The concept of permanent establishment (PE) was originally introduced to tackle cross-border business and transactions that were left untaxed in the country where the transaction was carried out on account of the absence of a legal entity or a concrete presence in the source country. An entity is said to have a PE in a jurisdiction if it has a fixed place of business through which it carries out business activities, either wholly or partly. The entity’s profits, which are attributable to the PE from which business activities were conducted, were liable to tax in the country where the PE was created.
In order to circumvent being liable to tax in the source country, the parties engaged in cross-border transactions entered into intricate arrangements to artificially avoid creating a PE in the source country. Resultantly, these transactions remained outside the scope of taxation in the source country, resulting in significant revenue loss to the country. These strategies also resulted in either negligible taxation in a low-tax country or altogether, double non-taxation of the transaction. To tackle this issue, an elaborate definition of PE was introduced in the domestic tax laws as well as covered in the bilateral tax treaties entered into by two countries/ jurisdictions. Both the UN Model Convention and the OECD Model Convention exhaustively cover the concept of PE. Despite this,
tax strategies such as entering into commiss
