Permanent establishment (PE) is an international tax concept that allows tax jurisdictions of source countries to tax businesses that do not have a subsidiary or legal entity therein.
It was agreed at the Organization for Economic Co-operation and Development (OECD) that there would be a global minimum corporate tax of 15% whose rationale is to prevent companies that set shop in low tax jurisdictions from siphoning/sourcing / repatriating untaxed profits from high tax jurisdictions to their countries of origin/ registration and consequently avoiding being taxed in the former.
Historically, PE rules have been subject to wanton abuse by companies that lack a physical/fixed presence in a jurisdiction through total tax avoidance.
To curb the above economic menace; The Finance Act, 2021, No 8 of 2021 (The Finance Act)- assented to on 29th June 2021, through an amendment to Section 2 of the Income Tax Act, expanded the definition of PE and introduced a service PE concept to align with Article 5 of the OECD Model by providing that provision of professional consultancy services in Kenya for a period of more than three months in any year of income constitutes a PE.
Alignment with the OECD model is further enhanced by providing that activities that are ancillary, incidental or preparatory in nature/character- are not deemed a PE.
However, Action Plan 7 of the Base Erosion and Profit Shifting (BEPS) project introduced an amendment to the exclusion rules aimed at preventing Multinational Enterprises (MNEs) from artificially avoiding PE statuses. This was done through the introduction of anti-fragmentation rules that provide that MNEs cannot fragment a cohesive operational activity into several small operations in order to argue that each is merely of a preparatory or auxiliary character.
We are yet to see how the Kenya Revenue Authority (KRA) will curb abuse of the exception rules; given that we do not have a proviso covering the anti-fragmentation rules in the Finance Act.
Tax Practice,
KenCo Consultancy Limited.
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