TAX 9869 Lecture Notes - Lecture 56: Double Taxation, Model Treaty, Iced Tea

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11 Aug 2020
Department
Course
Professor
Class 15: July 31, 2020
Revew:
To get treaty benefits
- Must be resident of treaty
- Meet lim. Of benefit clause (reviewed many articles in the treaty)
Article 5: Permanent establishment
- Generally speaking (context of FP doing biz in the US) but to be clear treaties cover both sides (US
person doing biz in another country)
- Whenever FP doing biz in US or US doing biz in FC, concern that a taxable presence is created
- FP created a US taxable presence which is based on facts/circum. And they have a US ToB they are
subj to US tax on ECI (statutory law// that’s what it says in IRC + Regs)
If however, you are dealing w/ for ex. FP is doing biz in US but FP is a resi of a country that has an
ITAX treaty w/ US and that FP who is a resi of that country also meets limitation on benefits clauses
(eligible for treaty benefits)
- Once you deal w/ treaty benefits you are out of the standards of US ToB/ECI and now talking
about permanent establishment (PE)
- PE: nexus to a state
- Are you doing enough activity in that country to give rise to permanent establishment?
- Test it: does the FP’s activities give rise to a PE in the US?
- Harder to create a perm establishment than it is a US ToB
- Being subject to a treaty is a good thing bc can reduce tax on cross border payments but also
being eligible allows there to be a more stricter test for taxable presence/PE
- PE means a fixed place of biz thru which a biz of an enterprise wholly or partly carried on
- If a FP (UK) and US have ITAX treaty; and a UK person/individual doing biz in US; then
determine does that biz give rise to PE
- If in US, UK has a fixed place of piz, probs have PE
- If UK decides to set up branch/LLC (under us tax principles owned 100% by somebody is a
DRE) which means its viewed as a branch
- A branch is a PE
- Paragraph 2:
- Place of mgt
- Branch
- Office
- Factory
- Workship
- mine/oil/gas well/quarry
- So a UK person can create PE by having a branch/office/factory located in the US (can be certain
exceptions)
- UK person doing business in US and working on a construction site, or installation/drilling, if UK person
has building site/construction site in US then only a PE if activities last for more than 12 months
- (this is a model treaty// so look to each specific treaty)
- Consequences of having PE (similar to having a ToB: if you have PE, there would be subj to tax on
income attributable to that permanent establishment
- Any biz profits arising from that PE is subj to tax in that country
- Just bc UK company isn't @ construction sit for 12mo straight, it could’ve hired subcontractors and if
you add those up and it comes out you've been there for more than 12 months; also counts as PE
- Income UK earned w/re: construction, US has rights to tax that income
- Excluded from PE:
- Solely for storage/delivery of goods belonging to enterprise
- If UK company has warehouse in US and want to sell to US customers but they have no ppl
who travel to US//would not be a permanent establishment
- If you add a sales person trying to sell product + delivering out of US warehouse you’d
have US ToB but not a PE
- Having the sales person maybe creates + warehouse for you US ToB but not PE
- Do get an exception:
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