Where a non-resident SP provides services in a jurisdiction without establishing a PE in that jurisdiction, the enterprise will benefit from the exemption from tax in that jurisdiction provided under Article 7. In these circumstances, double taxation will not arise, and the compliance burden on the enterprise in respect of these activities is minimal. The revenue of the host jurisdiction will be reduced, although, depending on the extent of the activities that can be conducted in the territory without establishing a PE, the revenue forgone may be low.
Where, however, an enterprise reaches the PE threshold, the equation changes significantly. The host jurisdiction is entitled to tax the profits attributable to the PE in full, and there are significant compliance obligations imposed on the enterprise.
In the first place, the enterprise and/or the tax administration must determine whether a PE exists, having regard to the definition under the applicable treaty. This is complex enough in relation to a fixed place of business or dependent agent PE, but may become more difficult in relation to a services PE. It will generally be fairly certain, when the enterprise establishes a place through which it will carry on business or perform services, whether those activities are likely to continue for a period of more than six months. However, where the existence of a PE depends on days of presence or days during which services are performed in a jurisdiction, it may be difficult to determine in advance whether the enterprise will be subject to tax in that jurisdiction under the treaty. It may also be difficult to determine whether projects in connection with which the services are performed are related or not.
When it is determined that a PE exists, the enterprise will be required to comply with all the tax obligations in the PE jurisdiction in accordance with the domestic law of that jurisdiction, including filing tax returns and determining taxable income in accordance with the rules of both the treaty and the domestic law of the host jurisdiction.