Kluwer International Tax Law

PE+ and the Evolution of Permanent Establishments in International Taxation

September 6, 2019

The concept of a ‘permanent establishment’ is a cornerstone of how multinational corporations are taxed. The digital economy is the major disrupter which may yet change how PE is defined – and taxes calculated. In the meantime, the PE+ platform allows a person to comparatively assess their PE options between selected different countries. This article explores these issues with the co-developer of the PE+ platform, the Swiss international tax specialist, Stefan Schmid.

Welcome to PE+

PE+ is an exciting platform and innovation that Wolters Kluwer has developed in collaboration with Stefan Schmid, a Swiss-based leading expert in international taxation. PE is what it’s all about in this article.

Permanent establishment (PE) is central to international taxation. PE is the taxable presence a company has in a country different to that of its head office. It’s a de facto consideration for any company doing business in another country.

If growth is envisaged, then operating in other countries may be needed. But how then would profits be allocated between the head office and the local presence in another country? That is the crux of the PE debate.

Traditionally, the basic approach to PE was quite simple: a fixed presence in a country + revenue generated in that country = permanent establishment. However, new distribution models and, in particular, the digital economy has been a major disrupter to this paradigm.

How do the twin factors of a ‘fixed presence’ and generated income in a country square with Big Tech companies, which often don’t have a fixed presence in a country or even directly attributable revenue therefrom?

These and other issues were discussed in a lively and interesting interview undertaken with Stefan Schmid, including his input into our PE+ platform.

A Man Made For Taxation

Stefan started by studying economics and then completed an MBA at a leading Swiss business school. His interest in tax was piqued during his economics studies, especially the international aspect thereof. He found the differences and similarities between different jurisdictions regarding taxation in international business compelling. That was to be his future.

For Stefan, the most fascinating aspect of international taxation was how intellectual property (IP) rights are valued across a value chain with an international footprint, as well as the taxation thereof. Deviating definitions can become complex for clients and tax consultants alike. For example, how does one ensure a corporation doesn’t pay twice on the same income?

Stefan started his professional career in 1994 with Coopers & Lybrand in New York. He soon discovered that the American taxation system was decidedly complex compared to that of Switzerland; and this from a man who candidly admits, “Trust me, I don’t like to do my own tax returns!” He returned to work in Switzerland in 1996.

Today he is based at PricewaterhouseCoopers (PwC) in Zurich as the Swiss International Tax Services Leader and also heads PwC Switzerland’s China Business Group. His work has included assisting multinational groups in setting up the operating legal models for their local operations, including whether they should have representation offices versus permanent establishments versus their own subsidiaries in given territories.

He has also assisted various multinational groups with claiming tax incentives and other benefits offered by Switzerland’s economic development programs.

Collaboration with Wolters Kluwer

Stefan spoke about how his collaboration with WK goes back a long time. He was co-editor of a book published by WK based on PEs, simply titled Permanent Establishments, and which comprised two main sections. The first section of the book written by Professor Dr. Ekkehart Reimer, which discussed how the Organisation for Economic Co-operation and Development (OECD) influenced the taxation of PE with the OECD Model Tax Convention.

The second section compared twenty different countries regarding how their taxation laws and rules ‘trigger’ PE and how this inter-plays with double taxation treaties concluded by the respective country, how they attribute profits, what happens if there is a loss in a given country, and so forth. As such, many diverse inputs from various countries were collated into this book, for which Stefan was the editor of the second section, i.e. the country chapters.

More About PE+

Stefan believes that the PE+ platform actually takes important aspects of the book Permanent Establishments into the digital realm. The ‘+’ in PE+ stands for additional functionality. There remains a strong emphasis on OECD rules regarding PE, which is reflected in the PE+ platform.

The platform is a tool that allows a user to set up to five countries side-by-side regarding their taxation regulations. It’s a comparative analysis tool, which, for example, allows a person to compare the taxation of local business activities between countries. The benefit is that a corporate can evaluate PE considerations in different territories in which they operate or wish to operate. PE+ does this by offering practical numerical examples with sample case studies.

The database currently comprises 20 countries, not all of which are OECD countries. The aim is that the PE+ country offering will be expanded to 40 countries in the near future.

What sets PE+ apart from other taxation-focused online platforms is simple: there is no similar comparative analysis tool regarding PE online. That alone makes it a very useful tool, according to Stefan.

The Future of PE

The PE concept is most certainly in a state of flux.

Once again, the digital economy is the ultimate disrupter at present and may yet affect how this profit allocation is determined, especially if the very definition of what constitutes ‘PE’ is in dispute.

Stefan speaks about how there is an ongoing international effort to try and have guidelines in place by end of 2020 on how to tax digital businesses. The trend will be a change as to how PE is defined. For example, a logical change could be that a company no longer needs to have a ‘fixed presence’ in a given country in order to be classified as having PE.

Also, there is much debate regarding taxation in terms of pure access to a given market. Minimum revenue-based thresholds may need to be established to ascertain what that ‘value’ of said access to a given market actually entails. That type of valuation is an issue that is easier debated than done.

Stefan does believe that there is a need for greater harmonization of taxation laws and/or applicable supranational rules between countries. As he says: “If there are no harmonized rules, then there is always the danger of double taxation or no taxation at all”.

Ultimately, for now it’s the digital economy that looms largest in international taxation discourse. As Stefan concurs, “it is probably in the forefront”. The definition of PE is, however, just one element of the equation. An even more fundamental issue will be how profits are allocated between different jurisdictions in which entities have a taxable presence. Once again, it’s the digital economy that provides the biggest challenges in this regard.

Will the current PE definitions suffice or will new rules/concepts be required in this regard? Only time will tell. In the meantime, and whilst that debate continues, PE+ can help any corporate user better understand the nuances in taxation laws between different countries. And like the PE debate, it too will no doubt evolve.

Wolters Kluwer


Kluwer International Tax Law is delighted to introduce PE+

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