The Challenges And Responses Of Permanent Establishment Principle In Digital Economy

In the international tax system,the principle of permanent establishment(PE)plays an important role in the distribution of tax jurisdiction among countries.It is a prerequisite for the source countries of income to tax the operating profits obtained by non-resident enterprises in their own countries.After more than 100 years of development and improvement,the international community has formed a set of PE systems centered with OECD Model Tax Convention.However,the rise of the digital economy has put the principle of PE to a great test and challenge.With the rapid development of new technologies and business models,more transactions take place directly on the Internet.Non-resident enterprises do not need to establish ‘physical presence' business premises in the source countries.At the same time,previously preparatory or complementary activities are now the core business of an enterprise and should no longer be classified as an exception to a PE.With the sustainable development of the digital economy in the future,the principle of PE will face more serious challenges.Thus,the problems exposed by the principle of PE in the digital economy may not only make it impossible to avoid international double taxation,but also become a hotbed for fostering malicious tax evasion by multinational enterprises.Therefore,how to improve and apply the principle of PE so that it can more effectively respond to the international environment under the digital economy is an important issue that needs close attention in the field of international taxation.In view of this problem,many experts in the theoretical circle have discussed and put forward a series of viewpoints and schemes at the beginning of this century.They include revising the definition of PE in OECD model,setting up virtual PE,levying bit tax,levying withholding tax and so on.Some of these schemes are more conservative or totally overturn existing rules.In the final report of the BEPS Action Plan,released by OECD in 2015,more specific responses are also given around the four options mentioned above.However,the approach suggested by the BEPS Action Plan is to maintain the existing PE principle in the current context and to update them on an ongoing basis.The BEPS Action Plan has received positive response from all over the world.At present,the European Union,India and other countries have started to work on legislation,and will soon issue relevant laws and regulations.As the second largest economy in the world,China should take the implementation of the BEPS Action Plan as an opportunity to explore a plan suitable for China's national conditions as soon as possible,and to safeguard China's tax rights and interests as far as possible on the premise of ensuring world tax fairness.In terms of concrete actions,there is a need to harmonize the definitions of PE in domestic tax laws and tax agreements;second,to seek bilateral or multilateral cooperation and to participate actively in the development of international tax rules;and,finally,to develop a new set of schemes.In the choice of specific options,this paper recommends the use of withholding tax scheme.Because compared with other schemes,this scheme can ensure the tax right of the source countries to a great extent,and it is also relatively simple in practice.Of course,in the specific implementation of tax withholding schemes,the products of digital economy such as block chain technology can be combined with.In turn,the development of the digital economy will promote the improvement of the international tax system.