndia,mainlyorwhollyfortheNRand/oritsaffiliates
•Businessconnectiondoesnotincludeanybusinessactivitycarriedoutthroughabroker,generalcommission
agent,etc.havinganindependentstatuswhoisactingintheordinarycourseofhisbusiness
•Ifsuchbroker,etc.worksmainlyorwhollyonbehalfofaNRand/oritsaffiliates,heshallnotbedeemedto
beanagentofanindependentstatus

9. 9
•SEPdefinedtomean:
-transactioninrespectofanygoods,servicesorpropertycarriedoutbyanon-residentinIndia,
includingprovisionofdownloadofdataorsoftwareinIndia,
providedthepaymentstherefromexceedsmonetarythresholdasmaybeprescribed;or
-systematicandcontinuoussolicitingofbusinessactivitiesorengagingininteractionwithusersin
Indiathroughdigitalmeans
providedthenumberofusersinIndiaexceedingthenumberasmaybeprescribed
•TransactionstoconstituteSEPinIndiairrespectiveofwhetherornot;
-TheagreementforsuchtransactionisenteredinIndia;
-NRhasplaceofbusinessorresidenceinIndia;
-NRrendersservicesinIndia
•Onlysomuchofincomeasisattributabletothespecifiedtransactionsoractivitiestobedeemedto
accrueorariseinIndia
Threshold of ‘revenue’
and ‘users’ to be
decided after
consultation with
stakeholders
India to re-negotiate
existing DTAAs for
inclusion of the new
nexus rule
Cross border business
profits to continue to
be taxed as per
existing treaty rules till
the DTAAs are
modified
Non-treaty
jurisdictions impacted
by the amendment
Business Connection –A bird’s eye view

10. Permanent
Establishment
-A broad overview

11. 11
1
3
Section92FoftheITA
definesPE
Section44DA–Specialprovisionsfortaxationof
RoyaltyandFeesforTechnicalServicesforanon-
residentcarryingonbusinessthroughaPEinIndia
TaxableinIndiaaspernormalprovisionsofITA.No
deductionforamountspaidtoHOorotheroffices
otherthanreimbursement
2
PEincludesafixedplaceof
businessthroughwhichthe
businessoftheenterpriseis
whollyorpartlycarriedon
PE under the ITA

12. 12
TheConceptofPEisdefinedbyArticle5ofthetaxtreaties
OECD:ThePEconceptmarksthedividinglineforbusinessesbetweenmerelytradingwithacountryand
tradinginthatcountry
PEisatermdefinedintaxconventionstodeterminewhenanon-residentistaxableinasourcecountry
UnderArticle7,aContractingStatecannottaxtheprofitsofanenterpriseoftheotherContractingStateunless
itcarriesonitsbusinessthroughaPEsituatedtherein
WhentheenterpriseoperatesthroughaPE,theprofitsattributabletoit,maybetaxedbythecountrywhere
thePEislocated,leavingthecountryofresidencetogiverelieffromdoubletaxation
WhereaPEisinexistence,thecountrywhereitislocatedmayalsotaxitscapitalgains,dividends,interest
androyaltiesthatareeffectivelyconnectedtosuchPE
PE under the ITA

13. Fixed BasePE AgencyPE ServicePE EquipmentPE
Place of Businessand
Virtual Projection
(DisposalTest)
Fixed place
(PermanenceTest)
Business conducted
through a fixed place
(ActivityTest)
Principal –Agent
contract
Dependent Agent (control
anddetailed
instructions)
Habitually concludes
contracts/plays a principal role
in concluding contracts/secures
orders/habitually maintains
stock for regular delivery on
behalf ofprincipal
Provision ofservices
Through employees or
otherpersonnel
Presence of employees
and/or gross revenue
linked to suchactivities
If article relatingto PE
includes use of
equipmentPE
Applicable only when
not regarded as
royalties
Under the DTAAs, PE is not constituted where only preparatory and auxiliary activities are performed
Construction PE
Relevant for
construction,
erection,
commissioning,
installation
contracts
Generally, PE
constituted when
project duration more
than 6 months or 9
months (depending on
tax treaty)
•Provisions of bilateral tax treaty with respect to agency PE are proposed to be amended through Multilateral Convention to Implement Tax Treaty Related
Measures [“MLI”].
•India and Japan are also signatory to MLI.
PE –Types of PE under most treaties

14. BC Vs PE

15. BC PE
Domestic law concept International tax concept
No exhaustive definition Defined exhaustively as well as
illustratively
No classification Classified as fixed place, agency,
construction & service PE on the basis
of activitiesperformed
Wider concept Narrower concept
BC vs. PE

16. Fixed Place PE

17. Permanentestablishmentmeansafixedplaceofbusinessthroughwhichthebusinessofan
enterpriseiswhollyorpartlycarriedon
17
Fixed Permanence test
Place of business Disposal test
Carrying on
business through
such place
Business activity
test
Fixed Place PE:A fixed place PE of a foreign enterprise exists in
the India (source country) when the following tests are satisfied:
•Physical place:There must be a physical place of business.
It does not matter whether this place of business is owned or
leased.
•Location:The place of business must be a fixed place. The
residence of an employee may also be treated as a PE if the
same if used as office for business.
•Permanence:The place of business must be for a fixed and
reasonably longer period of time. The term'carried on'in the
definition connotes that a mere passing, transient or casual
activity, though carried out from a particular place, does not
fall within the scope of the definition of PE. There should be a
reasonable degree ofcontinuity and regularity.
•At Disposal:The place must be at the disposal of the foreign
entity. If the place of business is situated in the business
premises of another enterprise and the foreign enterprise has
certain part thereofat its constant disposal, that premises
may be considered as having a PE in India.
•Business activity:Proper business activity must be carried
out from such fixed place.
Fixed Place PE

18. •Locationtestrequiresthatplaceofbusinesstobelocatedatasingleplace
•Itdoesnotmeanthattheequipmentconstitutingtheplaceofbusinesshastobeactuallyfixedtothe
soilonwhichitstands.Itisenoughthattheequipmentremainsonaparticularsite
•OECD–Bothgeographicalandcommercialcoherencearenecessary,thefactthatactivities
maybecarriedonwithinalimitedgeographicalareashouldnotresultinthatareabeingconsidered
asasingleplaceofbusiness
•AnisolatedactivitycannotleadtoestablishmentoffixedplaceofPEastheingredientsofregularity,
continuityandrepetitivenessareessentiallymissing
Location test / duration test
18
Fixed Place PE

19. •ThetermPEincludesespecially:
aplaceofmanagement;
abranch;
anoffice;
afactory;
aworkshop,and
amine,anoilorgaswell,aquarryoranyotherplaceofextractionofnaturalresources
awarehouseinrelationtoapersonprovidingstoragefacilitiesforothers;
afarm,plantationorotherplacewhereagriculture,forestry,plantationorrelatedactivitiesarecarriedon;
aninstallationorstructureusedfortheexplorationorexploitationofnaturalresources,butonlyifsousedfora
periodofmorethan183days.
•OECDconsidersthesatisfactionoftheconditionsprescribedinArt.5(1)asaprerequisitefortheabovelistto
constitutePE.Indiadoesnotagreewiththisposition
Illustrative list of PE
19@ 2018 Deloitte Haskins & Sells LLP
Fixed Place PE

20. Construction /
Installation PE

21. •Abuildingsiteorconstruction,installationorassemblyprojectbutonlyifsuchsite,projectoractivitieslastmorethan183days.
•Forthesolepurposeofdeterminingwhetherthe183dayperiodreferredtoasabovehasbeenexceeded,
•(i)whereanenterpriseofaContractingStatecarriesonactivitiesintheotherContractingStateataplacethatconstitutesabuildingsiteor
construction,installationorassemblyprojectandtheseactivitiesarecarriedonduringoneormoreperiodsoftimethatintheaggregatedo
notexceed183days,and
•(ii)connectedactivitiesarecarriedonatthesamebuildingsiteorconstruction,installationorassemblyprojectduringdifferentperiodsof
time,eachexceeding30days,byoneormoreenterprisescloselyrelatedtothefirst-mentionedenterprise,
Whereaoffice/workshopisusedforanumberofconstructionprojects,thenevenifnoneoftheprojectscontinuesformorethan6months,it
willbeconsideredasPEunderArt5(2)ifitsatisfiestheconditionofArt5(1)
Abuildingsiteorconstructionprojectincludes:
•Constructionofroads,bridgesorcanalsetc;
•Layingofpipelines,excavationordredgingprojects;
•Majorrenovationworkthatismoresubstantivethanmeremaintenance;
•On-siteplanningandsupervisionorerectionofbuilding,projectetc.
AssemblyorInstallationproject:Itincludesinstallationofnewequipment,plant&machineryoreveninstallationofcomputernetworkoranERP
packageiftheactivityoftheinstallationexceedstheprescribedtimeperiod.
21
Construction / Installation PE

22. Supervisoryactivities
•Thepre-requisiteforsupervisoryactivityconstitutingaPEisthatsuchactivityshouldbecarriedoutonlyinconnectionwithabuildingsite,a
construction,assemblyorinstallationprojectandnototherwise
•APEisconstitutedifthesupervisoryactivitiesexceedthetimelimit
−Itisimmaterialwhethertheindividualbuildingsite,aconstruction,assemblyorinstallationproject(inrespectofwhichthesupervisoryservices
arerendered)meetsthetimetest
−Minimumthresholdincaseofsupervisoryactivitiescoveredunderaseparateandindependentcontractmustbeconsideredfromthedatewhen
suchactivitiesstartandnotfromthedateofcommencementoftheentireproject–[KruppUDHEGmbH(28SOT254)(Mum)]
•Thereisnoconditionthatthepersonperformingsupervisoryactivitiesshouldalsobeprovidinginstallationservice
Measurementoftimeperiod
•Asiteexistsfromthedateonwhichthecontractorbeginshiswork,includinganypreparatorywork,inthecountrywheretheconstructionistobe
established(Ex.:aplanningofficeisinstalled)
•Asiteshouldnotberegardedasceasingtoexistwhenworkistemporarilydiscontinued–forexample,duetobadweather,shortageofmaterial,
labordifficulties.Seasonalandtemporaryinterruptionsshouldbeincludedindeterminingthelifeofasite
•Insomeprojects,duetoitsnature,contractor'sactivityhastoberelocatedcontinuouslyoratleastfromtimetotime,astheprojectprogresses.For
example–thiswouldbethecaseforinstancewhereroadsorcanalswerebeingconstructed,waterwaysdredged,orpipe-lineslaid
•Timespentpreviouslyonothersitesorproject(whichareunconnected)shouldnotbecounted
•IfaforeignenterprisesubcontractspartofitsworkinSourceStateinrelationtosuchsiteorprojectoractivitiestoasub-contractor,the
timespentbythesubcontractormustbeconsideredastimespentbythemaincontractorinsourcestate.
22
Construction / Installation PE

23. Agency PE

24. 24
•‘Habitually’referstoasystematiccourseofconductonthepartoftheagentandwould
meanrepeatedlyandnotinisolatedcases
•Dependsofthenatureofthecontractandbusinessoftheprincipal
What is ‘habitual
exercise’?
•Hehassufficientauthoritytobindtheforeignenterpriseandhaspowerstodecidethefinal
termsofthecontract
•Whileconcludingcontracts,hecanactonhisown,freely,andwithoutcontrolfromthe
principal
•Heisauthorizedtonegotiateallelementsanddetailsofacontractwhicharebindingonthe
enterprise
Authority to conclude
contracts
•IndianEvidenceAct–thecurrentroutineofbusinessusuallyfollowedbyapersonorin
whichhewasordinarilyorhabituallyengaged
•Anagentcannotbeactingin‘ordinarycourse’ofhisownbusinessifheperformsactivities
whicheconomicallybelongtothesphereoftheforeignenterpriseratherthantothatofhis
ownbusinessoperations
Ordinary course of
business
•Anagentpredominantlyactingforoneenterprisewouldbeeconomicallydependentonthelatterandhence,itwould
beadependentagent,eventhoughitmaynotbelegallydependent
Agency PE

25. Wholly or mainly on behalf of NR
25@ 2018 Deloitte Haskins & Sells LLP
•OECD-Whatisrelevantisthattheagentsactivitiesareforasingleprincipalandnotthattheprincipal’sactivitiesarecarriedonbya
soleagent
•Anagentactingwhollyoralmostwhollyonbehalfofasingleentityoritsgroupentityindicatesacertaindegreeofdependenceas
suchanentitymayplayasignificantroleinthebusinessoftheagent;accordinglysuchanagentwouldnotfallwithinthescopeofan
independentagent
•OECDmodelcommentarystatesthatapersonisindependentonlyifheisso,legallyandeconomicallyandactsinthe
ordinarycourseofbusinesswhenactingonbehalfoftheenterprise
•OECD-Wheretheperson'scommercialactivitiesfortheenterprisearesubjecttodetailedinstructionsortocomprehensivecontrolby
it,suchpersoncannotberegardedasindependentoftheenterprise
•Thefactthattheprincipalisrelyingonthespecialskillandknowledgeoftheagentisanindicationofindependence
•Dependencyisalsodeterminedbyhavingregardtotheextenttowhichtheagentexercisesfreedomintheconductofbusinesson
behalfoftheprincipalwithinthescopeofitsauthority
Agency PE

26. 26@ 2018 Deloitte Haskins & Sells LLP
Person acting on behalf of an enterprise
authoritytoconcludecontracts,habitually
concludescontracts/habituallyplaysthe
principalroleleadingtoconclusionof
contracts
Legally and economically independent
Ordinary course of business
No PE
PE
YES
YES
YES
NO
NO
NO
NO
YES
Agency PE -Summary

27. Service PE

28. •Service PE could be constituted in India where any enterprise:
 renders services in India (other than fees for technical services)
 to third party / associated enterprise
 through employees or other personnel
 for a specified period (183 days or more) within any 12-month period commencing or ending in the fiscal year concerned
28
Service PE
•Service PE –How to compute no. of days?
Solar days vs. Man days
-Electrical material CenterCo. Ltd., vs. DDIT [ITA(TP) No. 1104 (Bang) 2013]
-Clifford Chance vs. DCIT as reported in 76 TTJ 0725/82 ITD 0106 (Bombay ITAT)
Finding of ITAT
“MultiplecountingofthecommondaysistobeavoidedsothatthedayswhentwoormorepartnerswerepresentinIndia,together,aretobe
countedonlyonce.Multiplecountingwouldleadtoabsurdresults.Forexample,if20partnerswerepresentinIndiatogetherfor20daysin
onefiscalyear,multiplecountingwouldresultin400days.Therecannotbemorethan365daysinayear.”

29. Checklist for determining existence of Service PE
29
Criteria Check
Furnishing services other than Royalty / FTS
√
Services through employees or other personnel within state
√
No. of days the employees or other personnel furnishing services in India
√
Test of employment whether of the foreign company or Indian company √
Service PE vis-à-vis activities falling within negative List of PE [i.e. preparatory and
auxiliary activities –Article 5(4) or combination thereof, except 5(4.1)]
√
Majority of DTAAs signed by India which have a service PE clause specifically exclude income covered
under Article 12/13 (Royalties and Fees for Technical Services)
Service PE

30. DITvs.MorganStanleyandCo.Inc.andMorganStanleyandCo.Inc.vs.DIT292ITR416(SC)
•TheApexCourthadheldthatwheretheactivitiesoftheforeigncompanyentailsitbeingresponsiblefortheworkof
deputationistsandtheemployeescontinuetobeonthepayrollofthemultinationalenterpriseortheycontinuetohavetheir
lienontheirjobswiththemultinationalenterprise,aserviceP.E.canemerge
•Intheabovedecision,theCourtlaidtwotests,viz.(i)responsibilityfortheworkofassignedemployee;and(ii)control
overtheassignedemployee,however,itdidnotbringoutthefacts/processwhichsubstantiatessatisfactionofthistwo
testsinthegivencase(exceptthatitmentionedthathavingemployee’slienovertheoriginalemploymentwasassumedas
theforeigncompanyretainingcontroloverthetermsandemployment)
DDITv.JCBamfordExcavatorsLtd.43taxmann.com343(DelhiITAT)
•TheDelhiTribunalheldthatthedeputedemployeeswhichweresentonsecondmenttoIndiacontinuedtobeonthepayrollof
thetaxpayerandmaintainedtheirlienontheiremployment.Salaryfortheseemployeeswassoleresponsibilityofthetax
payer.TherewasnomaterialtoindicatethatthetaxpayerterminatedtheirservicesandtheywereemployedbytheIndian
Entity
Judicial precedents
30
Service PE

31. Exclusions from PE

32. BEPSAction7PreventingtheArtificialAvoidanceofPE-proposedchanges
32
Article 5(4)(a)
•Storage,displayanddeliveryofgoodsmaynotqualifyforexemptionifsuchactivitiesare
essentialandsignificantpartoftheactivitiesofanenterpriseasawhole
Article 5(4)(b)
•Ifstockaremaintainedatwarehousemaintainedbyindependentagent,noPEsinceplaceisnot
atdisposal
•However,ifunlimitedaccesshasbeenprovided,PEmaytriggerifstorage,displayanddeliveryof
goodsdoesnotconstitutepreparatoryandauxiliarycharacter
Article 5(4)(c)
•Goodsheldforprocessing–merepresenceofgoodswouldrenderthepremiseaPE,butif
unlimitedaccessisprovided,itcouldgivepowerofdisposal
•Maintenanceofsuchgoodsshallconstitutepreparatoryorauxiliarytoavailexemption
•Exemptionsaresubjecttoanti-fragmentationrule
Article 5(4)(d)
•Exemptionisnotavailableinasituationwheretheoverallactivityoftheenterpriseconsistsof
sellinggoodsandwherethepurchasingactivityrepresentsacorefunctionoftheenterprises’
business
Exclusions from PE

33. BEPSAction7PreventingtheArtificialAvoidanceofPE–anti-fragmentationrule
33
•NewPara4.1:
-Topreventanenterpriseoragroupofcloselyrelatedenterprisesfromfragmentingacohesivebusinessoperationinto
severalsmalloperationsinordertoarguethateachismerelyengagedinapreparatoryorauxiliaryactivity
-Underparagraph4.1,theexceptionsprovidedinparagraph4donotapply
-Paragraph4shallnotapplytoafixedplaceofbusinessthatisusedormaintainedbyanenterpriseifthesame
enterpriseoracloselyrelatedenterprisecarriesonbusinessactivitiesatthesameplaceoratanotherplaceinthesame
ContractingState;and
thatplaceorotherplaceconstitutesapermanentestablishmentfortheenterpriseorthecloselyrelatedenterprise
undertheprovisionsofthisArticle;or
theoverallactivityresultingfromthecombinationoftheactivitiescarriedonbythetwoenterprisesatthesameplace,
orbythesameenterpriseorcloselyrelatedenterprisesatthetwoplaces,isnotofapreparatoryorauxiliary
character,
-Providedthatthebusinessactivitiescarriedonbythetwoenterprisesatthesameplace,orbythesameenterpriseor
closelyrelatedenterprisesatthetwoplaces,constitutecomplementaryfunctionsthatarepartofacohesivebusiness
operation
Requires detailed analysis of activities undertaken by an organization to identify complementary functions that are part of acohesive
business operation
Exclusions from PE

34. Implications of PE in
India

35. FollowingarethepossibleimplicationsifaPEissaidtobetriggeredinIndia
Business Income and profit
attribution
Taxauditrequirements(conditional),withholdingoftaxoranyothercompliancesundertheprovisionsof
theAct.Other compliances
•FEMAregulatesestablishmentofaforeignenterpriseinIndiaforcarryingonanyactivityrelatingto
branch,officeorotherplaceofbusiness.
•TheconceptofPEarisesunderthedeemingfictionoftheincometaxlawortaxtreaty
•ThisraisesagreyareaonwhetheraforeignenterpriseisrequiredtoobtainregistrationinIndiaforthe
activitieswhichcreatesvirtualPEinIndia.
Registration under FEMA
•BusinessincomeshallbetaxableforthePEinIndia.
•Foreignenterpriseisrequiredtoascertaintheprofitsthatareattributabletotheactivitiescarriedoutin
IndiainamannerprescribedundertheprovisionsoftheActandtaxeditattherateof40%[excluding
surchargeandeducationcess].
Return of Income
ReturnofincometobefiledinIndiabydeclaringthebusinessincomeearnedonaccountofaPEinIndia.
Implications of PE in India

36. Curative Measures

37. Inourview,followingaresomeofthecurativemeasuresthatmaybeadoptedwherethereisriskofPE:
Refer the slide on PE triggering points and on
preventive measures
CHANGING THE PROCESS
Non-residents may choose to
change the process flow to avoid
the PE triggering points along with
business rationale(discussed later)
SUO MOTO DISCLOSURE OF PE
1 2
Wherethereishighexposure,
Non-residentsshouldsuomoto
disclosethatithasaPEinIndia
•Paytaxesattherateof40%
ontheprofitsattributableto
thePEinIndia;and
•Filereturnofincome
consideringthesaidprofits.
(refertheslideonPE
implication)
ALIGNING COMPENSATION
MODEL
3
Aligning the compensation model
to represent better ALP as per the
FAR thereby subsuming the
compensation for PE exposure
ADVANCE PRICING
AGREEMENT
4
To cover all the existing and
proposed transactions by filing an
APA
Curative measures

38. Risk Mitigation
Strategies

39. To mitigate the potential PE exposure for any non-resident in India, in respect of the services provided,
Companies can evaluate the following options:
•Introductorymeetingwithconsultantstoraiseawarenessandpresentanoverviewofthechanging
landscapealongsidecurrentandfutureregulatorychallenges.
•Carryoutauditofthecurrentsetup
•Operationalpracticeofdocumentedpoliciesandprocedures
•Sufficientcoveragethrougharules-basedreviewoftheproceduresandpoliciesappliedtoeachbusiness
lineandterritory
•Improvementstotheinternalcontrolframeworkandidentificationofopportunitiesfortaxefficiencies
•Reducingtheriskofunexpectedtaxpaymentsbyminimizingtheriskoferrorsincludinginterestcharges
andpenalties
•Theabilitytomakerelevantdisclosurestotaxauthoritiesshowingappropriatemeasureshavebeentaken
tomanagePEissues
PE risk mitigation strategies

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