On development of the concept of permanent establishment in the age of digitalization within the context of taxation of cross-border activity

Abstract

Introduction. The article considers modern developments of the concept of permanent establishment in the context of taxation of cross-border activities. The concept which was developed in 1920s has remained virtually unchanged since the early 1960s, despite the huge changes in the way that international business is conducted since then. However, as nowadays acknowledged, digitalization of business creates tax challenges, in particular, in a way taxing rights are distributed between the states. These challenges also raise questions regarding the ability of the existing international tax framework to determine where economic activities are carried out and value is created for corporate tax purposes. The purpose of the paper is to consider the developments around the concept of permanent establishment to address tax challenges of the digital economy, in particular, a new nexus for permanent establishment related to digital activities. Results. The purpose of the international taxation system’s design is to ensure fair allocation of taxing rights between different jurisdictions. While the general consensus is that taxation should take place where the value is created the current tax framework lack mechanisms which would ensure such taxation. This issue has been raised in research papers and addressed by the Organization for Economic Cooperation and Development. Although the BEPS Final Report identified tax challenges created, inter alia, by outdated concept of permanent establishment no common consensus was reached regarding measures to be taken to address those challenges. However, as a result of further work the concept of a new nexus was proposed and is being currently discussed. Conclusion. Introduction of the new nexus on an international level will provide the basis for fair allocation of taxing rights between states and will help to prevent unilateral measures taken by different countries to ensure taxation of digital activities within their jurisdictions that may create further distortions.