Place of Effective Management and Permanent Establishment in cross-border digitalized transaction

Abstract

According to the development of information, communication and technology, the modern society is turning into a digital economy system. Digitalization of products and services shortens distances between people and things. It opens up ample opportunities for innovation, investment and the creation of new digitalized business and jobs. However, such expansion of the digitalized economy and cross󰠏border transactions is affecting the international tax system, because multinational enterprises are avoiding tax through the Internet and mobile communication network. Particularly, corporate tax, personal income tax, and value added tax are at issue. First, this study is to investigate controversies surrounding digitalized products and services with respect to a permanent establishment, especially when products and services are provided to foreign countries which do not have a permanent establishment in the relevant country. Generally, the customs authority can impose customs duty on products when they are imported from abroad. However, as for digitalized rights and services, it is possible to use the products and services without paying tax through the web server located in a foreign country, because the tax authority seldom investigates such deal. Furthermore, transactions made through the Internet are increasing, and the characteristics of transactions of digitalized contents are changeable and complicated in the modern society. Now, the traditional concept of permanent establishment cannot deal with these problems. Multinational corporations are trying to abuse the concept of the permanent establishment to avoid tax, because the government cannot impose tax on foreign companies which do not have a permanent establishment in the country. If they use the Internet server to supply the digitalized services and contents such as e󰠏book, games, etc., many countries will take pains to classify the deals within their countries’ revenue power. Therefore, the purpose of this study is to suggest the countermeasures against multinational enterprises’ tax avoidance attempt rather than double taxation problems. A different attribution of taxing rights which may lead too low taxation is not per se an indicator of defects of the existing system. However, we should prevent the abuse of the defects by multinational enterprises. In order to address the problems of BEPS (Base Erosion and Profits Shifting), the OECD and G20 countries, working together on an equal footing, adopted a 15󰠏point Action Plan in 2013, and the EU published the Report of Commission Expert Group on Taxation of Digital Economy in 2014 to cope with these problems and suggested the solution to the tax challenges of the digital economy. It is important to examine closely how enterprises under the digital economy add value and make their profits in order to determine whether and to what extent it may be necessary to adopt the current rules in order to take into account the specific features of the digital industry and to prevent BEPS. This study will show the solutions to the problems which the present statutes cannot solve regarding the special issues and the available developments and review cases in the field of web server and cloud computing, etc. In order to overcome the deadlock of this situation on the permanent establishment principle, especially which was made for the attribution of taxing right to accomplish the principle that tax jurisdiction should generally be allocated between the source country and the residence country depending on the nature of the income, the new concepts of the rule are necessary such as significant presence of digital transaction and the place of effective management. Here, I would show the problems of permanent establishment on cross-border digitalized transactions through the cloud computing case and the possibility of applying the new concept, “Place of Effective Management.”