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CITN TAX ACADEMY CHARTERED INSTITUTE OF TAXATION OF NIGERIA    INTERNATIONAL TAXATION  COURSE         ABIODUN SADIQ(MSC,NIM,ACTI)

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4 . CONCEPT OF PERMANENT ESTABLISHMENT i .       Application of domestic laws. The structure of the business profits provisions The permanent establishment concept. The fixed place of business-PE basic concept The Illustrative list in Paragraph 2. The building site PE

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What is Permanent  Establishment(PE )? Permanent Establishment  means  a fixed place of business through which the business of an enterprise is wholly or partly carried out .  What are the b asic  rules of permanent  establishment? Basic rules of P.E are: The  right to tax is traditionally based on  connection to  jurisdiction . Taxation  is divided into  international and domestic  systems . An  international tax system  subjects its residents to tax on their income from all around the world while a domestic tax system subjects its residents to tax only on income arising out of a source within the borders of such a  State. Under  the international tax system,  a State’s right to tax firstly depends  on whether  the taxpayer deriving the said taxable income is a resident of that country or not .  With  respect to an entity or enterprise,  its place of effective management  or its headquarters within a State is used to establish residence of such an entity in the State hence making the entity taxable.  Where  the enterprise does not have a  place of effective management  or headquarters in a State, hence rendering such enterprise  a non-resident . The  permanent establishment  becomes the minimum criteria for establishing that such an enterprise has an  economic presence within the borders of the source State.

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In  the presence of an enterprise having cross border transactions, it is possible for the enterprise to be subject to taxable under  both the domestic tax system  of the State within which it is a  resident  as well as under the international tax system of the  source State  within which it has a  permanent establishment,  thus raising the question of double taxation.  To  help solve such a situation,  legal instruments, arising in the form of tax treaties  were created  to combat double taxation of income  arising out of cross-border transactions.  Integral  in solving this situation is the concept of  permanent establishment .  Permanent  establishment is  a source rule ; thus a basic requirement to be met before business profits of a  non-resident  that are attributable to its  permanent establishment  in the  source State  are taxed in that  State. Article  7(1) of the UN Model establishes  that “the  profits of an enterprise of a  Contracting State  shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a  permanent establishment situated therein.”  The  requirement for a  PE or fixed base is , therefore,  a threshold that needs to be satisfied  before a source country can tax residents of other treaty countries on business  profits.

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Application  of domestic  laws When  a business embarks on a  global expansion plan , one of the core considerations is corporate taxation on foreign sourced revenue.  While a company will typically be taxed on profits in its home country, there may be additional taxes owed in other countries of business activity.  This could affect the net profitability of entering a new country, and should be part of an overall planning analysis. The  term ‘permanent establishment’ refers to  activity by a multinational that creates a sufficient presence in a foreign country to make it liable for local corporate taxes or value added tax (VAT).   This law reflects the rights of countries to tax businesses that are generating revenue through local operations, even if they maintain their principle headquarters in the home country. The reason this becomes important for planning purposes is that a company could be subject to ‘double taxation’ on profits, since the home country could tax those amounts as well.  Of, course there are tax treaties and foreign tax credits available that could lessen this burden, but it depends on the country of business activity and home country tax policies. There are three  main sources for PE definitions  that lead to corporate tax, in order of priority: - Tax  treaties between the home country of a multinational and the host country where business is conducted. The tax treaty may offer more lenient criteria for triggering PE or extend a lower corporate rate to treaty members. - The  domestic tax law of each country that governs corporate tax. This would subject any PE activity to local corporate tax rules and  rates. - OECD  and UN Models: Member states could be guided by the models developed by the OECD and UN to determine when PE is created.  These models may be useful where a tax treaty does not contain reference to newer forms of revenue creation, such as ecommerce and cross border digital transactions.

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-  When a  company is entering a new market, each of these should be evaluated and activity monitored to anticipate potential tax liability.   If there is no tax treaty in place, then the host country’s laws will take priority over any international conventions.   This becomes important if a company is entering a developing country that is not an OECD member, and does not have a tax treaty with the home country. Both  the OECD and UN continue to offer guidance and model language for tax treaties in an attempt to create international consistency in the area of PE.  Neither of these models have any legal impact, except where the language has been formally adopted into a  treaty. Nonetheless , the models are valuable in gaining insight to non-traditional types of PE such as a ‘virtual’ presence in a country.  The OECD in particular is targeting what they term ‘artificial PE avoidance’ by multinationals on foreign-sourced income.

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The structure of the business profits provisions - 	 Treatment of Profits and Expenses The Nigerian tax laws do not discriminate between residents and non-residents in the allowance of expenses for the purpose of determining the taxable income. All expenses proved to be incurred for the production of the income are allowable as deductions.  Rent , interest, royalties, management fees, head office expenses and similar expenses are deductible if proved that they are “wholly, exclusively, necessarily and reasonably” incurred for the purpose of the trade or business.  - Fixed  Base of Business : If a non-resident corporation has a “fixed base” from which it carries on its business or trade in Nigeria, the profits from such activities would be deemed to be derived from Nigeria. The term  “fixed base ” implies  that the place must be easily identifiable and must possess some degree of permanence . It includes:  b .( i ) facilities such as a factory, an office, a branch, a mine, gas or oil well  etc ; (ii) activities such as building, construction, assembly, or installation; and (iii) furnishing of services in connection with the activities mentioned above.  However , two cases are specifically exempted and these include :  ( i )  facilities used solely for storage or display of goods or merchandise; (ii)  facilities used solely for the collection of  information

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iii. The permanent establishment concept The  concept of residence  determines the extent to which the income of a taxpayer is liable to tax under a tax jurisdiction.  In  Nigeria, a resident person (individual or corporate) is assessable on the global income. This means that the taxpayer is liable to tax on the income or profits “accruing in, derived from, brought into, or received in Nigeria.” It also determines the scope of deductions that may be allowed for the purpose of computing an individual’s chargeable income. For instance, only residents may  claim children’s allowance, dependents’ allowance and life assurance allowance.   For income tax purposes, a person may be resident, non-resident or possess dual residence . a )  Resident Individual-   An individual is regarded as resident in Nigeria throughout an assessment year if he: ( i ) is domiciled in Nigeria; (ii) sojourns in Nigeria for a period or periods in all amounting to an aggregate of 183 days or more in a 12 month period (inclusive of annual leave or temporary period of absence); or (iii)serves as a diplomat or diplomatic agent of Nigeria in a country other  than Nigeria . b )  Resident Corporation : A company is resident in Nigeria if it is incorporated in Nigeria .

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c)  Non-resident Individual : A non-resident individual is a person who is not domiciled in Nigeria or who stays in Nigeria for less than 183 days but derives income or profits from Nigeria. A non-resident individual becomes liable to tax from the day he commences to carry on a trade, business, vocation, or profession in Nigeria.  d)  Non-Resident Corporation : This is a company or corporation that is not registered or incorporated in Nigeria but which derives income or profits from Nigeria.  It is to be mentioned here for emphasis, that exemption from incorporation does not confer exemption from payment of tax on any company . Every company, resident and non-resident, is liable to tax in Nigeria if its income is liable to tax under the provisions of the Companies Incomes Tax Act . .

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iv. The fixed place of business-PE basic concept 	 Find below conditions(test) that must  be fulfilled to determine the existence of a  P ermanent  E stablishment(PE). The  “place of business” test - The  existence of a “place of business”, i.e., a facility such as premises or, in certain instances, machinery or  equipment; this place  of business must be “fixed”, i.e., it must be established at a distinct place with a certain degree of  permanence;  i.e  the  carrying on of the business of the enterprise through this fixed place of business. This means usually that persons (personnel) not “independent” of the enterprise conduct business in the State in which the fixed place is situated. Permanence  test In  order for a place of business to be “fixed”, it is also necessary that the presence of the business is not of a temporary nature. According to the Commentary on Article 5 of the UN Model Convention, a six-month time limit is normally considered long enough to be considered to be “fixed” it is though recognized that a PE may exist even for a short period of time under certain  circumstances. However , States and domestic courts diverge when it comes to determining the minimum period of time needed to establish a PE

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The “right of use/at the disposal test” Paragraph 3 of the UN Commentary on Article  5  explain that a place of business may  constitute a  PE of an enterprise if that place is “at the disposal of” the enterprise.  Following the  UN Commentaries, “no formal legal right to use that place is […] required ”. The Commentaries further clarify that “Whilst no formal legal right to use  a particular  place is required for that   place  to constitute a permanent  establishment, the  mere presence of an enterprise at a particular location does not  necessarily mean  that that location is at the disposal of that enterprise .” The  “business connection test” An enterprise performing a “business activity” and maintaining a fixed place  of business  in another country may still not have a PE in such country. The  PE definition  establishes that the business activities must be carried on “through”  a fixed  place of business.

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The Illustrative list in Paragraph 2. Paragraph 2 of OECD TMC states that ;The term “Permanent  E stablishment”  includes especially  -A place of management A Branch An Office A Factory Workshop A Mine Oil or Gas Well A Quarry Or any other place of extraction of natural resources.

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The building site PE Building  and Construction  Projects  A building site or construction or installation project constitutes a permanent establishment only if it last more than twelve months. This article is commonly adopted and provided for in tax treaties. However, depending on the treaty in question, this twelve month period can be reduced to as little as three months. - Since  building and construction projects are not “permanent” for the company,  the test for PE becomes more time-based.  Depending on the country or its tax treaties, the time period of construction activity may range from 6-12 months to trigger PE. - Because  the nature of construction work involves site preparation phases, periods of work stoppage and sub-contracting, this can be a complex area to determine when exactly PE taxing rights will arise in the host country.

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