Uneasy Application of Permanent Establishment
陈延忠
【全文】
Uneasy Application of Permanent Establishment Rule in a Digital Era:
Comments on Recent Work Undertaken by OECD
Chen Yanzhong, LLM Candidate, Xiamen University
I. Introduction: PE as a distributive rule
Ever since its first appearance in the 1899 double taxation treaty between Prussia and Austria-Hungary, the concept of Permanent Establishment (PE) has assumed great significance in international tax practice. The existence of PE has now been the decisive condition for the taxation of income from business activities and of capital pertaining to such activities. Under this rule, the host state may have priority in taxing the profits derived by an enterprise of the other contracting State only to the extent that the enterprise carries on business through a permanent establishment situated in the first-mentioned state and only insofar as the profits are attributable to such a permanent establishment. In other words, permanent establishment is the threshold requirement for the host state to exercise its tax right over cross-border business profits and all other business activities below this threshold will only be taxed by the resident state. This effective function of PE as a distributive rule of tax rights between source states and resident states makes it the best candidate to settle jurisdictional conflicts regarding cross-border business income. That is also the reason why over 3000 existing double taxation conventions adopted this rule.
To be specifically, the PE rule consists of two parts, the determination of PE governed by Art 5 of OECD Model Tax convention or UN Model and the profit attribution of PE addressed by Art.7 of these two models.
II. Application of PE in electronic commerce: challenges and policy options
The fast advance of information and communication technologies (ICT) has offered global business unprecedented opportunities. Even small businesses wherever they are located could sell their products and services to a customer in a remote place around the clock. The so called electronic commerce ,although not precisely defined or defined varyingly, involves the application of new ICT to a broad range of production and distribution activities being conducted on a global scale through channels which are digital and permit to do business interactively at any time, at any place. The basic characteristics of Electronic commerce are: simultaneous, dismantling geographical difference, lack of central control, global, anonymous, untraceable, etc. These characteristics have their tax implications and explain why so many are concerned about tax issues of the internet, why the most fundamental income tax challenges of e commerce is jurisdictional. One element adds to the complexity of this problem is that e commerce is still growing rapidly and becomes mainstream business in a global scale. See the Chart below.
