The Importance of Permanent Establishment in the Context of Taxation Issues in E-commerce

Abstract

E-commerce (including e-service) is considered a business method that eliminates territorial boundaries and provides new opportunities to businesses. Notwithstanding the advantages of e-commerce, it also brings some challenges, including in tax matters.For countries, taxation right for e-commerce activities is mainly based on the location of such activities performed. Although issues and disadvantages have always occured in international practice, currently they are increasing quickly. Countries are concerned with the taxation of e-commerce, that they might not gain their fair share of tax from the taxation process, meanwhile realizing that there should be chosen such a mechanism of taxation so that it would not hinder conducting such transactions. Hence, within the framework of e-commerce, for determining the taxation location of the profit, defining a permanent establishment has a significant role, because it is considered the main tool for having the right to tax a non-resident entity. It is obvious, that for regulating the taxation of e-commerce, international cooperation is needed, but such cooperation is not easy, because of the conflicting interests of different countries. According to the Organisation for Economic Cooperation and Development (OECD) leading model, the competence of taxing business income is given to that contracting country, where a permanent establishment of a transaction party exists.