Research On The Definition Of Place-based Permanent Establishment Under Digital Economy

The principle of permanent establishment is the basic concept of international taxation.The distribution of operating profits of multinational corporations between source and resident countries is a lever to balance the tax benefits of source and resident countries.The principle of a permanent establishment consists of two key steps,qualitative and quantitative.The establishment of a permanent establishment to determine whether a business premises constitutes a permanent establishment is a prerequisite for further quantitative research to determine the attribution of profits.Under the traditional business model,the international community has reached a consensus on the general definition of a permanent establishment.Typical site-based permanent establishments are required to meet business premises,fixedness,sustainability,and operational requirements.However,the traditional rules for the establishment of venue-based permanent establishments have experienced regulatory failures in the digital economy era.The Indian Right Florist Case is a typical case in which the Internet advertising model challenges the physical existence rules of entities.In the traditional sense,the permanent establishment emphasizes the existence of entities that have physical connections with the source,but now it is possible to conduct business through virtual presence through the Internet.With the development of information technology,enterprises have more and more profit creation links through online.Non-resident enterprises can interact with customers remotely through websites or other digital methods.Operation management can be carried out without the existence of physical entities.Dependence is greatly reduced.The discussion of the offline warehouse case in Japan reflects the difficulty of regulating the offline store-line warehouse in the digital age in the traditional permanent establishment-specific exemption clause.The exemptions listed in the specific activity exemptions are developed in the traditional business model.The production links such as storage,display,and intelligence gathering create less profit for the enterprise in the traditional business model,and play secondary or auxiliary functions.However,with the development of technology,the secondary production links in the past may play a key role in the digital economy business model,creating huge profits for the enterprise.The nature of the activity of the exemption clause in the digital age is difficult to judge.For the dilemma of the traditional permanent establishments in the digital economy,BEPS1 proposed a new joint point of “significant economic existence” and unilateral countermeasures such as withholding tax and equalization levy.For the above-mentioned coping strategies in the public commentary on BEPS1,scholars,tax practitioners and organizations involved in the front line of the digital economy business have formed more than 500 pages of BEPS1's mixed comments on the connection.The solution to the problem is currently difficult to reach an international consensus.Specific exemptions were amended in the BEPS7 and OECD(2017)model agreements,eliminating the exemption of ex officio and conducting substantive tests on “preparatory and complementary” activities.That is to say,a case analysis of the role played by a fixed business place in the overall activities of the company,and whether its role is critical and important.In addition,for the phenomenon of active splitting between closely related parties to avoid the formation of a permanent establishment,the BEPS7 and OECD(2017)notes are regulated to determine whether the overall business of the integrated enterprise or its related parties is eligible for exemption.In response to the identification of permanent establishments in the digital economy,the EU has proposed a short-term digital service tax,and has long established a coping strategy for the existence of “important figures”.Although the digital service tax proposal failed to pass,the EU has reference to the taxpayer's dual thresholds for global and EU total revenues and the corresponding judgment standards for different types of digital services.The “Important Numbers Existence” has a reference value as a measure of whether the “important figures exist” and its specific thresholds are measured by the number of revenues,users,and contracts.By comparing the unilateral practice of “significant economic existence” between India and Israel,the author draws that the judgment elements of “significant economic existence” should be based on quantitative criteria,giving taxpayers and tax authorities guidance on clarity and predictability,and supplementing with qualitative standards,leaving a flexible space to deal with the diversification and development of the digital economy model.The unilateral practice of equalization levy in India and France reveals conflicts between domestic tax interests and international obligations.When adopting unilateral measures such as equalization levy and withholding tax,it should be targeted and temporary,take into account international treaty obligations as much as possible,consider the cost of tax administration and the tax burden of small businesses and start-ups.After comparing the above multilateral,regional and unilateral responses,the author puts forward the coping strategies of the permanent establishment identification rules in China's digital economy.The author believes that China should introduce the“helpful and auxiliary” substantive test in the bilateral tax treaty and adopt the short-term withholding tax for transition,and actively participate in the construction of the new permanent institution concept.