The attribution of profits to a permanent establishment, including a Maltese income tax perspective

Abstract

The emergence of international business has rendered the concept of a permanent establishment an area of prime importance in international tax, in particular the issue of how profits are to be attributed to a permanent establishment of an enterprise which is resident in a different jurisdiction and consequently what are the taxing rights of the concerned States. Whilst evolving through double taxation treaties, the notion has gradually become recognised by the domestic laws of various States and granted utmost consideration by international organisations principally the Organisation for Economic Cooperation and Development and the European Union. Following an introduction to the subject through a brief look into the history of the permanent establishment concept, Part One analyses the relevant Articles of the Model Double Taxation Convention drafted by the Organisation for Economic Cooperation and Development. Apart from the main Articles directly related to the subject, 'Article 5 : Permanent Establishment' and 'Article 7 : Business Profits', other Articles requiring reference in the attribution of profits to a permanent establishment, as well as possible discrimination issues in the context of a further Article and the European Union's freedom of establishment notion, are briefly discussed. The second part of the thesis assumes a more practical perspective in that it commences by evaluating possible methods of attribution of profits. An analysis of how the various sources of income and expenses are effectively attributed to permanent establishments in certain circumstances sheds light on how intricate and problematic the task may be. In view of the inherent differences surrounding permanent establishments of banks, insurance companies and other financial institutions, the attribution of profits thereto is examined separately. In concluding, certain provisions in Maltese income tax laws which may be pertinent in the context of the subject matter are identified and proposed recommendations discussed.