Permanent Establishment in International Taxation and Indian Tax Law ( November 23, 2023 )

Understanding permanent establishment (PE) norms remains crucial in international taxation due to its impact on the taxation of multinational entities operating across borders. We discuss PE norms in global frameworks as well as how the concept is treated in India’s tax jurisdiction.

Since the start of 2023, Indian tax authorities have been proactively implementing measures to monitor international business establishments operating in the country. In May 2023, the tax authorities, citing a draft order, attributed an income of approximately INR 552.5 million (US$6.73 million) to Netflix’s permanent establishment in India for the assessment year 2021-22.

Similarly, in October 2023, the Indian Income Tax Department scrutinized around 40 Chinese solar module makers, including industry giants like Longi Green Energy Technology Co. Ltd. and Trina Solar Ltd, along with their Indian distributors, due to suspected tax evasion. This investigation is particularly significant, given that solar modules constitute more than 60 percent of the overall project expenditure.

These cases allude to the concept of permanent establishment, prompting us to compare the provisions of permanent establishment (PE) in international taxation with the domestic provisions governing the same.

What is permanent establishment in international taxation?

• The concept of permanent establishment serves as the foundation for the taxation of multinational corporations (MNCs) globally. However, PE norms are not applied uniformly in all international tax jurisdictions.
• To understand the full scope of their tax liabilities, it is necessary for MNCs to explore pertinent provisions within the UN Model, OECD Model, applicable Double Taxation Avoidance Agreements (DTAA), as well as domestic tax regulations.