Watch Out! Don’t Get Blindsided By Agency PE
By Khalid Sadur - Director, Corporate Tax, Advisory Services
One of the wrinkles of international business that most often takes my clients by surprise is Agency PE — in which the mere presence of an agent you control on the ground in a foreign country can trigger permanent establishment there.
That’s right. You don’t need a fixed place of business, if you control an agent, even if it’s a third party, you can end up triggering PE.
Don’t panic. That doesn’t mean that any agent operating on your behalf can trigger PE. Both the OECD and the UN have published (very similar) guidelines on what sort of agent can and cannot trigger permanent establishment in a country where none exists.
Generally, the key difference is between an independent and dependent agent. The most decisive distinction between these two types of agents is whether or not they’re able to enter into binding contracts with a third party on your behalf.
An independent agent is someone like a broker or commission agent who works at arms length for your business, essentially as a middleman, and who cannot trigger agency PE. An independent agent operates independently of your organization and is in business for themselves: They don’t work primarily for your business and they’re not empowered to enter into contracts on its behalf.
A dependent agent is, for most intents and purposes, effectively a part of your organization and can trigger agency PE. All or most of their work is on your behalf, and they’re empowered to enter into contracts on your behalf — or else the agent “habitually maintains stock of goods” on your behalf.
In principle, this sounds simple enough, but the multiplicity of possible business arrangements can make the question of whether a specific scenario triggers agency PE quite complex. Fights over agency PE are especially common in India, where there’s a rich body of case law on the issue, but disputes between businesses and government over agency PE happen all over the world.
The good news, in India and elsewhere, is that businesses with a keen understanding of agency PE rules have been able, time and time again, to challenge the finding of a dependent agent and the consequent permanent establishment. In one recent case in Canada, an American life insurance firm was able to reverse a finding of PE by proving that its Canadian salespeople were not concluding contracts on its behalf because policies had to be approved at its US office, and that approval was nontrivial because a full tenth of contracts were rejected.
Don’t get blindsided by agency PE. Understand the law’s nuances or seek the advice of someone who does — or else risk creating a taxable presence where you don’t want one.