Asia-Pacific Transfer Pricing Handbook

Chapter Forty

Permanent Establishment Parameters

Host Countries might be able to force multinational taxpayers to pay tax on their extended operations if the tax authorities are able to establish that these extended operations constitute a permanent establishment (PE) within their own territory. Developing and developed countries have long been asserting jurisdiction based on such PE claims. What is new to this tax regime are new methodologies—courtesy of the Organisation of Economic Co-operation and Development (OECD)—that enable tax administrations to assert a PE based on the extended operations of the multinational operations.

British-developed countries—including Australia, Canada, Hong Kong, India, Singapore, and the United States—apply long-existing common law determinations to the scope of PE activities. The host tax authority can ascertain whether its operations in a host country constitute a PE by applying common law principles. Into those established norms, the OECD formulated alternative approaches in July 2010 under which the host tax authority can ascertain whether operations in a host country constitute a PE.

We suspect that the tax authorities might view the OECD PE approach as adding to the government’s present tax arsenal, not replacing the existing common law approaches to assert PE status. We suspect that the OECD’s promulgation of PE principles will thus add to the tax exposure of the multinational enterprise (MNE).

OECD’S PERMANENT ESTABLISHMENT PROVISIONS ...