Eurasian Research Centre for Comparative and International Tax Law International tax and legal regulation of cross-border taxation in BRICS countries Procedural aspects of taxation of permanent establishments in BRICS countries European-Asian law congress ninth session Eugene A. Zakharov Yekaterinburg, June 18-19, 2015

Eurasian Research Centre for Comparative and International Tax Law Domestic legislation does not have legal definition or clarification of the term “permanent establishment of foreign company” – it is used only in DTTs. To do business in Brazil, foreign company may open a branch or set up a domestic company. Instruction № 81 (1999) Foreign company Ministry of Development, Industry and Foreign Trade National Department of Business Registration Federal level State level Foreign company Board of Trade (Junta Comercial) Brazil

Eurasian Research Centre for Comparative and International Tax Law Concept of “permanent establishment” is based on OECD Model Convention “Source taxation” or “residence”? Source taxation – easy way Permanent establishment: 1. Activities within Brazil de-facto 2. Activities through dependent agent Service permanent establishment: Article 5 (Permanent establishment) – only in Brazil-China DTT Articles 7 (Business income), 12 (Royalties), 21 (Other income) (not available now) Brazil (continue)

Eurasian Research Centre for Comparative and International Tax Law Copesul Case (Case RE RS, 17 May 2012): Germany Copesul – CIA / Petroquímica do Sul (Taxpayer) Surface Engineering Products (Canadian entity) Siemens Power Generation (German entity) Canada Brazil Technical services without transfer of know-how DTT Brazil-Canada: art. 7, 21 DTT Brazil-Germany: art. 7, 22 Payment

Eurasian Research Centre for Comparative and International Tax Law Copesul Case (Case RE RS, 17 May 2012): TaxpayerTax authorities 1 (Declaratory Act-ADN COSIT 1/2000) 2 Taxation under art. 21 “Other income” 3 Taxation in Brazil Brazilian company is liable to pay tax 1 (Declaratory Act-ADN COSIT 1/2000) can’t be used, as there was no transfer of technologies 2 Taxation under art. 7 “Business income” 3 Taxation in Canada and Germany (relatively) Court 1 Payments are not recognized as “income” in accordance with domestic legislation in force, but are recognized as worldwide income of service providers 2 Lex specialis derogate generalis 3 Taxation under “residence” principle Brazil (continue)

Eurasian Research Centre for Comparative and International Tax Law Influence of Copesul Case? TaxpayerTax authorities Declaratory Act-ADN COSIT 1/2000 Interpretative Declaratory Act No. 5/2014 (ADI 5/2014) Brazil (continue)

Russia Eurasian Research Centre for Comparative and International Tax Law The presence or absence of a permanent establishment in the Russian Federation, foreign organizations determine on the basis of the provisions of the Tax Code, taking into account provisions of DTTs. “Regular” activities - the Russian Tax Code approach “A certain degree of permanence and the absence of exceptional temporary nature of the activity” - OECD approach Income of a permanent establishmentCosts of a permanent establishment Functions, risks, assetsEconomic feasibility Source documents Connection between source of income and PE Direct costs of PE should be incurred within Russia Allocated costs on PE could be incurred anywhere Necessity to establish methodology of income and costs determination The calculation of the tax base separately for each PE/within the Group of PE

Russia (continue) Eurasian Research Centre for Comparative and International Tax Law “Requalification” in permanent establishment “Oriflame Cosmetics” Case № А /14 “Oriflame Cosmetics” LLC (Russia) Royalties on subconcession agreements Oriflame Kosmetiek B.V. (Netherlands) Royalties on franchise agreements Oriflame Cosmetics S.A. (Luxembourg) “Oriflame Cosmetics” LLS is an “extension” of global Oriflame. Legal status of Russian entity is not taken into account due to “piercing the corporate vail” The main purpose of payments was to obtain tax benefits Court decision

India Eurasian Research Centre for Comparative and International Tax Law Concept of “business connection” in domestic legislation: “… all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or…» Section 9(1)(i) of Income Tax Act The expression "business connection" must denote something, which produces profits or gains and not a mere state or condition which is favorable to the making of profit. (CIT v Visalakshi Achi reported in [1937] 5 ITR 448) “Connection” between non-resident and business in India (CIT v National Mutual Life Association of Australia [1933] I ITR 350, 361 (Bom) There must be some element of continuity in the relationship between the parties (CIT v Metro Goldwyn Mayer (India) Ltd [1939] 7 ITR 176 (Bom) Existence of an agent is not necessary and where there is regularity and continuity of operations, there is a business connection. (Bikaner Textile Merchants Syndicate Ltd v CIT [1965] 58 ITR 169 (Raj) It is not the length of time during which the connection has subsisted but the nature of the connection which would determine whether a business connection has been established or not (Bikaner Textile Merchants Syndicate Ltd v CIT [1965] 58 ITR 169 (Raj); A P Damodara Shenoy v CIT [1954] 26 ITR 650 (Bom)

India (continue) Eurasian Research Centre for Comparative and International Tax Law Testing components while determining PE status Permanent establishment Functions Subjective Objective Place of doing business Geographic criteria Place of doing business Geographic criteria Rights Degree of permanence Rights Degree of permanence Commercial activity Business connection Commercial activity Business connection Permanent establishment

Eurasian Research Centre for Comparative and International Tax Law India (continue) Attribution of profits to PE Rolls Royce Plc vs. ADIT (Delhi High Court) Rolls Royce Plc (UK) India UK Domestic customers Rolls Royce Indian Limited (Local office) Provision of services Sales of aircraft engines and spare parts Reception of requisition notes Rolls Royce Indian Limited (UK) Marketing services agreement and delivery services in India

Eurasian Research Centre for Comparative and International Tax Law Income was counted proportionally net of expenses for marketing services Factually local office rendered services not for Rolls Royce Plc (UK) but for Rolls Royce Indian Limited (UK) Key responsibility of local office was to obtain requisition notes and securing delivery of goods Employees of Rolls Royce Plc (UK) often visited India and used local office premises for activities Employees of Rolls Royce Indian Limited (UK) took part in meetings with clients, where strategic business decisions were made India (continue) Attribution of profits to PE Rolls Royce Plc vs. ADIT (Delhi High Court)

Eurasian Research Centre for Comparative and International Tax Law Attribution of profits to PE (continue) Centrica India Offshore Pvt. Ltd. v. CIT [W.P.(C) No. 6807/2012] Centrica India Offshore Pvt. Ltd British Gas Trading Ltd (UK) Director Energy Marketing Ltd. (Canada) UK India Back-office services agreement Secondment of personnel Centrica Plc (UK) Canada Secondment of personnel India (continue)

Eurasian Research Centre for Comparative and International Tax Law India (continue) Attribution of profits to PE (continue) Centrica India Offshore Pvt. Ltd. v. CIT [W.P.(C) No. 6807/2012] (continue) Despite the fact that formal control and supervision of the seconded staff carried out in India, the actual location of such skilled staff deemed to create a permanent establishment in India Despite the fact that payments for the services under the secondment contract were named “compensation”, this does not negate their nature as payment for services, even in the absence of margin. Consequently, such “compensation” shall be deemed as a “profit” of foreign companies, obtained through a permanent establishment in India. ● Case law tendency in India – rely on FAR analysis ● Necessity of tenable TP documentation for multi- national companies

China Eurasian Research Centre for Comparative and International Tax Law In DTTs used both models: UN Model and OECD Model Concept of “establishment” (“jigouchangsuo”) in domestic legislation Interpretation of tax legislation – authority of State Administration Of Taxation of China. (Guoshuifa [2010] № 75) Fixed place of business: Interrelation of Art 5(1) and Art 5(2) of Model Convention “through” which the business of an enterprise is carried on A building site: “… connected supervisory activities… ” Service PE: Definitions Calculation of time period Agency PE: ASEAN Model convention approach Permanent establishment

China (continue) Suzhou regulation Eurasian Research Centre for Comparative and International Tax Law Hotel Netherlands Hong Kong Managing company Management services Hiring and control Hong Kong bank account Compensation in the amount of 2% of the company's profit + 5% gross profit China Service providers

South Africa Eurasian Research Centre for Comparative and International Tax Law OECD Model is used “Source taxation” approach Residence on the “basis of origin” or “place of effective management” Taxation of revenues but not income in accordance with domestic Income Tax Act Service PE If there are VAT operations - the obligation to register and pay the appropriate amount of tax If the secondment of foreign personnel leads to a permanent establishment - the obligation to register as an employer Requisition of contract conditions from RSA resident

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