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Tax Issues for Remote Workers and Their Swiss Employers

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Tax Issues for Remote Workers and Their Swiss Employers

While COVID-19 had a profound effect on remote working in various countries, Switzerland has long experience with one form of remoter worker – the daily commuter across national borders. Surrounded on three sides by Italy, France, and Germany, Switzerland has negotiated several tax agreements with its neighbors that split the income tax pie and address social security coverage. Some agreements have national coverage, while others have local coverage affecting only the cantons and municipalities that straddle a specific international frontier. The stakes are high for a Swiss employer as the income tax rates and the social security charges can vary dramatically based on which country is allocated the right to tax. Thierry Boitelle, the founder of Boitelle Tax Sàrl, Geneva, and Sarah Meriguet, a Senior Tax Attorney at Boitelle Tax Sàrl, Geneva, explain all.

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Tax Cases Affecting Remote Workers and Their Employers

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Tax Cases Affecting Remote Workers and Their Employers

The legacy of the pandemic has demonstrated that an employee does not need to be in the office in order to work efficiently. Employees have adjusted to working remotely. In North America, remote working may mean a location in the suburbs surrounding the location of a business office, or perhaps a nearby state. In Europe, remote working may mean relocation to a different country. This raises questions for the employer regarding to the establishment of a P.E. in the country where the employee resides. Sunita Doobay, a partner of Blainey McMurtry, L.L.P., Toronto, discusses two recent tax rulings in Denmark and Spain and one tax case in Finland that address the issue. While all acknowledge that facts control the decision, tax administrations do not exercise judgement consistently.

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How Soon Is Now? The O.E.C.D. Starts Work on a Substitute for Unilateral Digital Economy Fixes

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How Soon Is Now? The O.E.C.D. Starts Work on a Substitute for Unilateral Digital Economy Fixes

As of November 2019, the arm’s length principle continues to operate among the O.E.C.D. Member States. In a little more than a year, this may be different. The O.E.C.D.’s workplan for urgent policy development will investigate a new nexus standard that departs from the arm’s length principle applied for decades. In his article, Michael Peggs explains the current debate between tax administrations concerning the attribution of profit to digital or non-physical P.E.’s and the three popular approaches that have been proposed. The mood in the O.E.C.D. is that markets matter most under each of the suggested approaches. Brainpower and manufacturing prowess are less important.

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India and the Digital Economy – The Emerging P.E. and Attribution Issues

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India and the Digital Economy – The Emerging P.E. and Attribution Issues

The exponential expansion of information and communication technology has made it possible for businesses to be conducted in ways that did not exist 15 years ago.  It has given rise to new business models that rely almost exclusively on digital and telecommunication networks, do not require physical presence, and derive substantial value from data collected and transmitted through digital networks.  So how and where should these companies be taxed?  Sunil Agarwal, an advocate and senior tax partner of AZB & Partners New Delhi, evaluates proposals already enacted in India and the U.K. and those under consideration at the level of the European Commission and E.U. member countries Italy, France, and Austria.  Should the digital tax be a consumption tax passed on to the final consumer or a minimum income tax based on global profits or substantial economic presence?  At this point, consensus does not exist.

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More Permanent Establishments: The Dwindling Preparatory and Auxiliary Activities Exception

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More Permanent Establishments: The Dwindling Preparatory and Auxiliary Activities Exception

Nothing is certain in this world, except death and taxes – and even taxes are subject to change.  The ever-expanding definition of a permanent establishment (“P.E.”) and ever diminishing exceptions to a P.E. under the O.E.C.D.’s B.E.P.S. Project has made one thing clear – the restrictions local jurisdictions put on activities by foreign taxpayers to trigger taxation are tightening.  The dwindling preparatory and auxiliary activities exception is a prime example.  Neha Rastogi and Beate Erwin explain.

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The I.R.S. Approach to the Dependent Agent Concept

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The I.R.S. Approach to the Dependent Agent Concept

When foreign corporations have certain limited activities in the U.S., a question that arises is whether a taxable presence exists in the U.S. for Federal income tax purposes.  A foreign corporate taxpayer with direct activities or operations in the U.S. is subject to U.S. corporate income tax and branch profits tax if it conducts a U.S. trade or business generating effectively connected income. Recently, the I.R.S. Large Business and International division published an international practice unit (“I.P.U.”) addressing the creation of a P.E. through the activities of a “dependent agent.” Fanny Karaman and Beate Erwin lead the reader through the I.P.U. and explain the four-step process that is used by the I.R.S. to evaluate whether a permanent establishment exists.

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A New Definition of Permanent Establishment in Italian Domestic Income Tax Law

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A New Definition of Permanent Establishment in Italian Domestic Income Tax Law

Italian domestic tax law has adopted the permanent establishment (“P.E.”) concept when determining whether business profits of a nonresident are taxable in the absence of an applicable income tax treaty.  Earlier this year, changes to the definition of the term broadened the scope of activity constituting a P.E.  Effective January 1, 2018, (i) a digital P.E. is treated as a fixed place P.E., (ii) the scope of the specific activity exemption has been scaled back, (iii) an anti-fragmentation rule has been adopted applicable to groups of companies, and (iv) the scope of an agency P.E. has been broadened. Stefano Loconte and Linda Favi of Loconte & Partners, Milan, explain the new rules.

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O.E.C.D. Receives Public Comments on Proposed Changes to the Model Tax Convention

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O.E.C.D. Receives Public Comments on Proposed Changes to the Model Tax Convention

In August, the O.E.C.D. released public comments on proposed changes to the Model Tax Convention.  Beate Erwin and Stanley C. Ruchelman examines the suggestions received by the O.E.C.D. and provides observations on the interplay between the O.E.C.D. proposed changes and existing U.S. approaches to these issues.  Areas covered include whether competent authority agreements can define undefined terms thereby removing the interpretation from local courts, whether a limitation on benefits (“L.O.B.”) clause or a principle purpose test (“P.P.T.”) is the better approach to limit treaty shopping, and whether a home that is leased to others can be a permanent home for purposes of applying the residence tiebreaker provision in a treaty. 

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The Changing Face of Service Permanent Establishments

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The Changing Face of Service Permanent Establishments

As governments struggle to adapt the old rules of taxable presence within a jurisdiction to economic activities in the digital age, new concepts have been asserted to impose tax on foreign service providers who are based abroad but regularly furnish services within a country.  India is among the global leaders rejecting physical presence in favor of location of the customer.  Neha Rastogi and Stanley C. Ruchelman look at the concept of destination based taxation and a recent case, where an Indian Income Tax Appellate Tribunal held that the physical presence of the foreign taxpayer’s employees is not relevant for determining the existence of a Service P.E. in the source country.

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O.E.C.D. Issues Proposed Changes to Permanent Establishment Provisions Under Model Tax Convention

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O.E.C.D. Issues Proposed Changes to Permanent Establishment Provisions Under Model Tax Convention

Earlier this year, the O.E.C.D. proposed amendments to Article 5 (Permanent Establishment) of the Model Tax Convention and Commentary.  The revisions eliminate loopholes that exist for commissionaire arrangements, artificial characterization of core activities as “preparatory,” avoidance of permanent establishment status through artificial fragmentation of contracts, and the use of not-so-independent agents.  Neha Rastogi, Beate Erwin, and Stanley C. Ruchelman explain the replacement provisions.

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Proposed Directive on the E.U. Common (Consolidated) Corporate Tax Base – A Primer

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Proposed Directive on the E.U. Common (Consolidated) Corporate Tax Base – A Primer

For decades, European bureaucrats looked with disdain at the way the various states within the U.S. compute state tax.  The arm’s length principle within Europe trumped state apportionment.  Now, however, the European Commission has issued three proposal directives that deal with (i) the Common Corporate Tax Base (“C.C.T.B.”) and the Common Consolidated Corporate Tax Base (“C.C.C.T.B.”), (ii) resolution of double tax disputes, and (iii) mismatches with non-E.U. countries. To the surprise of many, the C.C.C.T.B. includes a three-factor apportionment rule for the sharing of global income by the members of a corporate group operating throughout the E.U.  Stefano Grilli of Gianni, Origoni, Grippo, Cappelli & Partners, Milan, explains proposals that have been introduced.

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B.E.P.S. Action 7 – O.E.C.D. Calls for Improved International Coordination on the Allocation of Branch Profit

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One of three releases on July 4, the O.E.C.D.’s Additional Guidance on the Attribution of Profits to Permanent Establishments addresses the imponderable question – how much profit should be attributed to a P.E.?  The answer will make tax advisers quite happy: It depends on the facts, and the O.E.C.D. suggests that a coordinated global approach is required to avoid double taxation.  Stakeholders are invited to comment.  Michael Peggs examines five examples in the additional guidance.

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2016 Model Treaty – B.E.P.S. and Expatriated Entities

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On February 17, 2016, the Treasury Department released its 2016 Model Treaty. The model serves as the baseline from which the U.S. initiates treaty negotiations. Various provisions are discussed in detail in this month’s Insights.

The 2016 Model Treaty adopts certain B.E.P.S. provisions, including those that eliminate double non-taxation through a splintered operation which divides a long-term project among several related parties and each party maintains the project for a limited time. That type of planning no longer works. Other B.E.P.S.-related revisions are missing. Sheryl Shah and Elizabeth V. Zanet explain what is out and what is in. They also address the way payments from expatriated entities are treated. It is not all bad news.

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U.S. Treasury Announces New U.S. Model Income Tax Treaty

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On February 17, 2016, the Treasury Department released its 2016 Model Treaty. The model serves as the baseline from which the U.S. initiates treaty negotiations. Various provisions are discussed in detail in this month’s Insights.

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B.E.P.S. Initiative Spawns Unfavorable Permanent Establishment Court Decisions

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Two court cases in different parts of the world attack tax plans premised on the absence of a permanent establishment. Pertinent U.S. income tax treaties, with Japan and India respectively, were effectively ignored in each case. Taketsugu Osada, Christine Long, and Stanley C. Ruchelman explain.

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Indian MAT Exemption

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Following months of debate, the Indian Finance Ministry recently clarified that the Minimum Alternate Tax (M.A.T.) will not apply to foreign companies that do not have a permanent establishment and/or place of business in India.  Shibani Bakshi and Sheryl Shah discuss why the announcement is an affirmation of India’s positive attitude towards foreign investment.  The next move is up to the Indian Revenue.

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Tax Planning for Indian Businesses Investing in the US – Part II→

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Published in Taxsutra: September 2015.

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U.K. Implements 25% “Google Tax” on Diverted Profits

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The U.K. has implemented the controversial diverted profits tax on the profits of multinational companies that are “artificially diverted” from activity within the country. This 25% levy became effective on profits arising on or after April 1, 2015. At this point, it is unclear whether the outcome of the Parliamentary election on May 7 will impact the enforcement of the diverted profits tax, which was enacted without thorough examination by Parliament.

U.K. officials claim multinational corporations are manipulating the tax system and have imposed the 25% levy to prevent companies from avoiding a taxable presence in the U.K. This corporate diversions tax is aimed at entities that transfer profits to lower tax jurisdictions, away from the U.K. The diverted profits tax is being called the “Google tax” because it addresses the practices of well-known international entities such as Google Inc., Amazon.com Inc., and Starbucks Corp. that have used the U.K.’s permanent establishment and economic substance rules to craft tax advantages within the bounds of the law. Legislators have held hearings within the last year on how these three companies in particular have been able to generate billions of dollars in revenue in the U.K. but report little or no taxable profits.

The U.K. tax authority, Her Majesty’s Revenue and Customs (“H.M.R.C.”), introduced a draft of the diverted profits tax last fall and quickly implemented the legislation ahead of the May 7 election. There is great concern about the legislation’s complexity and that its hasty enactment will only result in future revisions, which will further complicate the matter. On the whole, the government is targeting transactions that it does not favor even though they are legal, and the tax itself is being criticized for undermining the Base Erosion and Profit Shifting project executed by the Organization for Economic Cooperation and Development.

Tax 101: Tax Planning and Compliance for Foreign Businesses with U.S. Activity

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I. INTRODUCTION

The U.S. tax laws affecting foreign businesses with activity in the U.S. contain some of the more complex provisions of the Internal Revenue Code. Examples include:

  • Effectively connected income,
  • Allocation of expenses to that income,
  • Income tax treaties,
  • Arm’s length transfer pricing rules,
  • Permanent establishments under income tax treaties,
  • Limitation on benefits provisions in income tax treaties that are designed to prevent “treaty shopping,”
  • State tax apportionment,
  • F.I.R.P.T.A. withholding tax for transactions categorized as real property transfers,
  • Fixed and determinable annual and periodical income, and
  • Interest on items of portfolio debt.

One can imagine that it is no easy task to identify income that is subject to tax, to identify the tax regime applicable to the income, and to quantify gross income, net income, and income subject to withholding tax. Nonetheless, the I.R.S. has identified withholding tax obligations of U.S. payers as a Tier I audit issue.