By Lynn M. Eller, CPA, APCIT, PFS
As selling overseas becomes easier and staff becomes more internationally mobile, understanding foreign tax filing requirements is critical. A good place to begin is by considering the permanent establishment threshold.
What Is a Permanent Establishment?
A permanent establishment (PE) is the term used to define a taxable presence within a certain foreign country.
Bilateral income tax treaties (i.e., agreements between the United States and a foreign jurisdiction) typically include a PE article that details when such taxable presence is reached. If there is no relevant treaty, taxable presence is determined by local tax law.
Generally, if a company has a PE in a country, then the income earned from selling goods or services into that country will likely be subject to foreign income tax.
The PE Threshold
Examples of activities that give rise to a PE in treaty countries generally include:
- Physical place of business in a foreign jurisdiction.
- This may include an office building, factory, workshop, etc.
- Facilities solely used to warehouse goods typically do NOT give rise to a PE.
- Personnel presence in a foreign jurisdiction.
- Persons that regularly execute contract on behalf of the company while physically present in a foreign country can trigger a PE.
- Merely conducting business in the foreign country through an independent agent with no authority to conclude contracts generally will NOT give rise to a PE.
Why This Matters for Your Business
Your business must carefully consider the degree of your PE risk. From there, you can address any potential foreign tax filing requirements.
The benefits of pro-actively getting this right include:
- Peace of mind
- Minimized risk of unexpected tax payments, errors, penalties, interest charges, etc.
- Increased likelihood of compliance with regard to appropriate disclosures
On the other hand, if PE is not properly managed, the risks include:
- Regulatory consequences and related reputation damage
- Unfunded tax liabilities
- Possibly needing to restate your financials
Take Action Today
Contact your PBMares team to learn more about practical steps you can take to ensure your specific needs with regard to selling overseas are properly addressed.