I was recently asked by an overseas client to assess their UK operations to determine whether they had a UK permanent establishment (“PE”). Of course, if the foreign company had a UK PE then there would be a requirement to register for UK corporation tax with HMRC and pay corporation tax on the profits attributable to the UK PE.
In my client’s case they started trading with UK customers nearly 10 years ago. Since then we have seen significant development in the international tax field and most notably, out of the ashes of the global recession, the OECD launched their BEPS project. One of the action points coming out of the project was Action Point 7 with the catchy title, ‘Preventing the Artificial Avoidance of Permanent Establishment Status’. The final report was released in November 2015 with a number of recommendations being made to tighten the definition of a treaty PE.
We highlighted to my client that we expect the UK to adopt the recommendations made by the OECD and that it would only be a matter of time before UK tax treaties would be updated accordingly. There has been a lot of theoretical debate as to whether the recommendations could be adopted by a tax authority prior to the relevant tax treaty being amended. A recent tax case in Spain suggests that tax authorities are already looking to enforce and rely on the recommendations made by Action Point 7 to support their argument that a foreign company has a PE in their territory. In my view, this provides early anecdotal evidence that tax authorities are looking to implement Action Point 7 before any changes are made to the tax treaty. If the Spanish tax authorities are taking this stance, then it doesn’t seem too fanciful to believe that other tax authorities, including HMRC, will be following suit.
Companies operating cross-border should be carefully assessing whether their activities in oversea territories are now at a greater risk of creating a local PE. The failure to comply with local tax obligations can be potentially significant so I recommend consideration should be given to undertaking a review of existing activities to gain an proper understanding of the risk posed.