INTERNATIONAL TAX CONFERENCE

1. SUBSIDIARY as PE INTERNATIONAL TAX CONFERENCE IFA Hyderabad Sub - Chapter 12 December 2008 P.V.S.S. Prasad FCA pvsatya.prasad@gmail.com

2. SUBSIDIARY as PE INTRODUCTION • Foreign Enterprise doing business in another country – Options • Direct Supply of products / rendering services • Construct Subsidiary • Establishing its own place of business • Subsidiary per se not PE – Protection Clause 1943 – Mexico Model

3. SUBSIDIARY as PE INTRODUCTION • Non tax situations • US Supreme Court – Environmental case – Best Foods 66 USLW 4439 (US) (1998) • Controlling interest – Agency -Avotus Corp V Canada (2007) DTC 215 (TCC) • Lifting the corporate veil

4. SUBSIDIARY as PE INTRODUCTION • Subsidiary may constitute PE of the parent if • Parent carries on business from subsidiary office • Subsidiary as agent of the parent • Construction work – Subsidiary concluding contract – While parent performs part of work • Among the above agency PE – popular and relevant • Issue – burning topic in Europe

5. SUBSIDIARY as PE Basic Rule PE – Art. 5(1) • Place – permanently used by the parent • Power of disposition – Employee • Tangible asset – sufficient • Bank note, Postal address, e-mail address / website – not PE • Capital assets, shares, patents, rights / software – not PE

6. SUBSIDIARY as PE Fixed Place • Fixed Place • duration – immaterial • Actual fixing on the soil not required • Coherent whole – commercially and geographically • Fixed geographical point not required

7. SUBSIDIARY as PE Fixed Place • Duration test – certain degree of permanency • Right to use test – parent’s own business • If preparatory of auxiliary activities – no PE • Parent managing subsidiary’s business – no PE for parent

8. SUBSIDIARY as PE Agency Rule PE – Art. 5 (5) • Agent different from enterprise itself • Acting on behalf of enterprise – in its own activities • Subsidiary concluding contracts of parent • repeatedly – not isolated • certain duration • Legal and economic transactions

9. SUBSIDIARY as PE Agency Rule PE • Preparatory/ Auxiliary – do not trigger PE • Exercise of rights to conclude contracts • Dependent agent – instructions of parent • Independent agent – not PE • excess activities – may trigger PE

10. SUBSIDIARY as PE Agency Rule PE • Legally & economically dependent on parent • Economic independence of subsidiary essential for no PE status • Subsidiary – own business not dependent agent • Renowned scholars views.

11. SUBSIDIARY as PE Foreign cases • Inver world Inc 71 TCM (CCH) 3231 (1996) • Taisei Fire & Marine Insurance Co. Ltd 104 TC 535 (1995) • OECD MC – Authority to conclude contracts – Main activity • Philip Morris GmbH 4 ITLR Part 6 (2002)903 – Italian Supreme Court

12. SUBSIDIARY as PE Attribution of profits – Subsidiary PE • Subsidiary if PE, has to file two Income Tax Returns • FAR analysis for attribution of profits • Transfer Pricing analysis paramount • Subsidiary’s own business and activity on behalf of parent

13. SUBSIDIARY as PE Attribution of profits – subsidiary PE • PE Concept and Transfer Pricing analysis – Interdependent in this context • Interhome AG – French Supreme Court (2003) CE June 03 no.224407 sect.min.C • OECD Report – Attribution – PE –July 2008 • PE – functionally distinct & separate entity

14. SUBSIDIARY as PE Attribution of profits – subsidiary PE • Profit attribution - FAR analysis – Transfer Pricing Principles • Real challenge attribution of functions & risks to PE • PE & TP challenges – Tax payer & Tax administrator • Tax authorities raise the issue of treating subsidiary as PE

15. SUBSIDIARY as PE Attribution of profits – subsidiary PE • Foreign parent to defend itself if no PE exists • TP adjustments – in the hands of subsidiary • Subsidiary as PE – foreign parent assessment in state of source • Situations where PEs do not trigger to be borne in mind

16. SUBSIDIARY as PE Situations not triggering PE • Brokerage / Commissionaire agreements – Civil Law Jurisdiction / Common Law Jurisdiction • A toll manufacturing agreement • Distribution agreement • Where distributor keeps its role – trader with minimum risks

17. SUBSIDIARY as PE Attribution – Transfer Pricing Principles • Invoking PE by the Revenue is not a straight proposition • Assessee having lost on the earlier ground needs to focus on attribution of profits to PE • Authorized OECD approach (AOA) for attribution to be followed • TP Study very critical

18. SUBSIDIARY as PE Other Foreign Cases : • Houle V Candadian National bank (1990) 3 SCR 122, • Dominion Bridge Co. Ltd. V The Queen, 75 DTC 5150 (FCTD): affirmed 77 DTC 5367 (FCA) • The North West Life Assurance Company of Canada V Commissioner of Internal Revenue 107 TC 363 (1996) • Panama Affiliate – Italy Supreme Court case 17206 / 06 • Italy’s Estate tax – Supreme Court case No. 13579 / 07

19. PANAMA- AFFILIATE TWO INDIVIDUALS COMMON SHARE HOLDER / DIRECTOR WORKED IN ITALY 1. REPRESENTATIVES AT ITALY OFFICE. 2. BOOKS & RECORDS MAINTAINED AT ITALY OFFICE. 3. BUSINESSOF PARENT CONDUCTED SUBSIDIARY -ITALY PE Reaffirmed Philip Morris GmbH (2002) - Case SUBSIDIARY as PESupreme Court – Italy case no. 17206 / 06

20. TAISEI - JAPAN REINSURANCE BUSINESS USA FORTRESS AGENT NOPE UNAFFILIATED SUBSIDIARY as PE ECONOMIC INDEPENDENCE LEGAL INDEPENDENCE

21. SUBSIDIARY as PE Indian Judicial rulings • SET Satellite 106 ITD 175 (Mum) (2007)-reversed – ITA no:944 0f 2007-dt.22 Aug’08 • Rolls Royce Plc (2008) 19 SOT 42 (Del) • Galileo International Inc (2008) 19 SOT 257 (Del) • Morgan Stanley & Co. (2007) 292 ITR 416 (SC)

22. OFFICE OF RRIL AT THE DISPOSAL SUPPORT SERVICES RRIL INDIA SOLICITING & RECEIVING ORDERS WHOLLY & EXCLUSIVELY FOR RRLC PE - RRPLC INDIAN CLIENTS SUBSIDIARY as PE UK ROLLS ROYCE PLC

23. SUBSIDIARY as PE Rolls Royce Plc • RR Plc – employees frequently visited India – used RRILs premises • Cost of maintaining office reimbursed to RRIL • RR Plc deemed to have PE in India – Art. 5(1)

24. SUBSIDIARY as PE Rolls Royce Plc • RRIL canvassed business – wholly & exclusively – Agency PE • 35% of the global profits attributed – marketing – India

25. AIRLINES PAYMENT PAYMENT INDIA USA TRAVEL AGENT (TA) PASSENGERS Does not charge fees Does not charge fees SERVER Provides support services and Equipments Services of Distributor GALILEO INC. DISTRIBUTOR Fees Payment TELECOM SERVICE PROVIDER SUBSIDIARY as PEGalileo International Inc

26. SUBSIDIARY as PE Galileo International Inc • CRS –Telecom Network – Fixed place- PE – Art. 5(1) • Indian distributor –Dependent agent • 15% of the revenue attributable to Indian PE • As distributor was paid 33% no further attribution required • E-Commerce transactions – New approach

27. MORGAN STANLEY & CO (MSCo) EMPLOYEES – FOR SECONDMENT & STEWARDSHIP FUNCTIONS ARM’S LENGTH CONSIDERATION BACK- OFFICE OPERATIONS PROVISION OF SERVICES UNITED STATES INDIA MSAS INTRA – COMPANY FLOW OF TRANSACTIONS SUBSIDIARY as PE

28. SUBSIDIARY as PE Morgan Stanley & Co • MSAS – back office services – Preparatory / Auxiliary – No PE • MSAS – did not conclude any contracts – No Agency PE • Stewardship services by employees of MSCo to MSAS – Quality assurance – No PE • Economic nexus – New concept

29. SUBSIDIARY as PE Morgan Stanley & Co • Deputation of employees by MSCo – key managerial functions of MSAS – Service PE • As MSAS was remunerated – ALP – No further attribution • MSAS – Service provider – also service PE • FAR analysis critical – cannot be generalized

30. SUBSIDIARY as PE UN MC – Force of Attraction • Art.7(1) – UN MC • Profits on direct sales also to be attributed to PE • Art.7(3) – certain restrictions – Expenses • DTAAs – USA, Canada & Italy etc,.

31. SUBSIDIARY as PE CONCLUSION TRIGGER POINTS • Conduct of subsidiary • Legal & economic independence • Representing the parent • Internal documentation

32. THANK YOU