The Challenges Of Digital Economy To The Definition Of Place-based Permanent Establishment

In the international tax treaties,the significant function of the permanent establishment(hereinafter referred to as PE)is to allocate and restrict the tax jurisdiction between the contracting states. PE is the precondition for income source country taxing non-resident companies on the operating profits gotten in the income source country. Usually, PEs can be divided into place-based ones and agent ones. The place of business is the core element of a place-based PE. And the traditional rule of definition of place-based PE involves three aspects, which are, firstly, the company has to run a place of business, and secondly, the place of business is permanent and fixed locationally, and thirdly, the company runs whole or part of the business activities through the fixed place of business.However, some problems are raised because of digital economy when defining place-based PEs. For example, in digital economy, substantial places of business do not necessarily exist, and the place of business is hard to be fixed even if the place of business exists, and some activities mentioned in the Paragraph 4 of Article 5 are no more just preparatory or auxiliary to the company’s business, and so on.With regard to the challenges of digital economy to the identification of PEs, this thesis chooses and discusses two solutions summarized in the Base Erosion and Profit Shifting project made by Organization for Economic Co-operation and Development. The first solution can be divided into two different and specific proposals. The first proposal is to make the whole Paragraph 4 of Article 5 subjected to the Preparatory and Auxiliary condition, otherwise to delete the words of Delivery and Purchasing from the paragraph 4. The second proposal is to modify the first sentence of Paragraph 4 of Article 5 and add a new one as supplementary. The second solution applies a new tax rule to the total digital businesses, which recommends creating a new nexus based on significant digital presence.In this thesis, the author’s opinion is that to make the whole Paragraph 4 of Article 5 explicitly subjected to the Preparatory and Auxiliary condition is more in conformity with the policy intention, and the new tax rule to create a new nexus need be improved. But if the problems of the new tax rule can be solved, applying the new tax rule and PE principle simultaneously would be better and simplifies the complexity raised because of the differences between the traditional trades and digital economy.As far as the identification of PEs, the problems of the rule in tax law and regulatory of China are that the definition of PE in Chinese law and regulatory is different with the definition in the tax treaties signed by the Chinese government, and there is no specific guidance about how to identify a PE and no statement about how to identify a PE concerning digital economy. So the author suggests the Chinese government doing something as follows. Firstly, unify the definition of PE in Chinese law and the tax treaties, and explicitly use the Permanent Establishment concept in Chinese law. Secondly, issue guidance for identification of PEs at the central government level. Thirdly, stir the concern about the studies of Organization for Economic Co-operation and Development on PE, and draw on the experiences of other countries in dealing with the PEs in digital economy.