Research On The Attribution Of Profit To Permanent Establishments Under The Background Of Digital Economy

The attribution of profit to permanent establishments involves the division of tax jurisdiction between the residence country and the source country and the double taxation on business profits.In 2010,the OECD issued the " 2010 REPORT ON THE ATTRIBUTION OF PROFITS TO PERMANENT ESTABLISHMENTS ",which proposed the functionally separate entity approach based on the arm`s length principle and applying the transfer pricing methods to calculate the profit attributable to permanent establishments by analogy.In 2013,OECD released reports on the prevention of Bases Erosion and Profit Shifting,which triggered global attention and discussion on national tax rules.In 2015,Addressing the Tax Challenges of the Digital Economy,Action 1-2015 Final Report,were released.In this plan,a series of changes in business models,transaction methods,and value creation methods due to the application of ICT technology to business operations were proposed.The current approaches of profit attribution cannot adapt to these changes,which exacerbating the problem of base erosion and profit shifting.This article uses the literature research method and the comparative analysis method,carries on the research to the permanent establishments ’s profit attribution,and the focus is on the method of attribution of the profits to permanent establishments.This article aims to clarify what problems profit attribution to permanent establishments facing in the context of the digital economy,and what solutions have been proposed by the international community.Based on the OECD tax treaty model and the United Nations tax treaty model,according to 《Addressing the Tax Challenges of the Digital Economy – action1:2015 Final Reports》,《Tax Challenges Arising from Digitalization – Interim Report 2018》,《Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalization of the Economy– Inclusive Framework on BEPS》in 2019,this article illustrates and analyzes the proposals to deal with the challenges faced by the attribution of profit to permanent establishments under the background of digital economy.This paper is divided into four parts,the first chapter studies the historical evolution of the profit attribution method of permanent establishments.From 1927,the conception of permanent establishment was first cited in multilateral tax treaties,to 1933,the independent enterprise hypothesis of the draft League of Nations was used to calculating the business profit of permanent establishments,and then in the model of the Mexican and London tax treaties,the independent accounting method was proposed,then the functionally separate entity approach based on the arm`s length principle appeared,and put forward the formulary apportionment approach and the common consolidated corporate tax base as an alternative to the functionally separate entity approach.The second chapter analyzes the new changes in transaction methods and content in the context of the digital economy,resulting in the permanent establishment principle being inadequate to adapt to the changes,and problems with the application of permanent establishment profit attribution rules.The third chapter introduces the current response plans that are highly concerned by countries,such as significant economic presence,user participation proposals,and new profit distribution rules.Chapter four points out the shortcomings of our country’s permanent establishment profit attribution regulations and proposes to lay a qualitative foundation for permanent establishment profit attribution with a new nexus,use the formulary apportionment approach in terms of profit attribution rules cautiously and strengthen the ability to collect and analysis data,prepare for the application of new tax rules.