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2 SUBSIDIARY as PE INTRODUCTION Foreign Enterprise doing business in another country – Options  Direct Supply of products / rendering services  Construct Subsidiary  Establishing its own place of business Subsidiary per se not PE – Protection Clause 1943 – Mexico Model

3 SUBSIDIARY as PE INTRODUCTION Non tax situations  US Supreme Court – Environmental case – Best Foods 66 USLW 4439 (US) (1998)  Controlling interest – Agency -Avotus Corp V Canada (2007) DTC 215 (TCC) Lifting the corporate veil

4 SUBSIDIARY as PE INTRODUCTION Subsidiary may constitute PE of the parent if  Parent carries on business from subsidiary office Subsidiary as agent of the parent Construction work – Subsidiary concluding contract – While parent performs part of work Among the above agency PE – popular and relevant  Issue – burning topic in Europe

5 SUBSIDIARY as PE Basic Rule PE – Art. 5(1) Place – permanently used by the parent  Power of disposition – Employee Tangible asset – sufficient Bank note, Postal address, address / website – not PE Capital assets, shares, patents, rights / software – not PE

6 SUBSIDIARY as PE Fixed Place  duration – immaterial Actual fixing on the soil not required Coherent whole – commercially and geographically Fixed geographical point not required

7 SUBSIDIARY as PE Fixed Place Duration test – certain degree of permanency Right to use test – parent’s own business If preparatory of auxiliary activities – no PE Parent managing subsidiary’s business – no PE for parent

8 SUBSIDIARY as PE Agency Rule PE – Art. 5 (5) Agent different from enterprise itself Acting on behalf of enterprise – in its own activities Subsidiary concluding contracts of parent  repeatedly – not isolated  certain duration Legal and economic transactions

9 SUBSIDIARY as PE Agency Rule PE Preparatory/ Auxiliary – do not trigger PE Exercise of rights to conclude contracts Dependent agent – instructions of parent Independent agent – not PE  excess activities – may trigger PE

10 SUBSIDIARY as PE Agency Rule PE Legally & economically dependent on parent Economic independence of subsidiary essential for no PE status Subsidiary – own business not dependent agent Renowned scholars views.

11 SUBSIDIARY as PE Foreign cases Inver world Inc 71 TCM (CCH) 3231 (1996) Taisei Fire & Marine Insurance Co. Ltd 104 TC 535 (1995) OECD MC – Authority to conclude contracts – Main activity Philip Morris GmbH 4 ITLR Part 6 (2002)903 – Italian Supreme Court

12 SUBSIDIARY as PE Attribution of profits – Subsidiary PE Subsidiary if PE, has to file two Income Tax Returns FAR analysis for attribution of profits Transfer Pricing analysis paramount Subsidiary’s own business and activity on behalf of parent

13 SUBSIDIARY as PE Attribution of profits – subsidiary PE PE Concept and Transfer Pricing analysis – Interdependent in this context  Interhome AG – French Supreme Court (2003) CE June 03 no sect.min.C CE June 03 no sect.min.C OECD Report – Attribution – PE –July 2008 PE – functionally distinct & separate entity

14 SUBSIDIARY as PE Attribution of profits – subsidiary PE Profit attribution - FAR analysis – Transfer Pricing Principles Real challenge attribution of functions & risks to PE PE & TP challenges – Tax payer & Tax administrator Tax authorities raise the issue of treating subsidiary as PE

15 SUBSIDIARY as PE Attribution of profits – subsidiary PE Foreign parent to defend itself if no PE exists TP adjustments – in the hands of subsidiary Subsidiary as PE – foreign parent assessment in state of source Situations where PEs do not trigger to be borne in mind

16 SUBSIDIARY as PE Situations not triggering PE Brokerage / Commissionaire agreements – Civil Law Jurisdiction / Common Law Jurisdiction A toll manufacturing agreement Distribution agreement  Where distributor keeps its role – trader with minimum risks

17 SUBSIDIARY as PE Attribution – Transfer Pricing Principles Invoking PE by the Revenue is not a straight proposition Assessee having lost on the earlier ground needs to focus on attribution of profits to PE Authorized OECD approach (AOA) for attribution to be followed TP Study very critical

18 SUBSIDIARY as PE Other Foreign Cases : Houle V Candadian National bank (1990) 3 SCR 122, Dominion Bridge Co. Ltd. V The Queen, 75 DTC 5150 (FCTD): affirmed 77 DTC 5367 (FCA) The North West Life Assurance Company of Canada V Commissioner of Internal Revenue 107 TC 363 (1996) Panama Affiliate – Italy Supreme Court case / 06 Italy’s Estate tax – Supreme Court case No / 07

19 SUBSIDIARY as PE Supreme Court – Italy case no / 06 SUBSIDIARY - ITALY PANAMA- AFFILIATE TWO INDIVIDUALS COMMON SHARE HOLDER / DIRECTOR WORKED IN ITALY 1. REPRESENTATIVES AT ITALY OFFICE. 2. BOOKS & RECORDS MAINTAINED AT ITALY OFFICE. 3. BUSINESS OF PARENT CONDUCTED Reaffirmed Philip Morris GmbH (2002) - Case PE

20 SUBSIDIARY as PE FORTRESS AGENT TAISEI - JAPAN UNAFFILIATED NO PE USA REINSURANCE BUSINESS LEGAL INDEPENDENCE ECONOMIC INDEPENDENCE

21 SUBSIDIARY as PE Indian Judicial rulings SET Satellite 106 ITD 175 (Mum) (2007)- reversed – ITA no:944 0f 2007-dt.22 Aug’08 Rolls Royce Plc (2008) 19 SOT 42 (Del) Galileo International Inc (2008) 19 SOT 257 (Del) Morgan Stanley & Co. (2007) 292 ITR 416 (SC)

22 SUBSIDIARY as PE ROLLS ROYCE PLC UK RRIL INDIA PE - RRPLC SUPPORT SERVICES OFFICE OF RRIL AT THE DISPOSAL INDIAN CLIENTS SOLICITING & RECEIVING ORDERS WHOLLY & EXCLUSIVELY FOR RRLC

23 SUBSIDIARY as PE Rolls Royce Plc RR Plc – employees frequently visited India – used RRILs premises Cost of maintaining office reimbursed to RRIL RR Plc deemed to have PE in India – Art. 5(1)

24 SUBSIDIARY as PE Rolls Royce Plc RRIL canvassed business – wholly & exclusively – Agency PE 35% of the global profits attributed – marketing – India

25 SUBSIDIARY as PE SUBSIDIARY as PE Galileo International Inc TRAVEL AGENT (TA) DISTRIBUTOR GALILEO INC. TELECOM SERVICE PROVIDER Services of Distributor FeesPayment Does not charge fees Provides support services and Equipments Does not charge fees PASSENGERS INDIAUSA PAYMENT AIRLINES SERVER

26 SUBSIDIARY as PE Galileo International Inc CRS –Telecom Network – Fixed place- PE – Art. 5(1) Indian distributor –Dependent agent 15% of the revenue attributable to Indian PE As distributor was paid 33% no further attribution required E-Commerce transactions – New approach

27 SUBSIDIARY as PE MSAS INDIA UNITED STATES INTRA – COMPANY FLOW OF TRANSACTIONS ARM’S LENGTH CONSIDERATION EMPLOYEES – FOR SECONDMENT & STEWARDSHIP FUNCTIONS BACK- OFFICE OPERATIONS MORGAN STANLEY & CO (MSCo) PROVISION OF SERVICES

28 SUBSIDIARY as PE Morgan Stanley & Co MSAS – back office services – Preparatory / Auxiliary – No PE MSAS – did not conclude any contracts – No Agency PE Stewardship services by employees of MSCo to MSAS – Quality assurance – No PE Economic nexus – New concept

29 SUBSIDIARY as PE Morgan Stanley & Co Deputation of employees by MSCo – key managerial functions of MSAS – Service PE As MSAS was remunerated – ALP – No further attribution MSAS – Service provider – also service PE FAR analysis critical – cannot be generalized

30 SUBSIDIARY as PE UN MC – Force of Attraction Art.7(1) – UN MC Profits on direct sales also to be attributed to PE Art.7(3) – certain restrictions – Expenses DTAAs – USA, Canada & Italy etc,.

31 SUBSIDIARY as PE CONCLUSION TRIGGER POINTS Conduct of subsidiary Legal & economic independence Representing the parent Internal documentation

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