E-commerce and Permanent Establishments: The issues and alternative solutions in the application of the OECD Model Income Tax Treaty
Date Issued
2011
Date
2011
Author(s)
Lin, Chi-Wei
Abstract
According to the international tax rules based on the OECD Model Tax Convention, the allocation of taxing rights between the residence country and the source country is determined by the Permanent Establishment (PE) principle, which can be categorized by the physical PE and the agent PE. Initially, due to the immobility of production factors such as labor and capital, a physical PE or an agent PE is required to constitute in the source state in order to operate large scale international business. However, as the developments of transportation and telecommunication technologies, the broaden requirements for the existence of a PE had huge impacts on the conventional PE principle. Moreover, due to the characteristics of e-commerce transactions, the existence of a physical PE or an agent PE is not required anymore to operate large scale business. This change, apparently, had significant influences on the fundamentals of the conventional PE principle. In a consequence, there is necessity to assess whether the conventional PE principle, under which the physical existence is a prerequisite, is still appropriate to be relied upon for the allocation of taxing rights over business profits. In addition, the intangible feature of e-commerce also has impacts on the classification of income. Traditionally, the income derived from the sale of tangible goods are classified as business profits, and the income derived from the provision of services and from the use of intangible property are defined as service income and royalty income, respectively. This rule of categorization based on the nature of objectives and the form of transactions will be significantly influenced by the characteristics of e-commerce transactions. Accordingly, Chapter two overviews the theoretical background of source-based taxation and examines its appropriateness in the context of e-commerce. Moreover, it discusses the impacts of the characteristics of e-commerce transactions on the interpretations of active income and passive income under the OECD Model Tax Convention. Chapter three explores the application of domestic income tax laws to cross-border e-commerce transactions with the aim to examine whether domestic income tax laws provide sufficient guidance with respect to the taxation of international e-commerce transactions. Chapter four discusses further the application of existing PE principles to cross-border e-commerce transactions. The circumstances under discussion which may constitute the existence of a physical PE or an agent PE include website, server, clientele, delivery of goods, place of contract, local access numbers, telecommunications infrastructure etc. Furthermore, with reference to the OECD commentary on the Model Tax Convention and relevant research reports, this dissertation demonstrates various types of income derived from e-commerce transactions. Chapter five analyses the pros and cons of alternative solutions to the conventional PE principle, including (1) the base erosion approach; (2) the virtual permanent establishment approach ;and (3) the quantitative economic presence approach. Finally, the conclusion will be presented in the end of this dissertation.
Subjects
permanent establishment
economic allegiance
fixed place of business
business agent
source of income
e-commerce
international tax law
the base erosion approach
the virtual permanent establishment approach
the economic permanent establishment approach
residence country
source country
business profit
remuneration for services
royalty
Type
thesis
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