Marius
Laurinaitis
Mykolas
Romeris University, Lithuania
E-mail: marius@laurinaitis.eu
Darius
Stitilis
Mykolas
Romeris University, Lithuania
E-mail: stitilis@mruni.eu
Irmantas
Rotomskis
Mykolas
Romeris University, Lithuania
E-mail: marius@laurinaitis.eu
Otabeg
Azizov
Kharkiv
Petro Vasylenko National Technical University of Agriculture, Ukraine
E-mail: tmcool777@gmail.com
Nataliia
Marchuk
State
Agrarian and Engineering University in Podilya, Ukraine
E-mail: nata.marchuk2205@gmail.com
Submission: 8/20/2020
Revision: 9/03/2020
Accept: 9/04/2020
ABSTRACT
The concept
of permanent establishment introduced over a century ago became obsolete in the
XXI age. It is completely irrelevant in terms of modern online business. Recent
OECD initiatives are only a late reaction to the internationally observed legal
loophole in taxing profits of e-commerce companies. Steps taken by the
international community over the last few years reveal considerable diversity
in approaches towards the concept of permanent establishment. Even the key
principles to be followed in the development of the new concept of permanent
establishment have not been agreed so far. The present article is an attempt to propose the major principles to be
followed in updated interpretations of the concept of permanent establishment
equally effective in terms of both big multinationals and SMEs.
Keywords: Permanent
establishment; E-commerce taxation; Digital economy taxation
1.
INTRODUCTION
European
governments emphasize the need of a fair and effective taxing system in the
digital era (EUROPEAN COMMISSION, 2017)[1]. The major problem, however, is how
to successfully combine efficiency of the newly developed system with fair
taxation. Fair taxation is actually about how to fairly confer the right to
levy profit taxes imposed in international trade on a nation state (HONGLER; PISTONE, 2015). The existing taxation systems adopted by contemporary nation states
may be subdivided into two types: source states and resident states (FAULHABER, 2019).
The
balance between the source state and the resident state has been of key
importance in dealing with double taxation issues for over 100 years. To deal
with the problem, the concept of permanent establishment was introduced as a
key legal instrument regulating cross-border relations Introduction of the
permanent establishment allowed successful combination of residence state
taxation, applicable in domestic trade, with source state taxation, widely
adopted in international trade.
In
the XX century, operation of an offshore business in its full capacity was
hardly possible without a locally established representative subject (DANON; SPINOSA; TURINA, 2018). Businesses adopted a more or less uniform understanding of the
requirements for business representation to be relevant and sufficient to open
a permanent establishment in the target state independently on the fact of
rendering certain services in its territory[2].
The understanding was greatly contributed by OECD interpretation of the PE
concept and judicial practice extending the PE perception without prejudice to
the key principle, that is the state's right to collect profit tax where the
latter is gained from its citizens and the company has a permanent
establishment in the form of a material object.
However,
the situation has changed with the arrival of the digital era. E - commerce
companies have become so flexible that they are able to conduct their business
in several counties simultaneously by introducing new business models to enjoy
tax deductions offered by the legislator[3].
However, the most important thing is that the companies can successfully
operate having no object to represent their permanent establishment in the
countries (DANON; SPINOSA; TURINA, 2018).
It
has become very difficult or, in the case of small and medium business,
impossible for the state to identify the actual location of the source of the
corporate revenue. Corporate income is distributed so as to leave the state no
opportunity to impose taxes on the income ("stateless income") (TURINA, 2019).
Also, international companies working in the digital economy (typically set up
in economically developed countries) may operate in their full capacity in the
market of developing countries without physical presence in their territory
escaping the burden of tax in the country of operation (HONGLER;
PISTONE, 2015).
The
major objects debated in the end of the XX century and the beginning of the XXI
century as potentially suitable to represent company's permanent establishment
were the server and the website of the company.
2.
METHODOLOGY
Methodologically, this research focuses on the global regulation of electronic commerce
taxation in comparison with the regulation initiatives in separate regional
(such as EU) or individual countries, and also on the understanding of fair and
efficient international taxation in the legal doctrine. The authors use
qualitative research methods, such as the method of textual analysis and the
analysis of case law in the field of electronic commerce taxation.
3.
LITERATURE REVIEW
3.1.
Historical review: the server, the
website and the permanent establishment
A
company's server used to be considered the most popular instrument to
substitute the permanent establishment of an e-commerce company operating in a
foreign market. Already in 2000, the approach was reflected in commentaries on
Article 5 of OECD Model Tax Convention. The commentaries extended treatment of
the permanent establishment in view of e-commerce realis, which remained
unchanged until 2017, when OECD updated Model Tax Convention.
Assessment
of the server's suitability as a company's permanent establishment in a foreign
market has to be grounded on standard criteria set for a permanent
establishment:
· business operations must not be
limited to preparatory and ancillary works,
· the server has to be constantly used
for business operations,
· its location has to be permanently
fixed.
Operations
of a foreign company cannot be considered business operations and the company
cannot be considered having a permanent establishment if its e-commerce
operations are limited to ancillary works foreseen in Article 5 paragraph 4 of
the OECD Model Tax Convention. Already in 1998, the Ottawa conference (TAXATION AND ELECTRONIC COMMERCE, OECD 2001) accentuated e-commerce activities that may be
ascribed to ancillary and preparatory works according to Article 5 paragraph 4
of the OECD Model Tax Convention (the activities, as a matter of fact, cannot
make an essential and significant part of the activity of the enterprise as a
whole):
· providing a communication link –
much like a telephone line – between suppliers and customers;
· advertising of goods and services;
· relaying information through a
mirror server for security and efficiency purposes;
· gathering market data for
enterprise;
· supplying information (MODEL
TAX CONVENTION, 2017).
Here,
supply of information is understood not as provision of goods or services to
the end user, but as an interim act in negotiating a deal where rendering
information to a contractor or a third party is necessary.
The
convention also pointed out key activities of e-commerce (eventually transposed
to the commentary on OECD Model Tax Convention) that may allow recognition of
specific activities as business activities in the target country:
· entering into a business transaction
with a client,
· payment for acquired goods or
services,
· automatic delivery of goods by means
of facilities in the target country.
However,
there is one essential thing that may help distinguish between the core and
ancillary business activities. According to OECD, the activities are
attributable to the existence of the server and their accomplishment is
inseparable from the server's functional capabilities. The server is definitely
a part that is necessary to accomplish the activities. However, the key item to
trigger the activities and ensure smooth performance and control is the
company's website.
The
fact that the activities are automated is essentially predetermined by the used
software. Meanwhile, the company's website may be treated as a combination of
software and electronic data. Also. the scope of functions chosen by the end
user depends on opportunities offered by the website. In case of two identical
servers, possibilities to perform certain activities may be completely different
as the possibilities directly depend on the websites hosted on the servers.
Probably,
less discussions in the context of e-commerce arise about business continuity.
The OECD recommended 12-month period (often limited to 6 months in practice) is
usually agreed in traditional business as well in view of specific
circumstances[4].
In that sense, e-commerce implies no additional circumstances that may not be
agreed upon by international agreements.
Probably
most attention should be paid to the fixed place of business requirement.
Before emergence of e-commerce, understanding of the place of business was
essentially based on the territorial principle. OECD Model Tax Convention gives
no exact definition of the place of business. The definition is also absent in
international treaties for avoidance of double taxation.
However,
Article 5 paragraph 1 of the OECD Model Tax Convention and Commentaries on the
Convention allow identification of certain elements helping understand the
concept of the place of business: "certain amount of space at enterprise
disposal which is used for business activities”; "area in a customs
depot"; "business facilities of another enterprise", etc.
There
is no requirement for a specific location to run a business. Instead, relation
to a certain territory is emphasized (important aspects include the time-period
and performed functions). The formal requirement for enterprises to have legal
grounds for business activities in particular premises is not necessary.
However,
understanding of the place of business is impossible without linking it to an
object having a physical expression. Securities, bank accounts, and intangibles
cannot be places of business (SKAAR, 2000). OECD Model Tax Convention says
nothing about airspace as a possible place of as in such case, according to GUTMAN
(2001), we would have to talk not only about physically tangible subjects, but
about the concepts of time and space as well.
Existence
of the place of business is also subject to another criterion, namely, it must
be "fixed", i.e. there must be a "link between the place of
business and a specific geographical point". The narrow understanding of
the place of business has led to the situation where, according to OECD
interpretation, only a server may have a physical location and such location
may thus constitute a “fixed place of business” of the enterprise that operates
that server.
Big
companies normally have their own servers whereas small and medium e-commerce
businesses, which may have their websites hosted on extramural servers out of
their direct control (quite a frequent situation in e-commerce), have been
neglected by OECD. Whereas, according to OECD, a website hosted on a server is
an intangible item, that it, has no physical expression in a particular place,
it cannot be sufficient for the enterprise to be considered having a permanent
establishment[5].
Thus,
an essential condition for a place of business to be specified is its
geographical location within the boundaries of the country. No place of a
foreign business outside the country's territory can create a permanent
establishment within its jurisdiction. „It is difficult to apply the current
system of giving the source country priority in taxing active income while the
country of residence has priority in taxing passive income to e-commerce
because the current system does not produce a result that accurately reflects
the economic source of the income or the location of the economic activity“
(BASU, 2017).
The purpose of the
study is to
investigate which principles must be fundamental in addressing the development
of an international taxation system for e-commerce. Adherence to these
principles must be unconditional. We will see that the lack of common values
does not allow for an effective fight against tax evasion. The principles of
fairness and efficiency must underpin the formation of common values for all
states.
4.
RESULTS AND DISCUSSION
4.1.
Research of fair and efficient
principles in e-commerce taxation
Speaking
of the OECD’s interpretation of the permanent establishment in terms of
e-commerce, it has to be noted that its approach has been quite successfully
oriented towards implementation of an efficient taxation system. This is
predetermined by linking a permanent establishment to a server as an object
having a physical expression easy to fix and control. The solution also leaves
no uncertainties of permanent establishment where the website is hosted on an
extramural server.
However,
apart from being efficient, the international taxing system has to be fair. The
country where the host server is located may have nothing to do with business
activities carried out by the enterprise. An attractive tax system may be the
only reason for the enterprise to have its server in the country. It is
particularly relevant to small and medium enterprises, which have no problem with
mobility and are willing to save on taxes by exploiting loopholes in the tax
system. One of the techniques used by huge multinationals is by opening their
branches in various low tax jurisdictions. The problem may be well illustrated
by French[6]
and Spanish[7]
cases.
The
above-mentioned cases are good examples of how decisions based on a narrow
understanding of permanent establishment result in unfair taxing of the income
of foreign base companies. The two examples obviously show how the company's
income gained from the French citizen falls outside the country's jurisdiction.
Traditionally, for the sake of taxing, a commissionaire was not deemed a
subordinate agent and its performance created no permanent establishment if the
principal had no other representation in the target country. The approach has
been followed by courts in the XXI century as well[8].
Meanwhile, a broader understanding of permanent establishment would allow the
source state to enforce its right to collect taxes from income generated in its
jurisdiction[9].
Divergence
in approaches may be observed not only on the international scale. Even within
the same state, different institutions (typically tax authorities and courts)
often have different approaches towards the grounds for a permanent
establishment to arise[10].
The
Spanish court decision allows an assumption that the key provisions of the
source state taxation are no longer compatible with the narrow understanding of
the permanent establishment.
The
source state has to preserve its right to impose tax on income gained from its
citizens by a foreign enterprise. OECD approach on how to attribute profits to
permanent establishments of e-commerce companies, adopted 20 years ago, is
based on a traditional requirement of a physical object absolutely irrelevant
in the electronic environment[11].
The
requirement is in line with classical judicial doctrines, but completely
irrelevant in the modern digital era[12].
Although it was noted already on the issuance of the new commentary on OECD
Model Tax Convention of 2000, wider debates on the mandatory physical company
representation in the target country being incompatible with the modern digital
economics started only very recently (ORGANISATION FOR
ECONOMIC CO-OPERATION AND DEVELOPMENT, 2018).
Such
understanding of the permanent establishment may lead towards tax competition
between nation states, which has already been observed in the clash between
national tax systems and e-commerce (REUVEN, 2000). Nation states have already taken
measures to introduce digital service taxes aimed at modification of the
outdated system of international taxation.
Sporadic
measures by individual nation states may overlap with equivalent decisions of
other nation states. As a result of such competition, businesses are likely to
face hindrances negatively affecting development of e-commerce (ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT, 2018). The ultimate objective should be
an agreement on how to properly differentiate corporate income according to the
income source and impose corresponding taxation norms.
Even
the digital service taxes considered by nation states today are aimed at
individual subjects, namely, at big multinationals. In France, digital service
taxes are even referred to as GAFA[13]
tax. Similar decisions, e.g. Diverted Profits Tax (DPT), have been debated in
the UK as well[14].
Initiatives have been set up in Italy, Spain, Poland and Austria. As a rule,
the new taxes aim at avoiding application of the norm of permanent
establishment.
The
new taxes are not normally coordinated with other countries and have already
caused international disputes. Until measures taken by governments are
exceptionally oriented to huge multinationals, the majority of small and medium
e-commerce companies will remain beyond the boundaries of a fair and efficient
taxing system. Therefore, it is crucial to address the issue of double taxation
on a multilateral and not on a single state level.
Of
course, the multilateral level cannot be understood as all-encompassing and universally
recognized and applied. That would definitely be impossible[15].
However, in view of long-term ambitions to develop a sustainable taxation
system, scholars refer to eliminating (where possible) the deep-rooted tax
sovereignty as an option possible in combination with an ultimate authority
(VAN RAAD, 2001).
The
tax law is about to lose its efficiency with the emergence of e-business. The
trend may be observed in other spheres as well. For instance, U.S. sales tax
regulation in e-commerce has to subject to standard requirements set by the
Congress since uncoordinated measures introduced by individual states are
likely to create additional barriers to businesses undergoing different norms
set by individual states at the same time (HMAYAKYAN, 2019). It seems that the
holistic approach may be one of the most viable ways to develop an efficient
taxation system in the digital economy.
It
seems that the holistic approach may be one of the most viable ways to develop
an efficient taxation system in the digital economy.
4.2.
Results: an alternative to the
permanent establishment
Following
long discussions, the international community has finally made initial steps to
shift from the physical nature of the permanent establishment. In 2018, OECD
acknowledged that a PE threshold "generally has the effect of deeming a PE
to exist in circumstances where one would not ordinarily exist under the
traditional application of the PE definition" (ORGANISATION
FOR ECONOMIC CO-OPERATION AND DEVELOPMENT, 2018).
The
wider approach to the concept of permanent establishment allows extending its
boundaries by refusing physical representation of businesses and a fairer
distribution of the corporate taxation among individual nation states. For a
company to be deemed having a permanent establishment, its "digital
presence" or "service permanent establishment" are enough.
The
new approach also allows enterprises not to worry about their representation in
the target country and focus on their business efficiency. Universal acceptance
of this approach would help achieve two important goals:
· nation states would be given an
opportunity to impose taxes on profits generated within their territories by
enterprises registered outside their boundaries making taxing dependent on the
source and not on the place of registration and reducing hereby tax competition
between individual countries;
· there would be no need for
enterprises to move their business to favourable tax states including tax
havens and jurisdictions with more favourable tax treatment.
However,
it has to be noted that the new definition of a permanent establishment also
entails certain risks to be taken into account. For example, it is very
difficult to define strict boundaries of such permanent establishment. The
complexity of the task and the requirement to legitimately attribute profit to
the permanent establishment may cause loopholes leading to "full taxation
of income attributable to the Virtual PE to no source taxation at all” (MORENO;
BRAUNER, 2019).
The
fact that a great deal of nation states have a positive approach to the new
interpretation of permanent establishment proposed by OECD means the approach
may someday become universal. Several nation states have already made first
steps defining new treatment of permanent establishment and setting criteria
for its existence.
Even
before the recent discussions, Israel had treated the concept of permanent
establishment wider than it is described in OECD Model Tax Convention. A
permanent establishment is defined here as inseparable from income-producing
activities of an enterprise. Therefore, it is not surprising that Israel was
among the first to produce an official circular on Internet activity of foreign
companies in Israel (the circular) in 2015-2016. Israeli Tax Authorities rely
upon the concept of "significant economic presence", oriented towards
challenges of the digital economy. It has to be noted, though, that the concept
is only applicable where countries have no double taxation agreement.
Significant economic presence may be applied to enterprises that have no
tangible assets in Israel, but are deemed to be having „digital presence".
Possible applications may include:
· Online contract conclusion: a
significant number of contracts are concluded online between the foreign company
and Israel customers;
· Use of digital products and
services: the foreign company offers online services/products that are used by
a significant number of Israel customers;
· Localised web site: the foreign
company employs a website with localised features targeted at the Israel market
(e.g., Hebrew language, local discounts and marketing, local currency and
payment options);
·
Multi-sided
business model: the company generates significant revenue that is closely
related to the volume of online activities performed by users located in Israel
(ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT, 2018).
Similar
provisions on corporate taxation were adopted in India in 2019. A company with
no residence in India can still be deemed having "significant economic
presence" and be subject to income taxation if:
· its annual revenue exceeds a set
limit, independently on whether the revenue is gained from trading in goods,
services or assets including data or software downloading,
· and it has a certain number of customers
constantly or systematically using services rendered by the company.
In
dealing with the issue of the trade tax jurisdiction in 2017, Supreme Court of
the United States hearing a case of South Dakota v. Wayfair Inc.[16]
refused to apply the traditional requirement of
physical presence and ruled that "a business may be present in a
State in a meaningful way without" that presence "being physical in
the traditional sense of the term". Thus, the court extended the judicial
practice formed in Quill Corp. v. North Dakota[17]
and National Bellas Hess, Inc. v. Department of
Revenue of Illinois[18]
and maintained a new approach in tax law.
A
similar concept of permanent establishment of virtual services in the framework
of existing double taxation agreements was introduced by OECD in 2018
(ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT, 2018). Although
welcomed by Saudi Arabia and India, the concept failed to get a wider
international support. Such treatment of the permanent establishment could have
been interpreted much wider going beyond the boundaries of the electronic
environment to include consulting services, call centres, etc. Nation states
saw a risk of legal disputes caused by the indefinite interpretation of permanent
establishment.
Nearly
at the same time, the European Commission proposed new rules for taxing
businesses operating in the electronic environment (EUROPEAN
COMMISSION 2020). The
proposal was a necessary measure by the Commission until OECD finds a digital
business taxing solution acceptable to the international community. As the
progress in the field is slow, the European Commission extended the existing
concepts of permanent establishment by acknowledging digital representation of
businesses in foreign countries. Digital services to be included into the scope
of business have to be rendered over the Internet or an electronic network and
have to meet the following criteria:
· the service must be automated,
· human interference into the service
provision must be limited to minimum,
· the service provision must be
impossible without information technologies (EUROPEAN COMMISSION 2020).
Although
the European Commission has extended boundaries of the permanent establishment,
the initial changes comprise only part of business activities, i.e. the digital
representation per fiscal year has to be significant, which means the company's
revenue from electronic services in the jurisdiction has to be at least 7 mil
euros or the company has to serve at least 100 000 end users or have at least
3000 contracts on e-service provision in the target country (EUROPEAN COMMISSION 2020).
OECD
proposals of 2019 also envisage estimation of business revenue limitations as a
key criterion grounding application of the new rules of PE interpretation
linking the company to the state's jurisdiction and granting the state the
right to impose taxes on the company's revenue (ORGANISATION
FOR ECONOMIC CO-OPERATION AND DEVELOPMENT, 2019). It means that only a limited number of
companies are likely to fall within the scope of the new regulation.
The
regulation does not extend on small and medium enterprises. Companies not
meeting the aforementioned requirements will not be subject to income taxing.
However, if the approach was adopted, each nation state would have to set
business revenue limitations for the tax burden to appear in its jurisdiction
(TURINA, 2019).
One
of the means for companies to ascribe their customer to a certain jurisdiction
is the Internet Protocol (IP) address. However, companies may use other means
of the customer location as well. For instance, the number of devices connected
to the digital interface through which the digital services are supplied may be
used as a suitable and sufficient technique to assess the proportion of total
revenues of the company (COMMISSION RECOMMENDATION, 2018).
However,
little is said about measures to be applied by tax administering institutions
to ensure efficient operation of the system. Without such instruments, we may
end up having a system designed only for big business. It seems that nation
states are just desperately seeking to regain lost income from big corporations[19]
making little or no efforts to develop a fair and efficient taxation system.
The
minimal measures envisaged by the European Commission greatly remind the
electronic services taxation scheme introduced at the beginning of the century
where the implementation measures were absolutely inefficient in case of small
and medium enterprises registered outside the EU. The system aimed at
improvement of large business tax administration (undoubtedly important as
well) leaving the question tax inevitability for small and medium business
unresolved. Electronically provided services remained beyond the scope of tax
monitoring. The partial system operation was based on the knowledge of big
companies subject to registration in the system. There were no measures to
identify non-registered businesses subject to such registration according to
the nature of their business operations.
5.
CONCLUSIONS
Failure by the international community to adopt a universal approach to taxing revenues raised from e-commerce predetermines isolated endeavours by individual states to develop new rules of international taxation. Meanwhile, international taxation may only be effective in presence of multilaterally agreed rules. The wider such rules are acknowledged, the more effective their implementation may be expected. Therefore, it is essential to curb further development of unilateral initiatives to preclude their evolution into long-term national strategies. As OECD fails to find a widely acceptable solution, nation stated are desperately trying to regain their lost tax revenues ignoring the need to develop a modern internationally acknowledged taxation system. As a leading organization, OECD has to ensure that the newly developed taxation system is acceptable to the vast majority of nation states.
The newly developed system of taxing e-commerce companies must be grounded on the source principle. The principle of fairness is essential in the system to apply equally to big, small and medium enterprises. It must be developed as a system extending upon all e-commerce business and not applicable only to specific cases (big e-commerce companies in the present context).
The
extended understanding of the permanent establishment has to be universally
acknowledged and acceptable to the international community instead of being
reflected only in individual court decisions. Attributing a permanent
establishment to tangible assets, which has lasted for over a century, has be
fully rejected in favour of an up-to-date fair and efficient PE concept
suitable to modern cyberspace business. The key focus in PE creation must be on
relations between the state and economic activities of the company.
REFERENCES
BASU, S. (2017) International
Direct Taxation and E-Commerce: A Catalyst for Reform. NUJS Law Review, v. 10, n. 1, p. 19-48.
COMMISSION RECOMMENDATION of 21.3.2018 relating to the corporate taxation of a significant digital presence. Brussels, 21.3.2018 C (2018) 1650 final. Available: <https://ec.europa.eu/taxation_customs/sites/taxation/files/g_recommendation_significant_digital_presence_21032018_en.pdf>. Access: 22 February 2020.
EUROPEAN COMMISSION (2020) Fair Taxation of the Digital Economy. Available: <https://https://ec.europa.eu/taxation_customs/business/company-tax/fair-taxation-digital-economy_en>. Access: 22 February 2020. Access: 17 April 2020.
FAULHABER L. V. (2019) Taxing Tech: The Future of Digital Taxation. Virginia Tax Review 39.2, p. 145-196. Available: <https://ssrn.com/abstract=3460741>.
Access: 18 April 2020.
GHOTBIFAR, F.; MARJANI, M.; RAMAZANI, A. (2017) Identifying and assessing the factors affecting skill gap in digital marketing in communication industry companies. Independent Journal of Management & Production, v. 8, n. 1, p. 1-14. DOI: http://dx.doi.org/10.14807/ijmp.v8i1.507.
GUTMAN, M.G. (2001) Taxation of Income Derived from Electronic Commerce: Argentina. 55TH CONGRESS OF THE INTERNATIONAL FISCAL ASSOCIATION, v. LXXXVI, p. 215-241.
HENRIQUES, A.C.V.; MEIRELLES, F.S.; CORTEZ DA CUNHA, M.A. (2020) Big data
analytics: achievements, challenges, and research trends. Independent Journal of Management &
Production, v. 11, n. 4, p. 1201-1222. DOI: dx.doi.org/10.14807/ijmp.v11i4.1085
HMAYAKYAN, H. (2019) Taxation in the Cyber Age: The Future of Wayfair. Loyola of Los Angeles Entertainment Law Review, v. 39, n. 3, p. 285-321.
HONGLER, P.; PISTONE, P. (2015) Blueprints for a New PE Nexus to Tax Business Income in the Era of the Digital Economy. WU International Taxation Research Paper Series No. 2015 – 15, p. 17. DOI: 10.2139/ssrn.2586196.
MODEL TAX CONVENTION on Income and on Capital. OECD, 2017.
MORENO, A. B.; BRAUNER, Y. (2019) Taxing the Digital Economy Post BEPS – Seriously. Columbia Journal of Transnational Law, v. 58, n. 1, p. 121-188.
ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT (2019) Public Consultation Document: Secretariat Proposal for a "Unified Approach" under Pillar One. Available: <https://www.oecd.org/tax/beps/public-consultation-document-secretariat-proposalunified-approach-pillar-one.pdf>. Access: 22 February 2020.
ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT (2020) Tax Challenges Arising from Digitalisation - Interim Report 2018: Inclusive Framework on BEPS, OECD/G20 Base Erosion and Profit Shifting Project, paras. 379, Available: <https://www.oecd.org/fr/fiscalite/tax-challenges-arising-from-digitalisation-interim-report-9789264293083-en.htm>. Access: 22 February 2020.
REIS, J.G.M.; NETO, P.L.O.C.; FUSCO, J.P.A.; MACHADO, S.T. (2014) Supply chain
strategies in the context of an e-commerce chain (e-chain). Independent Journal of Management &
Production, v.5, n. 2, p. 438-457. DOI: http://dx.doi.org/10.14807/ijmp.v5i2.148.
REUVEN,
S. A. (2000) Globalization, Tax Competition, and the Fiscal Crisis of the
Welfare State. Harv. L. Rev., v.
113, n. 7, p. 1573-1676.
SIMANJUNTAK, M. (2020) Consumer
empowerment on online purchasing. Independent Journal of
Management & Production, v. 11, n. 1, p. 236-255. DOI: dx.doi.org/10.14807/ijmp.v11i1.964
SKAAR,
A. A. (2000) Erosion of the Concept of Permanent Establishment: Electronic
Commerce. Intertax, v. 28, n. 5, p. 188-194.
TAXATION
AND ELECTRONIC COMMERCE, OECD 2001. Implementing
the Ottawa Taxation Framework Conditions.
TURINA,
A. (2019) The progressive policy shift in the debate on the international tax
challenges of the digital economy: A “Pretext” for overhaul of the
international tax regime? Computer Law
& Security Review, p. 1-17.
VAN RAAD, K. (2001) International
Coordination of Tax Treaty Interpretation and Application. Intertax, v. 29, n. 6-7, p. 212-218.
WAGNER
CARDOSO, W.; JUNIOR, W.A.; BERTOSSE, J.F.; BASSI, E. & PONCIANO, E.S. (2017) Digital manufacturing, industry 4.0, clould computing
and thing internet: Brazilian contextualization and reality. Independent Journal of Management &
Production, v. 8, n. 2, p. 459-473.
DOI: dx.doi.org/10.14807/ijmp.v8i2.572.
[1] „Since the start of its mandate,
this Commission has taken action to ensure the principle that all businesses
operating in the EU should pay their taxes where profits and value are
generated. This principle is essential for a fair and effective taxation in the
Single Market, and it can only be enforced through common and coordinated
measures“.
[2] A radio broadcasting company set up in Mexico broadcasted their programs to the USA. The company charged the US listener a fee collected directly from the customer and only used mail boxes located in the US. The court held that mail delivery was not of the same importance as company's headquarters or commercial operations in the USA. The company's premises and facilities were located in the Mexican territory. Advertising contracts were also drawn up in Mexico. All business operations necessary to render the service took place in the company's studio in Mexico. Finally, the court ruled that the source of income was not in the US territory since all operations to render the service (i.e., radio broadcasting) were conducted in Mexico. The court, however, had no doubts that the audience was in the US territory and the advertising was targeted specifically at the US listener. The case is more than 70 years old and similar situations have to be treated today in view of opportunities granted by the Internet. (Piedras Negras Broadcasting Co. v. Commissioner, 43 B.T.A. 297 (1941), nonacq., 1941-1 C.B. 18, aff’d, 127 F.2d 260 (5th Cir. 1942))
[3] Double Irish Dutch Sandwich technique
used by Google may be a good example of a business structure designed to avoid
income taxing.
[4]
Some jurisdictions acknowledge that a circus has to have its permanent
establishment even if it constantly moves from one location to another. Other
countries, however, refuse to acknowledge existence of its permanent
establishment as circle performances are given in changing locations (SKAAR,
2000). When business activities are inseparable from a specific geographical
location, a period of several weeks may be applied. However, the Norwegian
Supreme Court denied a permanent establishment in Alphawell case for a consultancy firm which used a number of
different offices for 6 months in certain intervals within a period of 4 years.
The court held that the degree of business continuity was insufficient.
(Alphawell Ltd and Richard Pegrum v Ministry of Finance, Høyesterett (Norwegian
Supreme Court), 10 June 1994, Case number 56/994)
[5] Conditions stipulated in the
hosting contract have no importance in this case. Even if the hosting contract
stipulates which particular server the company's website has to be hosted on,
the hosting contract will not be treated as sufficient grounds for the company
to have a permanent establishment.
[6] Google France (Google subsidiary)
was rendering marketing services and analysis of AdWords services rendered to
the French customer by Google Ireland (Google subsidiary) under a cooperation
contract. Google France had no right to contract with clients on behalf of
Google Ireland. The French Tax Administration (FTA) argued that Google Ireland,
having used Google France employees (Google France employees negotiated Google Ireland contracts with the customer,
the contracts contained names of Google France employees, Google France hired
legal advisers to negotiate the contracts), technologies and market data, de facto had a permanent establishment in
France. The Paris Administrative Tribunal refused to acknowledge Google
Ireland's permanent establishment within French jurisdiction as FTA was
claiming. Google France activities were deemed axillary in view of the fact
that it had no right to enter into contract with the customer and therefore
Google Ireland's representation in France was insufficient. (Google Ireland
Limited v. Administration générale des finances publiques, Case 1505113/1-1,
Tribunal administratif de Paris (12 July 2017)).
[7] Dell Spain (Dell Inc. subsidiary)
was an authorized Dell Inc. distributor. After restructuring, Dell Spain acted
on the basis of a commissionaire agreement with Dell Ireland. The company's
main activity was to render services specially designed for large corporate
clients. The Supreme Court held that such Dell Spain activities create Dell
Ireland's permanent establishment according to provisions of the double
taxation agreement on a subordinate agent and a fixed place of business. The
court also stated that the requirement for a subordinate agent to be „acting on
behalf of an enterprise“ implies no necessity to interpret it as direct
representation whereas a permanent establishment associates not only with
particular premises, but has to be interpreted wider to include actual links
between the enterprise and the agent manifesting in daily activities of the
latter in accordance with instructions and management of the enterprise. (Spain
vs. Dell, June 2016, Supreme Court, Case No. 1475=2016)
[8] France vs. Zimmer Ltd., March
2010, Conseil D’Etat No. 304715, 308525; Norge vs. Dell Norge. December 2011,
HRD saknr 2011-755.
[9] Spain vs. Dell, June 2016, Supreme
Court, Case No. 1475/2016. See also: India vs Mastercard, June 2018, AAR No
1573 of 2014.
[10] This may be well illustrated by
France vs Valueclick Ltd. March 2018, CAA, Case no 17PA01538
[11] The requirement, however, has
never been absolute. A certain category of the corporate profit could always be
taxed by the source state, in spite of the absence of the permanent
establishment in the state. The right was enforced in Article 6 and 13 of the
OECD Model Tax Convention. National courts have also been flexible about
corporate possession of tangible assets in the target country. In Formula One
World Championship Ltd. Vs. Commissioner of Income Tax case in 2017, the
Supreme Court of India held that the Buddh International Circuit may be deemed
a prmanent establishment for commercial/business activities in F1 Championship.
The Supreme Court stated that: the race track was "a virtual projection of
the foreign enterprise of one country into the soil of another country";
the enterprise was conducting business activities; the place of business was„
"fixed"; and the place of business was in the company's disposal. In
Formula One World Championship Ltd. Vs. Commissioner of Income Tax,
International Taxation - 3, Delhi & Anr. 2017).
[12] It has to be noted though, that
OECD is not the only to maintain this approach. In terms of indirect taxing,
the European Union had been clinging to practices incompatible with the digital
era for decades on the same grounds of the supremacy of physical objects. The
EU scheme of taxation of electronic services introduced at the beginning of the
century and later transformed into MOSS (Mini One Stop Shop) was aimed at the
development of a uniform registration and VAT accounting scheme for
non-European Union e-commerce companies operating within the EU jurisdiction.
The initial VAT accounting initiatives were not all-encompassing. Therefore,
application of a reduced VAT rate to printed books and the standard rate to
e-books had long remained a norm whereas the only criterion to differentiate
the former from the latter was their tangibility. E-books were treated as
services and therefore were subject to different legal norms than goods. When
France and Luxembourg unilaterally decided to apply a reduced VAT rate to
electronic books in 2012, the EU Commission banned the reduction on the grounds of
violation of EU law. Only in 2018, the European Commission changed its decision
and allowed a reduced VAT rate for electronic books. It took almost two decades
though.
[13] GAFA is acronym for Google, Apple,
Facebook and Amazon – the 4 most powerful e-commerce companies in the U.S.
[14] DPT is not applicable to small and
medium enterprises.
[15] „The grand illusion of a single,
worldwide tax system that would eliminate all international inefficiencies and
assist all the nations of the world in maximizing their relative advantages is
commonly accepted as utopian.“ (BRAUNER, 2003).
[16] South Dakota v. Wayfair, Inc., 585
U.S. (2018).
[17] Quill Corp. v. North Dakota, 504
U.S. (1991).
[18] National Bellas Hess, Inc. v.
Department of Revenue of Ill., 386 U.S. (1967).
[19] The
attention paid to big corporations should only be an impetus to start a reform
in taxation (MORENO; BRAUNER, 2019).