The Challenges of Taxing Profits Attributed to Permanent Establishments: A South African Perspective
When countries enter into a tax treaty, the treaty lays down the rules for the taxation of income by the two countries.Tax treaties are usually signed on the basis of a particular model and they generally follow the provisions of the prescriptive articles in the latter.It is a principle of international tax treaties that the profits of an enterprise of a contracting state are taxable only in that state, unless the enterprise carries on business in the other contracting through a permanent establishment (‘a PE’) situated therein.Even if a PE exists, only the profits attributable to the PE are taxable.Thus, the significance of a PE is that it gives the country in which it is situated (the source country) the right to tax its income, even though the PE has no separate legal existence.
The approach recommended by the Organisation for Economic Co-operation and Development (OECD) for attributing profits to PEs requires that a PE be treated as a separate legal entity and that transfer pricing rules applied to separate legal entities be applied to the PE.Of course,this gives rise to conflicts in the application of the domestic tax laws of some countries.This article sets out the workings of the OECD profit attribution rules, the criticisms of these rules and the challenges of applying these rules from a South African perspective.The article also sets out the views of some commentators on how these challenges can be resolved, and finally offers are commendation for resolving the problem from a South African perspective.
Source: By Annet Wanyana Oguttu (University of South Africa) SA Merc LJ
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