Abstract
M.Com. (South African and International Taxation)
The concept of permanent establishment (PE) is a fundamental concept in international tax law, as it establishes the right to tax business profits of non-resident entities in the country where business activities are carried out. This study was motivated by the challenges governments and business entities face in the allocation of taxing rights in the digital economy.
This study considers the history and the meaning of the current Organisation for Economic Co-Operation and Development (OECD) permanent establishment concept, and analyses its effectiveness in the digital economy. The digital economy and the event of e-commerce have changed the way in which business transactions are conducted and how multinational entities are structured. The digital economy has created different means of value creation for business entities, and new challenges are being confronted internationally regarding the taxation of such value created. This directly affects revenue collection by governments globally. A largely qualitative approach was undertaken in conducting the research. This included a detailed reading on the topic to support any inferences and conclusions.
This study finds that the current OECD concept of permanent establishment is no longer an effective concept in the current digital economy. The event of e-commerce is challenging the core elements of “physical presence” and “fixed place of business”. Large multinational entities have low effective tax rates on their profits, and governments are being deprived of tax revenue that would normally have resulted from increased productivity. Data and data collection are important value creators in the digital economy, and there is an increasing need to tax digital company profits. The OECD Base Erosion and Profit Shifting (BEPS) Project announced in 2013, means to address resultant issues, such as tax-base erosion, tax abuse, and artificial avoidance of permanent establishment status. This study concludes that either the concept of permanent establishment needs to be redefined to ensure its effectiveness in the digital economy, or a completely new concept needs to be created.