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Permanent Establishment and the OECD Commentary

Related Content: Electronic Commerce; Embedded Software; OECD’s Technical Advisory Group n Treaty Characterisation of E-Commerce Payments;

There is broad consensus on clarification of the Commentary on the OECD Model Tax Convention (`Model`) in respect of the application of the current definition of permanent establishment. In short, the clarification of the Committee states:
- that a web site cannot, in itself, constitute a permanent establishment;
- that a web site hosting arrangement typically does not result in a permanent establishment for the enterprise that carries on business through that web site;
- that an Internet service provider normally will not constitute a dependent agent of another enterprise so as to constitute a permanent establishment for that enterprise and that while a place where computer equipment, such as a server, is located may in certain circumstances constitute a permanent establishment, this requires that the functions performed at that place be significant as well as an essential or core part of the business activity of the enterprise.

Of necessity this clarification assists considerably in the formation of international ta planning and offshore tax and treaty structuring.

Know your Offshore Terms:

Offshore - Definitional Content of Term

In its origins, the term offshore refers to tax haven jurisdictions. The term has more recently come to embrace even high tax jurisdictions where funds are placed or operations or transactions are located in a different country for fiscal, regulatory, secrecy or similar reasons.

Pioneer Industries Incentives

Pioneer industries may be entitled to complete freedom from income tax on the basis of the product investment levels, skills, and advanced technology; and dividends paid out of the exempt income may also be free of tax. Post-pioneer companies may also be taxed at a concessionary rate. Pioneer industries incentives may play a role in an international tax plan, by narrowing the gap between high tax jurisdictions and tax havens or international offshore financial centers (IOFCs). Pioneer status may be extended to companies providing engineering, technical, and computer-based industrial design services.

Export Incentives

Companies that export manufactured goods frequently benefit from a reduction in corporation tax. The definition of manufacture may be extended to include a wide range of items. Export incentives may play a role in an international tax plan, by narrowing the gap between high tax jurisdictions and tax havens or international offshore financial centers (IOFCs).

Permanent Establishment Concept

The term permanent establishment, as employed in the OECD Model Convention and in most tax treaties, includes especially: a place of management; a branch; a factory; a workshop; a mine, quarry, or other place of extraction of natural resources; or a building site or construction or assembly project that exists for more than twelve months. Avoiding or creating a permanent establishment may be an important factor in the design of an international tax plan.

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