Eurasian Research Centre for Comparative and International Tax Law eurasiatax

1. Eurasian Research Centre for Comparative and International Tax Law http://eurasiatax.com European-Asianlawcongressninthsession International tax and legal regulation of cross-border taxation in BRICS countries Procedural aspects of taxation of permanent establishments in BRICS countries Eugene A. Zakharov Yekaterinburg, June 18-19, 2015

2. Eurasian Research Centre for Comparative and International Tax Law http://eurasiatax.com Brazil • Domestic legislation does not have legal definition or clarification of the term “permanent establishment of foreign company” – it is used only in DTTs. • To do business in Brazil, foreign company may open a branch or set up a domestic company. Instruction № 81 (1999) Federal level State level

3. Eurasian Research Centre for Comparative and International Tax Law http://eurasiatax.com Concept of “permanent establishment” is based on OECD Model Convention “Source taxation” or “residence”? Source taxation – easy way Permanent establishment: 1. Activities within Brazil de-facto 2. Activities through dependent agent Service permanent establishment: Article5 (Permanent establishment) – only in Brazil-China DTT Articles7 (Business income), 12 (Royalties), 21 (Other income)(not available now) Brazil(continue)

4. Eurasian Research Centre for Comparative and International Tax Law http://eurasiatax.com Copesul Case (Case RE 1.161.467 - RS, 17 May 2012): Brazil(continue) Siemens Power Generation (German entity) Surface Engineering Products (Canadian entity) Technical serviceswithout transfer of know-how Germany Canada Payment Brazil Payment Copesul – CIA / Petroquímica do Sul (Taxpayer) DTTBrazil-Canada: art. 7, 21 DTT Brazil-Germany: art. 7, 22

5. Eurasian Research Centre for Comparative and International Tax Law http://eurasiatax.com Brazil(continue) Copesul Case (Case RE 1.161.467 - RS, 17 May 2012): Taxpayer Tax authorities Court

6. Eurasian Research Centre for Comparative and International Tax Law http://eurasiatax.com Brazil(continue) Influence of Copesul Case? ?

7. Eurasian Research Centre for Comparative and International Tax Law http://eurasiatax.com The presence or absence of a permanent establishment in the Russian Federation, foreign organizations determine on the basis of the provisions of the Tax Code, taking into account provisions of DTTs. “Regular” activities - the Russian Tax Code approach “A certain degree of permanence and the absence of exceptional temporary nature of the activity” - OECD approach Russia

8. Eurasian Research Centre for Comparative and International Tax Law http://eurasiatax.com “Requalification” in permanent establishment “Oriflame Cosmetics” Case №А40-138879/14 Russia (continue) “Oriflame Cosmetics” LLC (Russia) Oriflame Kosmetiek B.V. (Netherlands) Oriflame Cosmetics S.A. (Luxembourg) • Royalties on subconcession agreements • Royalties on franchise agreements • Court decision • “Oriflame Cosmetics” LLSis an “extension” of global Oriflame. • Legal status of Russian entity is not taken into account due to “piercing the corporate vail” • The main purpose of payments was to obtain tax benefits

9. Eurasian Research Centre for Comparative and International Tax Law http://eurasiatax.com • Concept of “business connection” in domestic legislation: • “… all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or…» Section 9(1)(i) ofIncome Tax Act • The expression "business connection" must denote something, which produces profits or gains and not a mere state or condition which is favorable to the making of profit. (CIT v Visalakshi Achi reported in [1937] 5 ITR 448) • “Connection” between non-resident and business in India (CIT v National Mutual Life Association of Australia [1933] I ITR 350, 361 (Bom) • There must be some element of continuity in the relationship between the parties(CIT v Metro Goldwyn Mayer (India) Ltd [1939] 7 ITR 176 (Bom) • Existence of an agent is not necessary and where there is regularity and continuity of operations, there is a business connection. (BikanerTextile MerchantsSyndicate Ltd v CIT [1965] 58 ITR 169 (Raj) • It is not the length of time during which the connection has subsisted but the nature of the connection which would determine whether a business connection has been established or not(Bikaner Textile Merchants Syndicate Ltd v CIT [1965] 58 ITR 169 (Raj); A P DamodaraShenoyv CIT [1954] 26 ITR 650 (Bom) India

10. Eurasian Research Centre for Comparative and International Tax Law http://eurasiatax.com Testing components while determining PE status India (continue) • Rights • Degree of permanence Objective Subjective Functions • Place of doing business • Geographic criteria • Commercial activity • Business connection Permanent establishment Permanent establishment

11. Eurasian Research Centre for Comparative and International Tax Law http://eurasiatax.com India (continue) Attribution of profits to PE Rolls Royce Plc vs. ADIT (Delhi High Court) Rolls Royce Plc (UK) Marketing services agreement and delivery services in India Rolls RoyceIndian Limited (UK) Sales of aircraft engines and spare parts UK India Provision of services Rolls RoyceIndian Limited (Local office) Domestic customers Reception of requisition notes

12. Eurasian Research Centre for Comparative and International Tax Law http://eurasiatax.com India (continue) Attribution of profits to PE Rolls Royce Plc vs. ADIT (Delhi High Court) Income was counted proportionally net of expenses for marketing services • Factually local office rendered services not for Rolls Royce Plc (UK) but for Rolls Royce Indian Limited (UK) • Key responsibility of local office was to obtain requisition notes and securing delivery of goods • Employees of Rolls Royce Plc (UK)often visited India and used local office premises for activities • Employees of Rolls Royce Indian Limited (UK) took part in meetings with clients, where strategic business decisions were made

13. Eurasian Research Centre for Comparative and International Tax Law http://eurasiatax.com India (continue) Attribution of profits to PE (continue) Centrica India Offshore Pvt. Ltd. v. CIT [W.P.(C) No. 6807/2012] Centrica Plc (UK) Director Energy Marketing Ltd. (Canada) British Gas Trading Ltd (UK) Back-office services agreement Canada UK Secondment of personnel Secondment of personnel India Centrica India Offshore Pvt. Ltd

14. Eurasian Research Centre for Comparative and International Tax Law http://eurasiatax.com India (continue) Attribution of profits to PE (continue) Centrica India Offshore Pvt. Ltd. v. CIT [W.P.(C) No. 6807/2012] (continue) • Despite the fact that formal control and supervision of the seconded staff carried out in India, the actual location of such skilled staff deemed to create a permanent establishment in India • Despite the fact that payments for the services under the secondment contract were named “compensation”, this does not negate their nature as payment for services, even in the absence of margin. • Consequently, such “compensation” shall be deemed as a “profit” of foreign companies, obtained through a permanent establishment in India.

15. Eurasian Research Centre for Comparative and International Tax Law http://eurasiatax.com • In DTTs used both models: UN Model and OECD Model • Concept of “establishment” (“jigouchangsuo”) in domestic legislation • Interpretation of tax legislation – authority of State Administration Of Taxation of China. (Guoshuifa [2010] № 75) China

16. Eurasian Research Centre for Comparative and International Tax Law http://eurasiatax.com Hotel China (continue)Suzhou regulation Compensation in the amount of 2% of the company's profit + 5% gross profit China Hong Kong Hong Kong bank account Service providers Netherlands Management services Hiringand control Managing company

17. Eurasian Research Centre for Comparative and International Tax Law http://eurasiatax.com • OECD Model is used • “Source taxation” approach • Residence on the “basis of origin” or “place of effective management” • Taxation of revenues but not income in accordance with domestic Income Tax Act South Africa

18. Eurasian Research Centre for Comparative and International Tax Law http://eurasiatax.com Thank you for your attention!