Failure to manage permanent establishment risks when doing cross-border business activities may result in an unexpected negative impact on a multinational corporation’s tax position.
With the trend of globalization, companies increasingly have extensive business operations across many territories and jurisdictions but not all of them have a good understanding of domestic tax regulations, in host countries, as well as tax treaties.
Meanwhile, the tax authorities in many countries are paying increased attention to and have aggressive policies on issues related to Permanent Establishment (“PE”), especially since the release of Base Erosion and Profit Shifting (“BEPS”) Action Plan by the Organisation for Economic Cooperation and Development (“OECD”) in 2015.
Therefore, one of the potential common tax exposures that international and global enterprises encounter in their normal course of tradeoff business is the situation in which an unintended “taxable presence,” i.e. PE, is created in a jurisdiction.
In practice, a PE is not exactly what it sounds like.
It might be created through business activities of corporations in the host countries and it is not easy to recognize in some circumstances. Consequently, failure in managing PE risks when doing cross-border business activities might result in unexpected negative impact on the tax position and worldwide business results of international and multinational corporations (e.g. tax claw-back, penalty and interest).
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