Understanding double taxation agreements

Anneri Lück - In my previous articles I gave an overview of some of the important considerations when operating across jurisdictions.

One of the key elements of any cross border tax considerations relates to the interpretation of double taxation agreements, the relief and taxing rights it allocates between the different jurisdictions.

When working with double taxation agreements (DTAs), one of the most important concepts is that of a permanent establishment (PE). Where a PE is created in a particular country - Namibia, for example - this often gives Namibia a taxing right on the income. Where a PE is not created, no taxing right accrues to Namibia unless specifically dealt with in another article.

In most DTAs the following would constitute a PE:

* A fixed place of business through which the business of an enterprise is wholly or partly carried on;

* a place of management;

* a branch;

* an office;

* a factory;

* a workshop;

* a mine, an oil or gas well, a quarry or any other place of extraction of natural resources;

* a warehouse, in relation to a person providing storage facilities for others; and

* in the case of Namibia, a guest farm or other operation of a similar nature.

NAMIBIAN TAX TREATIES

In a number of the Namibian tax treaties you would also find specific inclusion of the following paragraphs that create a PE in Namibia:

· A building site, a construction, assembly or installation project or supervisory activities in connection therewith, but only where such site, project or activity continues for a period of more than six months; or

· the furnishing of services, including consultancy services, by an enterprise of a contracting state through employees or other personnel engaged in the other Contracting State, provided that such activities continue for the same project or a connected project for a period or periods aggregating more than 6 months within any 12-month period.

Another situation that causes a PE in many treaties is where a person is acting in, e.g. Namibia, on behalf of an enterprise of, e.g. South Africa, and that person:

* Habitually exercises an authority in the Namibia to conclude contracts in the name of the South African enterprise; or

* maintains in Namibia a stock of goods or merchandise belonging to the South African enterprise from which such person regularly fills orders on behalf of the South Africa enterprise.

In such cases, the South African enterprise is deemed to create a PE in Namibia even though they do not have a fixed place of business of their own in Namibia.

The concept of PE is thus one of the most important concepts in international tax planning. It is imperative to understand the concept fully before embarking on the structuring of activities in another jurisdiction.

* Anneri Lück is the associate director of corporate and international tax at PwC Namibia. Contact her at [email protected]