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Force of Attraction

Updated on July 18, 2023

The “force of attraction” refers to a principle that allows a country to tax the income of a non-resident entity or individual based on the presence of a “permanent establishment” within its jurisdiction. It is a concept used in international tax law to determine the taxability of certain types of income.

The force of attraction principle states that if a non-resident entity or individual has a permanent establishment (such as a branch, office, or place of business) in a particular country, that country has the right to tax not only the income generated by the permanent establishment but also certain types of income that are “forcefully attracted” to it. This means that income that is closely connected or attributable to the activities of the permanent establishment may be subject to taxation in that country, even if the income is earned outside the country’s borders.

Why is the ‘Force of Attraction’ concept necessary?

The importance of ‘Force of Attraction concept is highlighted hereunder.
Combatting Tax Avoidance: The concept prevents multinational enterprises from avoiding taxes by shifting income to low-tax jurisdictions.
Ensuring Fair Taxation: It ensures that each country has the right to tax income generated within its jurisdiction.
Countering Profit Shifting: The concept addresses the practice of shifting profits to favorable tax jurisdictions.
Strengthening Tax Jurisdiction: It extends the tax jurisdiction of the country where the permanent establishment exists.
Promoting Transparency: It promotes transparency by ensuring appropriate disclosure and taxation of income.
Complementing Tax Treaties: The concept complements international tax treaties and domestic tax laws.
Supporting Revenue Collection: It helps countries generate tax revenue from economic activities within their borders.