The notion of permanent establishment : developments in the context of the digital economy

Abstract

Over the years, the definition of Permanent Establishment (“PE”) found under the OECD Convention has undergone a number of significant changes in order to keep up with evolving trends, in furtherance of its original scope and function. This concept has allowed states to tax the significant presence of a non-resident enterprise within its jurisdiction. However, in the recent years the digitisation of the economy has placed substantial strain on the PE concept. The definition of PE found in Article 5 of the OECD Convention is based upon traditional business models which differ greatly from the business models found in the digital economy. Due to the latter’s unique characteristics, the definition provided is no longer capable of encapsulating the significant presence of an enterprise within another state; something that is largely attributable to the definition’s reliance on physical presence. Over the years, the OECD has attempted to develop the PE notion in order to make it compatible with economic realities and to provide a definition which is better suited for the digital economy. The digital economy provides legislators with an ever-changing landscape and attempting to establish a PE definition which fits all the current business models in play, whilst being flexible enough to encompass the possible future business models which might emerge, is seemingly impossible. However, it seems clear that it is no longer possible to regulate the digital economy and the regular economy by using the same set of rules and practices. The concept will continue to be efficient in allocating taxing rights to source states in the context of traditional business models however, it cannot be considered as being an appropriate way of taxing a nexus in the context of the digital economy. The OECD attempted to create a new scenario through which taxing rights would be allocated to the source country, as opposed to the residence country. Similar measures have also been taken at national level. Whilst the PE concept is not applicable to the digital economy, source based taxation itself remains relevant.