Global trading tax changes impact SMEs too

17 December 2016

Nobody can have failed to notice the ongoing media outcry against the tax arrangements of certain large multinational corporations or the challenges against them by various tax authorities and the European Commission.

But what if you are not a global multibillion dollar business? Surely all of this is not relevant to you? Wrong, I am afraid. The backlash against large corporate tax avoidance has generally targeted the largest multinationals but some of the new rules being introduced will apply to both small and medium size businesses too.

New rules

All businesses need to be aware of significant changes to the rules concerning the triggering of a tax liability in countries in which they operate through a ‘permanent establishment’ (PE).

By way of background, a country can generally claim taxing rights on profits that are attributable to a PE of a business trading in its territory. For most businesses this means that they may fall within local tax rules if they have a fixed place of business in that country or sell through a dependent agent. It is the rules in respect of these triggers that are changing and which will result in the hurdle for triggering a PE being lower in countries around the world.

The PE concept has been around for many years but businesses have been able to sidestep it, either accidently or intentionally, by arranging their affairs in such a manner as not to fall within the conditions for creating one. In particular, it has been possible to store goods in another country without creating a fixed place of business PE. Also an agency PE could often be avoided if sales contracts were actually concluded outside of the territory where they were discussed.

Now new recommendations by the OECD will seek to change the circumstances that trigger a PE. These recommendations seem destined to form the basis of local law in countries around the world. For instance, using a warehouse which forms an integral part of a company’s distribution business to store goods may now trigger a PE; as may the actions of a dependent agent who habitually plays a principal role in concluding contracts, no matter where the contract signing takes place.

Businesses that sell or distribute goods or services in another country therefore need to review this new PE risk as a matter of some urgency – no matter how large or small they are.

For more information please get in touch with Ken Almand, or your usual RSM contact.

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