Mastering U.S. Permanent Establishment Tax Under New OECD Guidance vs. General Tax Treaty Approach

Description

An often complex challenge for U.S. corporate tax advisers of foreign companies is the allocation of U.S. taxable income arising from a “permanent establishment” (PE) in the United States. The critical first step in calculating such income and resulting U.S. tax obligations is determining what standards apply in deciding whether a foreign corporation has a PE that would create a taxable presence. U.S. domestic tax law often conflicts with specific tax treaty provisions, creating both risk and opportunity for corporate tax advisers, and recent OECD guidance likely will create further complications.

Foreign-based multinational companies conducting business in the United States face varied tax treatment of their income and activities, depending on whether the corporation’s country of residence has an income tax treaty with the United States. All U.S. bilateral income tax treaties contain a “permanent establishment” provision, which exempts a nonresident corporation’s business profits from taxation unless the profits are attributable to a permanent establishment within the host country. Depending on the tax rates in the treaty countries, creating a PE in the United States can either reduce or increase a foreign-based multinational’s foreign tax expense, and may be a useful planning tool.

The recent guidance from OECD would further complicates the process of calculating profits attributable to a PE. Under the OECD “authorized approach,” multinationals will be required to treat business units with a PE as “functionally separate entities” which will use arm’s length transfer pricing standards to calculate business profits subject to host country tax. Tax advisers to foreign-based multinationals need to have a working knowledge of the risks and opportunities involved with the OECD permanent establishment approach.

Our experienced panel will provide a practical and thorough approach to the evolving permanent establishment rules for foreign-based multinational companies with U.S. branch operations to minimize costly withholding, reporting requirements and significant tax and penalties.