The paper highlights that complexities surrounding Permanent Establishment (PE) rules in India impact the inflow of Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI).
About Permanent Establishment (PE)
- Permanent Establishment is a fixed place of business where the enterprise conducts its activities wholly or partly.
- Permanent Establishment determine a country’s right to tax the business income of non-resident entities, thereby profoundly influencing the investment climate and flow of capital.
- Source state has the authority to tax the profits attributable to the PE within its borders.
- In India, Income Tax Act, 1961, employs the term “Business Connection” for determination of PE and specific PE definitions are primarily found in Double Taxation Avoidance Agreements (DTAAs).
- India expanded definition of PE with introduction of Significant Economic Presence (SEP) criteria to tax digital businesses which does not have physical presence in India.
- Issues with PE rules: Ambiguity surrounding definition creates significant tax risks, compliance burden, differing views for profit attribution between tax authorities and companies, mixed application of Arm’s Length Principle etc.
Key Recommendations of Working Paper
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