PE Watch | Latest developments and trends, July 2024

OECD developments

OECD releases fourth batch of Administrative Guidance, including new rules for allocating taxes to foreign PEs

On 17 June 2024, the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework released a fourth tranche of Administrative Guidance (pdf) on the Pillar Two Global Anti-Base Erosion (GloBE) Rules. Among other items, the June 2024 Administrative Guidance provides new rules on how to allocate current and deferred taxes, including taxes that may be pushed down to a foreign Permanent Establishment (PE).

Regarding current taxes, the June 2024 Administrative Guidance provides a common mechanism to push down an amount of the taxpayer's current taxes to a PE, where the taxpayer's domestic tax regime allows for cross-crediting of foreign taxes. The pushdown mechanism follows a four-step allocation formula:

1. Determine the taxpayer's foreign-source income
2. Calculate Allocable Covered Taxes
3. Calculate the Cross-Crediting Allocation Keys
4. Allocate Allocable Covered Taxes using the Cross-Crediting Allocation Keys

For deferred taxes, the 2024 Administrative Guidance adopts a "branch accounting" mechanism to push down an amount of deferred tax that is reflected in the financial accounts of a Main Entity "with respect to the assets and liabilities" of a foreign PE. This follows a five-step formula.

The June 2024 Administrative Guidance permits making a Five-Year Election on a jurisdictional basis to exclude allocations of deferred tax expense. If the election is made, any allocable deferred tax expense or benefit is excluded from Covered Taxes of all Constituent Entities in the jurisdiction where the PE is located and from Covered Taxes of the Main Entity.

Additionally, the June 2024 Administrative Guidance extends earlier guidance on Substitute Loss Carry-forward Deferred Tax Assets (DTAs) to foreign PEs. As such, a Substitute Loss Carry-forward DTA is available where a Main Entity has a domestic tax loss that offsets foreign-source income attributable to a foreign PE.

See EY Global Tax Alert, OECD/G20 Inclusive Framework releases fourth tranche of Administrative Guidance on Pillar Two GloBE Rules , dated June 28 2024.

PE domestic law

Pakistan expands definition of "business connection" to include Significant Economic Presence

On 29 June 2024, Pakistan published the Finance Act 2024 in the Official Gazette, enacting measures proposed in the 2024–2025 Budget. Among these measures, the definition of "business connection" has been expanded to include "significant economic presence" in Pakistan. This amendment broadens the scope of what constitutes Pakistan-sourced income for nonresidents. Business income of a nonresident is considered Pakistan-sourced income to the extent it is directly or indirectly attributable to a "business connection" in Pakistan.

The criteria for establishing a significant economic presence, as enacted, include:

• Engaging in transactions involving goods, services or property, including data or software downloads in Pakistan, that exceed a prescribed aggregate payment threshold during the tax year

• Systematic and continuous solicitation of business activities or engagement in interaction with a prescribed number of users in Pakistan through digital means

The Federal Board of Revenue has yet to prescribe the thresholds for digital transactions or user engagements.

These criteria apply regardless of the location where the transaction agreement is signed, whether the nonresident has a presence or place of business in Pakistan, or whether the nonresident renders services in Pakistan. Only the income attributable to these specified activities will be considered to accrue or arise from a business connection in Pakistan.

These amendments do not affect nonresidents covered by a tax treaty, as treaty provisions override domestic tax laws, subject to certain anti-avoidance provisions.

The new rules became effective on 1 July 2024.

For additional information concerning this Alert, please contact:

Ernst & Young Belastingadviseurs LLP (Netherlands)

• Ronald van den Brekel 

• David Corredor Velasquez 

Ernst & Young Solutions LLP (Singapore)

• Chester Wee 

Ernst & Young LLP (United States)

• Jose A. (Jano) Bustos 

• Gagan Malik

• Ana Mingramm 

• Roberto Aviles Gutierrez
  

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.