Can an employee’s business trip to another country to service a client create a Permanent Establishment (PE) for the employer? Yes, it is possible!
A previous blog explained the general concept of permanent establishment, which provides the right for a country to tax a business on the income earned in or allocated to the country. It outlined two possibilities, according to OECD guidance, for an employee working in a country where the company does not have a presence to trigger a permanent establishment: 1) by using a home office to operate as a fixed place of business or 2) by working as a dependent agent with the authority to enter into contracts on behalf of the business. OECD guidance and its model income tax treaty are generally followed by developed countries as they negotiate and enter into agreements with one another for their cross-border activities.
On the other hand, agreements between developed and developing countries more commonly follow the United Nation’s double tax treaty model. The UN model includes the provision of services, including consultancy services, as another way for a business to create a PE. For example, Article 5(2)(k) of the income tax treaty between New Zealand and Philippines says a PE exists if employees provide services within the country for over about 6 months within a 12-month period. Such a clause is generally absent from treaties based on the OECD model.
Over 3,000 bilateral income tax treaties are in effect around the world. Most countries generally follow the UN or OECD models, but articles do get amended or interpreted differently as trading partners negotiate with each other.
In our recent release of PinPoint Business Travel, we enhanced the Permanent Establishment risk assessment feature to evaluate all three PE types (Fixed Place of Business, Dependent Agent, and Services) based on content in the relevant bilateral tax treaty. For example, the tool will reference the New Zealand and Philippines tax treaty if the business trip or remote work occurs between these two countries. Our database includes over 3,000 treaties to comprehensively support PE assessment.
Businesses extend their services across borders in today’s global economy. Employees may provide services via business trips to another country. Effective assessment of PE risks enables businesses to proactively identify and manage potential tax obligations, ensuring compliance with tax regulations and protecting their financial well-being in an increasingly interconnected business landscape.
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