Dell case: Why do we need the BEPS project?
Recently the Spanish Supreme Court made a landmark decision on the existence of Permanent Establishments (“PEs) in foreign jurisdictions. This decision, if used by tax administrations in other countries, may be far-reaching and may affect many businesses engaged in cross-border activities. Interestingly it is not the proposed Action 7 BEPS measures that should concern businesses. Instead, the broad approach to the interpretation of PEs should be their main concern as this potentially is a source of uncertainty. Even before the Action 7 BEPS measures are implemented, companies may have a PE abroad. The decision of the Spanish Supreme Court in the Dell case illustrates that tax authorities may apply a broad interpretation in this respect.
30 Nov. '16
The case concerned a discussion between the Spanish tax administration and the Dell group over whether Dell Ireland had a PE in Spain under articles 5(1) (i.e. fixed PE) and 5(5) (i.e. dependent agent PE) of the Double Taxation Avoidance Agreement (“DTAA”) between Spain and Ireland. The Irish Dell company was responsible for the commercialization of Dell computers in Europe. Sales however were carried out through local subsidiaries located in other European countries (Dell Ireland had neither personnel nor premises abroad). Dell Spain functioned as a distributor for the Spanish market, which included a number of activities complementary to the sales functions (technical support, logistics, warehousing, marketing, after-sales services and administration of the Spanish online store).
From the start the Spanish company acted as a full-fledged distributor. As from 1995, the customer portfolio was transferred to Dell Ireland including inventory risk, claims et al. Thereafter Dell Spain became a commissionaire (i.e. Dell Ireland acting as the principal). The Spanish tax authorities reasoned that the premises of Dell Spain was at the disposal of the Irish Dell company and subsequently formed a fixed place of business through which Dell Ireland carried out its business activity (article 5(1) DTAA Spain - Ireland) and, subsequently, that Dell Spain acted as a dependent agent (article 5(5) DTAA Spain - Ireland) of Dell Ireland.