Research On The Principle Of Permanent Establishment In International Taxation In The Digital Economy

Under the traditional tax rules,the taxing right of source state to a non-resident enterprise’s business profits which is sourced from its territory is based on the principle of permanent establishment,which means the profits of an enterprise of a contracting state("resident state")shall be taxable only in that state unless the enterprise carries on business in the other contracting state("source state")through a permanent establishment("PE")situated therein and the profits is attributable to that PE.In the real economy,cross-border enterprises have to set up a fixed place of business in the source state through which the business of an enterprise is wholly or partly carried on,or entrust a person in the source state to conclude contracts in the name of the enterprises.Therefore,whether a non-resident enterprise sets up a fixed PE or an agent PE,it must maintain a certain degree of physical presence in the source jurisdiction.The physical presence is considered as the sole nexus that the source state could use to tax the business profits of a non-resident enterprise.However,with the rapid development of the Internet and Communication Technology("ICT"),new digital business models have emerged at the historic moment.Products and services could be digitally transformed and then be transmitted on the Internet,a virtual space without borders.Digital enterprises,which have the key features like concealment of operating entities,intangibility of fixed place,mobility of intangibles,are different from traditional enterprises.Therefore,there is no need for digital enterprises to have any form of physical presence and to engage in local production and operation activities in the source state.They also have increasingly fast and convenient transactions and payment methods.All these characteristics lead the source state not be able to apply the principle of PE,because physical presence is the sole nexus.It is difficult for the source state to determine the resident status,the identification of source of income,classification of income and standard of PE,which results in huge challenges for the source state in applying the principle of PE in the International taxation.The International community has realized that digital enterprises use ICT to erode the tax bases and transfer the profits in the whole world,avoiding the taxing jurisdiction of both resident and source state,in order to reduce their own tax burdens,while causing huge losses of tax revenue in various countries and areas.Therefore,how to formulate and modify the existing principle of PE and adopt effective taxation management measures to tax the business profits of non-resident digital enterprises has become a key issue of concern in the International community.OECD adopts a multilateral tax plan that appropriately expands connotation and extension of PE on the basis of maintaining the traditional PE concept;EU adopts a regional tax plan which contains both temporary and comprehensive taxation measures;Some countries adopt unilateral tax practice,such as Israel’s digital PE plan,Italy’s withholding tax plan,India’s equalisation levy plan and Spain’s digital service tax plan.All these tax plans are formulated to expect that source state could apply the new principle of PE to take effective tax management measure for digital enterprises.China,as one of the biggest capital-importing countries,has huge digital market.However,there are not enough legislations in the area of digital economy currently,and specific tax collection and management measures also need to be further improved.The above-mentioned multilateral,regional and unilateral tax plans are not all applicable to the Chinese market.On the basis of a comparative analysis of the rationality and feasibility of the implementation of tax plans other countries in China,and in light of the current status,this article establishes a Chinese Plan with Chinese characteristics,that is,new PE principle includes both physical PE and digital PE.Non-resident enterprises who satisfy the criteria for physical presence or digital presence,their business profits sourced from China and attributable to the PE shall be subject to corporate income tax,or their whole income shall be subject to withholding tax.