viernes, 12 de diciembre de 2008

PE and International Tax Law in a Latin American Context

Intenational approach of PEs, and Uruguay speciallities

The OECD model convention and the UN and US model conventions start with a general clause for defining a PE, namely, a "fixed place of business through which the business of an enterprise is wholly or partly carried on".

Uruguay's domestic legislation has adopted this definition while eliminating the need for the enterprise to carry on all or part of its business in Uruguay (article 10, title 4, TO). It does not include any requirement, either, for the fixed place of business to be productive, thereby adhering to the principle of economic belonging in the PE definition.

On the other hand, the Uruguayan state's treaty practice has adhered closely to the definition proposed by the OECD and UN model conventions.

As stated in the introduction to this report, since there are not many administrative rulings on this matter nor is there any case law, it is only possible to mention a few cases in which the Uruguayan tax authorities (DGI) have tangentially analyzed the existence of a fixed place of business, without delving deeper into the analysis of the commentaries on the OECD and UN model conventions, or using, at least directly, the well-known tests of location, duration or right of use in order to deem that a PE exists.

For illustration purposes, in ruling 2057,18 the DGI took the view that the ad hoc lease and sale of real estate did not constitute a PE. Note that although this view predates the tax reform introduced by Law 18,083, its interest lies in the fact that the tax authorities considered that the direct performance of an isolated act was not sufficient for a fixed place of business to be deemed to exist; instead, this required the performance of such acts on an ongoing and permanent basis over time. This ruling shows, albeit not very clearly, the significance of duration, time and repetition in the definition of a PE, which could be crystallized in the future through application of the duration test.

Furthermore, in ruling 4969 of 2008,20 subsequent to the tax reform, the taxpayer was a foreign firm that provided industrial consulting services by sporadically assigning one of its partners to Uruguay. Although the tax authorities denied the existence of a PE by reason of the services rendered (a special case which is analyzed further on), it should be noted that the ruling recognized that the partner's trips to Uruguay and the rendering of services on the client's premises in Uruguay did not constitute a PE, since they implied that the foreign firm "did not wholly or partly carry on its business through a fixed place of business in Uruguay".

In addition, although there have not yet been any rulings on the issue, this section would not be complete without a brief reference to the impact of the PE definition on e-commerce, bearing in mind the huge relevance that this way of doing business has to the modern world and its strategic nature for Uruguay in view of its efforts to become a regional services center. Regarding this issue, which has already been analyzed excellently by Uruguayan tax commentators,22 suffice it to say that the OECD has paid special attention to its impact on the PE definition23and taken the view that the mere combination of intangible elements that make up a website does not mean that a PE exists, whereas a PE may be deemed to exist where there is a server on which activities specific to the enterprise's core business and not preparatory or auxiliary are engaged in.

In conclusion, Uruguay has adopted the general definition of PE contained in the OECD and UN model conventions in its domestic legislation and treaty practice. Although at present there is no solid administrative or legal opinion on its interpretation, the views that have been expressed by the authorities on an isolated basis are consistent with the definitions and interpretations of these international forums, and, in general, this trend will foreseeably continue since the express sources of the reform are precisely today's best international tax practice, which, for the most part, has remained largely the same over time.

jueves, 2 de octubre de 2008

International Tax and PE

International Tax non-treaty uses of the PE in Venezuela

Perhaps it should not be surprising that, in a country in which income tax was territorial (based exclusively on source) since its inception (in 1942) until 2001, and which covered (and continues to cover) an extremely broad definition of nexus for source taxation, the concept of PE was not covered for income tax purposes30 until the change to worldwide income taxation.

In any case, the concept of PE as a factor limiting source taxation has been present in Venezuela for an extended period in the area of local entities' taxation, where the concept of PE was introduced by the Supreme Court of Justice in the late 1970s in order to reduce exposure by taxpayers - industry, commerce and commercial service providers - to multiple taxation due to source-to-source conflicts regarding the municipal tax on commercial and industrial activities (formerly known as patente de industria y comercio).

While the court did not apply the PE concept always on a consistent basis, and case law on the matter swung back and forth from time to time, it was clear that for a PE to arise a fixed place of business should exist within the territory of the municipality and that simple trading of products belonging to a taxpayer having such a fixed place of business in another municipality (a factory, an office, among others) was not to be subject to the municipal tax on activities; as such the concept of PE was used to identify the extent to which the commercial acts within the municipality amounted to an industrial or commercial activity, i.e. to limit the scope of source taxation.

Nevertheless, the tax courts never went far enough to define in detail when a PE was deemed to exist and the cases decided did not commonly deal with more complex issues, other than the mere existence of an office, factory or shop.
Notably, in three areas case law produced interesting approaches, the first one regarding the fixed condition of the place of business, under which it was commonly considered that a legal right - ownership or leasehold - should exist for the premises to trigger a PE; the second one applied to a storage facility where no goods were delivered within the municipality, and which was not considered to trigger a PE (under arguments that it would clash with the federal freedom of commerce provisions dormant commerce clause under the Venezuelan Constitution); and the third one covering a trend of cases related to agency agreements under which the Supreme Court of Justice ruled that when the activity was carried out through a commissionaire agent this activity could not be attributed to the principal as the agent was acting in his own name even though on behalf of the principal and hence no PE arose for the principal.

At some point in time, some authors and practitioners called for the use of the definition of PE under the tax treaties in place in Venezuela to fill in when applying the PE concept created by the Supreme Court of Justice for municipal taxes,31and it was used in practice to some extent, even though no administrative or court authority was actually issued on the matter.

More recently with the passing of the Master Law for municipal powers, a PE is clearly required for taxation of industrial and commercial activities within a municipality, and a set of examples under which a PE is considered to arise is included in it but no clear or consistent definition is covered or may result from these rules. In the case of services the law provides for a term - of three months - in carrying out the service or works within the municipality in what may be considered a peculiar services PE, but then it falls back to the broader PE rules if the three-month term is not met.

As such, the case law and the rules laid down add little, if anything, in clarifying the application of the PE definition under the OECD and UN models (as per the tax treaties in place in Venezuela).

A single reference to a PE was first introduced in Venezuelan federal statutes in 1982 with the passing of the first Master Tax Code.32 Under the provision establishing the rules for identifying when a person was to be considered a Venezuelan resident taxpayer (article 30(4)) it was concluded that individuals or companies having a PE in Venezuela were Venezuelan resident taxpayers to the extent of the operations carried out through the PE.

This rule remained in place until the Master Tax Code amendment in 2001, when it was scrapped from the Master Tax Code without any explanation in the corresponding legislative history. It may not be surprising that such a provision was repealed shortly after Venezuela adopted worldwide income taxation as it may have led to confusion in the application of tax treaties by Venezuela as a residence state, particularly regarding the obligation to grant an exemption under some of the tax treaty provisions covering methods for elimination of double taxation (Chapter V, article 23 OECD model) to foreign income attributable to PEs in Venezuela of otherwise non-resident taxpayers.

In any case, no case law or any administrative authority was issued on what the term PE encompassed under the provision for the twenty years or so during which the provision remained in place, but a regulatory provision dealing with PEs was issued in 1994 for purposes of the business assets tax (BAT).

While there is no publicly available administrative history or working documents on it as neither the income tax law nor the BAT included any reference to PE then, the rationale of the provision seems to have been to identify the extent to which carrying out entrepreneurial acts would amount to the carrying on of industrial or commercial activities.

In any case, the breadth of the provision made it of little help for BAT purposes and brought into question whether it was to be used in interpreting article 30(4) of the Master Tax Code. This led some practitioners to consider that the meaning of PE for these purposes was to be found mostly in the consistent application of the definition in the tax treaties in place in Venezuela and integrated by means of analogy (as allowed by the Master Tax Code) as both were statutory provisions, rather than an analogy with the regulatory provision.

A provision dealing with the PE definition was finally included in the income tax law amendment of 1999 when Venezuela shifted to worldwide income taxation. There are two certain things about the definition: first, the list of situations giving rise to a PE under the provision is hardly coherent enough to be considered a definition, and, second, any purpose for the definition to limit taxation at source is largely defeated by the width of the definition of nexus under the income tax law.