Crummy headlines are among the worst PR disasters, and certainly the likes of Google, Priceline/Booking.com and McDonalds are suffering from bad press in Europe. This is due to complex tax minimization structures, Panama Papers or BEPS, and authorities having seen the light to pursue every angle to improve tax revenue.
This is not a new trend. Authorities have always been auditing non-resident companies, but they have certainly stepped up the vigor and tenacity of going after non-resident companies. France and Italy are currently the fiercest, but don’t be surprised if other countries go along soon.
The recent pursuits focus on U.S.-based companies having a “permanent establishment” overseas. There is a lot to say about this subject, simply because tax collection is largely dependent on whether a company is a resident business or rather a more distant operator.
Collecting tax from a resident company is relatively straight-forward, because tax liability rules are generally the same as those for local businesses. Collection from non-residents is a much more remote concept, in income tax often covered by tax treaties and withholding taxes and in VAT this is often facilitated by reverse charges.
For VAT, the definition of a “permanent or fixed establishment” has been subject to court cases and interpretations for many years. The base definition is a “sufficiently permanent establishment of human and technical resources” – and immediately questions pop up such as “What does “sufficiently permanent” mean?” and “What are human and technical resources?”.
In the day-to-day practice of VAT “sufficiently permanent” means “longer than it takes to simply set up and run a local business”, so I always use 3 months as an initial threshold – beyond that period I start asking more questions. “Human and technical resources” are easier to define. People and machines. A lady with a laptop, a guy with a wrench.
The “establishment” is relatively easier. A hotel room or corporate apartment or warehouse (owned or rented) are all examples of an establishment. Is storage space on a rented computer server a permanent establishment? Not under the current dogma, because there is no hands-on human involvement. But tread carefully here! The definition doesn’t say that the “human” must be a dependent employee – the datacenter operators who are instructed by the non-resident customer may very well be regarded as agents, and fulfill the requirement of the human element.
The “human and technical resources” and “establishment” questions are relatively unambiguous – particularly for installation projects, where the “p.e.” question pops up most often. In those cases, the “p.e.” question boils down to what extent the establishment is “sufficiently permanent”.
But for companies like Google, Booking.com and McDonalds the issue is rather whether local contractors (like sales people or marketeers) can be considered the human element of the permanent establishment. If these operators are not very independent from their giant, U.S. based customer, the p.e. issue for VAT is a real one.
And I bet that if you are a business developer / consultant in France or Italy, and you have Google as your client, you don’t have time for many other clients…
So take a minute and consider your company’s overseas business strategy. Is it based on locally operating, independent contractors? Or perhaps regional entities that use these contractors across their geographies? When you have a permanent establishment for VAT, your tax liability is vastly different from merely being a non-resident.