Changes To PE Concept In The Context Of Electronic Commerce

With the globalization of economy, countries relax the limitation to the exchange ofgoods, capital, technology and work forces between countries, which boost internationaldirect investment. With the access to WTO, China gets a more open and more friendenvironment to foreign investment. The amount of transnational business income risesharply both in China and in international community. International investors always tendto elude the business income tax of source country to achieve the biggest profits whileresident countries always claim taxation on their residents' international income. In thecontext, it is important to protect the taxation of source countries on international businessincome. Up to now, international community distributes the taxation of international income byinternational treaties of avoidance of double taxation, in which the PermanentEstablishment principle is used to tax the business income of nonresidents from sourcecountry. In the treaties made between China and others countries, PE principle is alsoemployed to regulate the taxation on the international business income. However, PE concept which is an essential step to apply PE principle is challenged bythe electronic commerce emerging in the late 90's of 20th century. Due to the characters ofe-commerce, source countries can not find a PE in their territories and then acclaim taxjurisdiction by applying the traditional PE rules based on a certain degree of physicalpresence. International community confronts a threat to the balance of internationaltaxation as well as China, as a net import country, faces the problem of tax base erosion. Itis an emergent task for both China and international community to create new rules to taxthe incomes of nonresidents by transnational e-commerce. The article is composed of four parts: Part I introduce the history of the PE principle and PE concept, which play anessential role in taxing nonresident's business income and then describe the PE-constitutecriteria inducted by the Avid A. Skaar. Part II addresses the challenges to PE concept posed by the transnational e-commerceby applying PE-constitute criteria to the elements of e-commerce and analysis theoutcomes following the challenges. Part III describes the responses of selective countries at the level of both domestic andinternational law, analysis the stand and view of concerned international organizations andintroduces some approaches to tax transnational e-commerce raised by academics. Part IV discusses the challenges posed by the transnational e-commerce transactionsto China and argues the best solution to tax e-commerce income is to keep PE principle andchange the PE concept with regard to the original aim of PE principle and presentlegislations of China. With reference to the approaches which discussed in part III-and U.S.practices in jurisdiction field, the last section establishes a new set of criteria to find anexistence of PE. Considering the history of PE rules and the present legislation of China, this articleargues PE principle should continue to be applied on taxing transnational e-commercetransactions while changes should be made to PE concept. To establish a new set of criteriaof PE concept which are suitable for China and can be accepted by the internationalcommunity, the article discusses the drawbacks of regulation raised by OECD as therepresentative of developed countries, compares different approaches to tax thee-commerce income including tax base erosion, virtual PE, economic presence PE and so on,and makes reference to practice of US in the jurisdiction field, combined with reflection onthe present social and legal reality of China.