Permanent Establishment Angst

Client started working as a Consultant in the US at the end of the tax year.
Spent < 60 days in the US.
Client files Canadian Taxes. So, no matter what he has to report the income on the
Canadian Side.
The question is does this income get taxed for Canada or the U.S?

Need to consider Permanent Establishment (PE).  He does not have a space at the US workplace specifically for him.
According to the IRS definition of Permanent Establishment, he doesn't really have PE.
So, that means he shouldn't have to pay U.S. Tax.

This doesn't seem right since the revenue is generated in the US and it seems reasonable that the income should be attributed to the U.S.
Even if the client doesn't pay U.S. tax he still has to file a tax return to enact the Treaty.

I found this link and think it applies:
http://www.radiusworldwide.com/knowledge/resources/explanationwhatcreatespermanentestablishmentpe

I really do believe that even though technically he does not meet the formula for PE per the IRS tests, that the work he does in the US is deemed PE.

I think the risk here is that you file a US tax return and pay tax on the US sourced revenue to the US. Canada could then argue that you do not have any PE in the US. But we could argue that you in fact do - that you do indeed work from the space.

"Explanation of What Creates a Permanent Establishment (PE)Any “business” activity carried out in a country which results in “revenue” being generated (which can either be revenue generated directly in the country or where the activity in the country contributes to the “group” entity’s revenue), is likely to be deemed (by local authorities) as having created a “PE”.  What this means is that the local country tax authorities will assess corporate tax on a “deemed revenue” arising in-country.  In most countries in order to “recognize” a PE, it needs to be formally registered under some corporate identity, typically a branch, representative office, or a subsidiary entity.
....
PE determination is notoriously a “grey” area, but some “physical” tests are commonly used by advisors and tax authorities for determining whether a PE, on balance, exists.  While such tests do vary by country, generally the following are useful as indicators of a PE.

• Operating out of a fixed place of business. This may include not only formal office accommodation but also an employee’s home office where
  • a dedicated business telephone/fax line is available and/or
  • the home address is used on business cards and/or
  • the home address is used as a postal address for company correspondence.
• The employee receives “sales related” compensation such as sales commissions and bonuses.  This may also extend to stock options in some countries.
• Job title or job description would indicate activities related to direct revenue generation / support or sales activities.
• Sales are made to customers based in county and local contracts are negotiated by the local employee. Note that even though the employee may not have power to sign the commercial contracts, if they are deemed substantially involved in negotiating the terms of the contract and have basically identified the customers and “concluded” the contract terms, except for physically signing the contract, then it is likely that the contract will have been deemed to have been “concluded’ locally.

By way of example:

• If there is an “engineer” on the ground in-country servicing a contract (e.g. installation services, repairs and maintenance etc) which has been concluded by the US parent company, then this is a business activity to which revenue can be attributed at the group level, and a PE is likely to have been created.
• If there is a sales rep on the ground who cannot physically sign contracts but who has a job title which includes “Sales” and/or part of his compensation package includes sales related commissions, then his activities are business activities — and PE is created.  The additional risk here is that the authorities may well see a copy of the payslip which states “sales commissions” and this may automatically trigger a PE.
• A customer relations liaison manager or supplier relations manager working in country, by very nature of his activities, is carrying on business related activities, on behalf of the group entity which is earning revenue from such relationships, and this is likely to trigger a PE."

Lori 
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