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Tax Control Framework and cross-border aspects, especially Permanent Establishments

Management must ensure tax compliance for the local part of its legal entity and for its PEs

Key Facts
  • Multi-national group companies: parent company and its management are responsible for ensuring tax compliance with regard to its subsidiaries within the country and abroad
  • PEs are part of a local legal entity performing activities abroad
  • Management must ensure that all PEs are registered and fulfil tax compliance
  • Tax Control Framework: ensures tax compliance globally and avoids contentious tax controversy with the tax authorities
  • Joint Audit: very efficient and successful tool for tax administrations as well as the tax payer
  • Digitisation: global transparency enables cross-border application of international standards

Extended responsibility of management

In today’s globalised world, top management is not only liable for compliance regarding its represented company. In the case of multi -national group companies, the parent company and its management are responsible for ensuring tax compliance with regard to its subsidiaries within the country, but also for its activities abroad which are performed by separate legal entities or Permanent Establishments (PE). This is the result of the Administrative Offence Law in Germany (and similar regulations) stating that appropriate personnel must be chosen.

In the case of separate legal entities, this responsibility is doubled: direct liability of the local management and indirect responsibility of top management.

In the case of Permanent Establishments (PEs) abroad, there is an extended risk. PEs are not a separate legal entity. They are part of a local legal entity performing activities abroad. They exist even though one may not have already realized their existence and even though a registration has not yet been performed, e.g. by exceeding a specific duration of time or due to sales activities abroad. Therefore, local management must ensure tax compliance not only for the local part of its legal entity but also for its PEs. Management must ensure that all registered and also all potential PEs fulfil tax compliance. This includes, in the first instance, the detection within the organisation, but also registration, fulfilling all foreign tax and legal requirements as well as complying with local foreign rules in respect of PEs. Additionally, the PEs may need to be registered also according to the local tax law of the country in which the legal entity (= head office) is registered. Also, within the tax returns of the legal entity, the results of the PE need to be taken into consideration according to the respective rules. Hence, in light of BEPS and its extended PE definition, ensuring worldwide tax compliance is a key responsibility of management, even more so in the case of PEs. This may be less apparent but is more hazardous, as non-compliance may lead to severe results such as the blacklisting of the company in the case of non-compliance.

Tax Control Framework as enabler for compliant treatment of permanent establishments

An appropriate Tax Control Framework set up in order to ensure tax compliance not only locally but also globally and for Permanent Establishments enables transparency throughout the whole organisation. This is a good start so as to avoid contentious tax controversy with the tax authorities - showing taxpayers’ the company´s interest in behaving in a compliant manner all over the world. Due to the fact that also the authorities, not only tax authorities, are deeply interconnected, companies need to make sure that they have full transparency within their organisation to ensure respective compliance.

Joint Audit

Joint Audits have already been considered to be very efficient and successful in the past - from both tax administrations as well as the tax payer. In light of the extended global transparency requirements resulting from country-by-country reporting, management should be aware that tax compliance is not only a local issue but a global one.

Impact of digitisation

Considering the fact that many countries already require electronic tax filing in all areas of taxation, especially in the case of Multi National Enterprises and cross-border activities, digitisation and the transparency of processes and numbers is vital. Also tax authorities will focus on direct data access and respective analysis. With a global transparency, a cross-border application of international standards will also be enabled, avoiding the inconsistent application of different local tax laws - the latter relevant particularly to the increasing number of Permanent Establishments.

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Tax Control Framework
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