Peter Barnes Talks to Bloomberg BNA: New Taxation Threshold ‘No Golden Goose' for Countries

When a new super tax treaty goes into force July 1, tax officials in some countries will be a step closer to being able to use a lower bar to determine whether they can tax multinationals operating in their jurisdictions.

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Pursuing PEs May Disappoint Tax Authorities

Even if the change to PE rules in the MLI lets tax authorities find new PEs, governments may not realize much revenue from them.

“The tax authorities think if they can find a PE, there's going to be a golden goose with significant tax revenues,” said Peter Barnes, a tax law professor at Duke University and Of Counsel at Caplin & Drysdale. “The taxpayers assert correctly in many cases that, ‘I have a PE, but the income attributable to the PE is really quite modest,’ ” because it might be a “cost-plus operation” with a fairly limited presence.

“So you end up with tax authorities pursuing PE cases believing that there's an enormous amount of revenue there, when the government's resources could probably be better spent on other audit issues,” he said.

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Risk of Dispute

The creation of new PEs might not substantially raise multinationals’ tax bill. But corporate tax officials worry it could open the door to more disputes with tax authorities in the jurisdictions that are now asserting the multinational has a taxable presence there.

While there is some administrative burden to filing additional tax returns in more jurisdictions, “the bigger concern is the potential for audits and transfer pricing disputes, over what is often a relatively small amount of money,” Barnes wrote in a June 28 email to Bloomberg Tax.

Multinationals are concerned “that the lower threshold for finding a PE will cause countries to assert jurisdiction to tax and then there will be audits and transfer pricing disputes that must be managed,” he said.

For the full article, please visit Bloomberg BNA’s website (subscription required).

Excerpt taken from the article “New Taxation Threshold ‘No Golden Goose’ for Countries” by Isabel Gottlieb for Bloomberg BNA.