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Profit Attribution to Permanent Establishment(PE) in India

Topics Covered:

  1. Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

 

Profit Attribution to Permanent Establishment(PE) in India

 

What to study?

For Prelims and Mains: What is PE and how are they taxed, issues and challenges present, need for measures?

 

Context: CBDT invites stakeholder comments on report pertaining to Profit Attribution to Permanent Establishment(PE) in India.

 

Background:

Recognizing the significance of issues relating to attribution of profits to a permanent establishment as well as the need to bring greater clarity and predictability in the applicable tax regime, a Committee was formed to examine the existing scheme of profit attribution to PE under Article 7 of DTAAs and recommend changes in Rule 10 of the Income-tax Rules, 1962. The Committee has submitted its report and it has been decided to seek suggestions/comments of the stakeholders and the general public.

 

Relevance of Pes:

Usually, foreign companies get tax concession under Double Taxation Avoidance Treaties and they pay taxes in their home countries. But if they have PEs in India, they should pay taxes for the income they have created in India. Thus, PE makes a foreign companies’ Indian income taxable in India.

 

What is a Permanent Establishment?

A Permanent Establishment in India is a fixed place of business, wholly or partly carried out by a foreign enterprise operating in India. Such fixed place of business can be a branch office, a place of management, a factory, a warehouse, a workshop etc. However the definition of permanent establishment differs in each tax treaty.

 

Governing provisions:

Taxation of non-residents in India is governed by the provisions of the Income-tax Act, 1961 (“the Act”) and the provisions of the Double Taxation Avoidance Agreement(s) [DTAA(s)] concluded or adopted by the Central Government under the powers conferred under Section 90 or 90A of the Act, respectively. The business income of a non-resident can be taxed in India if it satisfies the requisite thresholds provided under the Act as well as the threshold provided in the applicable tax treaty, by a concept of Permanent Establishment (PE).