Permanent establishment in corporate taxation in the digital era

Abstract

Digital economy has significantly grew in the past 15 years, and currently it already accounts for more than 50 percent of the whole market capitalization worldwide. There is no longer a need for physical place to generate profits from the particular jurisdiction if business activity is digital. Nonetheless, the international taxation rules of allocating taxation rights for business profits to non-resident jurisdiction has not changed in way to tackle substantial economic presence, without fixed place of business. Thus, resulting in harmful use of permanent establishment principle for tax planning purposes, which has led to profit shifting away from the high-tax jurisdiction to low-tax jurisdictions and also not fairly allocating rights between related jurisdictions, in particular causing loses for market jurisdictions. To answer the arising challenges from digital economy OECD/G20 under the new BEPS project are creating new nexus rules with regards to digital economy, moreover they have also placed a focus on solutions for already existing issues under the current set of rules, under BEPS Action 7. The support for changes can also be seen through European Commission proposals for council Directives and interim measures within different domestic laws. Nonetheless, global issues ask for global solutions, thus to properly create new nexus rules, it asks for international solution, for the sake of certainty and unnecessary negative impact on the global economy. This thesis analyzes the issues currently arising from application of permanent establishment principle to digital enterprises and pays attention to possible solutions and outcomes under new nexus rules taking into account work done so far and trends to which development is leaning to.