Determining the Right Tax Jurisdiction in Bilateral Taxation Treaties and Preventing Abuse of the "Permanent Establishment" Concept

Abstract

Bilateral tax treaties in the world are significantly spreading as a tool for waiver of double taxation, which is an obstacle in the way of expansion of international trade. In the text of the such treaties, the concept of "permanent establishment" is predicted, which means a fixed place for doing business by the companies residing in Contracting States in order to clarify tax liability of entrepreneurs in both countries. Determination of the question of tax residence has critical importance for recognizing tax liability of a tax payer and in bilateral tax treaties, having a permanent establishment means residency and tax liability in relation to the profit attributable to this unit. However, it has been seen that transnational companies attempt to take fraudulently measures through bilateral tax treaties to reduce their tax liability by abusing the concept of permanent establishment. Organization for Economic Cooperation and Development has introduced and published solutions and amendments to deal with transnational corporations’ tax avoidance and tax evasion strategies the application of which in Iran’s tax law system will be useful to determine the competent tax jurisdiction and encountering ‘treaty shopping’ by transnational corporations.

Keywords

• permanent establishment - centre of vital interests –place of effective management – treaty shopping – conduit companies