Permanent Establishment within the Digital Economy

Christian Borgbo & Nikolaj Lehto Hansen

Student thesis: Master thesis

Abstract

In recent years, global revenues in the digital economy have grown exponentially. Digitalization has expanded companies’ possibilities and fundamentally changed the way companies do business. Companies operating across borders no longer need a physical place of business to sell products and provide services to foreign customers. With new technologies, companies can now do business with customers geographically located in other countries without having a physical presence in a given country and without being subject to local taxation. Current legislation and bilateral conventions preventing double taxation often results in taxation of income in the country of corporate domicile, thus basing the assessment of where to tax income on purely physical factors. OECD has highlighted this issue in its ongoing work within the BEPS Project. The development has led to considerations regarding a change of the current definition of Permanent Establishment. The aim is to develop new measures that ensure a fair taxation between states on income derived from digital products and services. This thesis investigates the concept of Permanent Establishment and how it can be used to tax highly digitalized companies. Firstly, the thesis will characterize the digital economy as well as digital products. This is followed by an analysis of the current state of law related to Permanent Establishment and international taxation based on the OECD Model Tax Convention Article 5. The analysis shows that there are difficulties with the current assessment of Permanent Establishment based on a physical presence in regard to highly digitalized companies. Based on this analysis, the thesis will examine legislative proposals from the OECD and the European Union targeting income derived from digital products and services. The thesis will consider whether the principle of Permanent Establishment can be modified and/or renewed to solve the difficulties related to the taxation of the digital economy. Based on the above, the thesis concludes that there is an international demand for a revision of the OECD Model Tax Convention in order to ensure taxation of profits where the economic activities are performed and where the value is created. The thesis recommends changing the current definition of Permanent Establishment to include a company’s significant economic and digital presence in a given country in the assessment.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2019
Number of pages95
SupervisorsLouise Fjord Kjærsgaard