Reliability of permanent establishment concept in taxation of electronic commerce

Abstract

The Advent of e-commerce has caused many to question the reliability of the Permanent Establishment concept. Features of e-commerce that include; the borderless, ubiquitous, intangible nature of Internet as well as the expected reduction of the need of certain intermediaries in the business process; allow a business to earn income without having to maintain a physical presence in the market territory. In light of these features, and considering the traditional requirement of a physical presence for a permanent establishment to be rise, it is easy to conclude with arguments calling for the abandonment of a PE concept. While the research accepts these arguments as being valid, nevertheless, it will be argued by the researcher that the PE concept is theoretically justifiable for income that arises from international transactions conducted in an e-commerce environment. The researcher argues that if the concept of permanent establishment cannot be sustained in this new digital realm, then overall taxation of e-commerce will be complicated thus increased tax avoidance. The researcher argues that however imperfect the PE concept is, it is the devil we know that should be maintained. The researcher will however, show that despite the necessity of the PE concept, there is need for understandable and comprehensible interpretations to clarify and build up its application to e-commerce. The researcher argues that the PE concept needs to be redefined because the application of the PE concept under traditional principles may be rendered problematic in light of certain e-commerce features that are essential and significant from a tax perspective. It should therefore be redefined to encompass the innovations of e-commerce and more specifically in clarifications of when is it considered that a foreign business enterprise has a physical presence.