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Q The question of what constitutes a permanent establishment is of crucial importance in the international taxation of business profits Explain why this is so and critically examine recent developments in the interpretation of the concept A Introduction Importance of permanent establishment The term permanent establishment PE of a non-resident is a key concept in the typical double tax treaty and in the OECD model tax treaty The existence of a PE is necessary for a source country to tax business profits of a resident of another country If an enterprise fails to classify as a PE its profits will be exempt from income tax in the country of source and would only be subject to fiscal compliance in the country of residence There are certain countries which may impose a withholding tax on specific categories of business incomes earned by non-residents who are not classified as PE however these withholding taxes can be precluded through international accords Although definitions of PE might vary across countries to take into account the enacting countrys specific circumstances most states draw on the general principle of the OECD model which defines PE in Article 5 Paragraph1 as A fixed place of business through which the business of an enterprise is wholly or partly carried on Fixed in the sense that a physical building or property is used to carry out the enterprises business and it should be foreseeable that the enterprises use of such property is more than temporary However as the essay progresses we will see that merely having a physical place of operation is not sufficient to constitute a PE certain other criteria also needs to be satisfied For example a property owned solely for the use of storage or for collecting information would not constitute a PE Historically the concept of PE answered the internationally-felt need for ascertaining the taxability or foreign commercial activity in the source state The PE
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