The Pit of Permanent Establishment – Part 3

Working with a Local Service Provider to Deliver Services in a New Country

Local Service Provider mirkwood evans vincent

In the articles “The Pit of Permanent Establishment – Part 1”, we looked at how a business can accidentally create a permanent establishment in a new country by not obtaining the correct legal and tax advice.

In “The Pit of Permanent Establishment – Part 2”, we looked at avoiding a permanent establishment by working with a local distributor or agent.

In this article, we look at a variant of the local agent model, which will not work for all service providers, but which works well for certain providers of international telecommunications and certain other technology services, where their customers have a specific requirement for appropriately skilled and licensed support, invoiced locally in country. We are talking in all cases here about the provision of services in a country outside of the European Economic Area.

One Stop Shop (“OSS”) Solutions

We will start by looking at a solution known as OSS (or “one stop shopping”), which goes back to the days when telecommunications licences were simply not available to anyone other than a single regulated provider in the majority of countries. In some (although by no means all) countries, these OSS arrangements are still available, notwithstanding the liberalisation of the telecommunications market globally. OSS involves a regulated Local Service Provider providing services to your customer on the Local Service Provider’s terms and conditions, but invoicing those charges to you as agent for your customer. Your customer needs to sign an agency letter, appointing you as agent to receive and pay the Local Service Provider’s charges on their behalf.

The upside of this solution is that it helps to keep invoicing straightforward for your Customer because all their invoices come through you as their key provider of international services. It does however, typically involve your customer agreeing the Local Service Provider’s terms and conditions as well as your terms and conditions, which does not work for all customers.

Assignment of Services to a Local Service Provider

A more sophisticated variant of the OSS type solution involves the local portion of services under a contract for international services between you and your customer being assigned to the Local Service Provider in connection with the provision of regulated services in the Local Service Provider’s jurisdiction. There are no permanent establishment or regulatory concerns because the licensed Local Service Provider provides the services to your customer and not you. Depending on how the assignment is structured, you can also avoid withholding tax concerns, because all that is assigned is the right to provide local services, without any payment back from the Local Service Provider to you, which might attract withholding taxes.

The assignment is on pre-agreed terms, which either dovetail with your standard terms of business or have specific variations, which you spell out in your contract with your customer. You have flexibility with this solution, to “absorb” risk under the international services agreement, to the extent that Customer agrees terms which may be better than you are able to agree under your standard assignment terms with the LSP.

Revenue Recognition

If local invoicing is important to your customer, the Local Service Provider provides this. Bear in mind, however, that the assigned portion of the services cannot be recognised as revenue for you because you are not providing the services, except to the extent that there is a subcontract back from the Local Service Provider to you for the non-locally regulated services.

This variation on the assignment model can result in a subset of locally invoiced revenue being treated as the international support costs for providing the local service and therefore cable of revenue recognition, but (a) the subcontracted back portion may attract withholding tax and (b) the Local Service Provider can only subcontract back that portion of the charges which do not relate to the locally provided service.

If you would like some advice about using a local service provider to provide services to your customers in particular jurisdictions under an international services agreement, please contact