Uneasy Application of Permanent Establishment Rule in a Digital Era:

　　UneasyApplicationofPermanentEstablishmentRuleinaDigitalEra:
   
    CommentsonRecentWorkUndertakenbyOECD
   
   
   
    ChenYanzhong,LLMCandidate,XiamenUniversity
   
   
   
    I.IntroductionEasadistributiverule
   
    Eversinceitsfirstappearanceinthe1899doubletaxationtreatybetweenPrussiaandAustria-Hungary,theconceptofPermanentEstablishment(PE)hasassumedgreatsignificanceininternationaltaxpractice.TheexistenceofPEhasnowbeenthedecisiveconditionforthetaxationofincomefrombusinessactivitiesandofcapitalpertainingtosuchactivities.Underthisrule,thehoststatemayhavepriorityintaxingtheprofitsderivedbyanenterpriseoftheothercontractingStateonlytotheextentthattheenterprisecarriesonbusinessthroughapermanentestablishmentsituatedinthefirst-mentionedstateandonlyinsofarastheprofitsareattributabletosuchapermanentestablishment.Inotherwords,permanentestablishmentisthethresholdrequirementforthehoststatetoexerciseitstaxrightovercross-borderbusinessprofitsandallotherbusinessactivitiesbelowthisthresholdwillonlybetaxedbytheresidentstate.ThiseffectivefunctionofPEasadistributiveruleoftaxrightsbetweensourcestatesandresidentstatesmakesitthebestcandidatetosettlejurisdictionalconflictsregardingcross-borderbusinessincome.Thatisalsothereasonwhyover3000existingdoubletaxationconventionsadoptedthisrule.
   
   
   
    Tobespecifically,thePEruleconsistsoftwoparts,thedeterminationofPEgovernedbyArt5ofOECDModelTaxconventionorUNModelandtheprofitattributionofPEaddressedbyArt.7ofthesetwomodels.
   
   
   
    II.ApplicationofPEinelectroniccommerce:challengesandpolicyoptions
   
    Thefastadvanceofinformationandcommunicationtechnologies(ICT)hasofferedglobalbusinessunprecedentedopportunities.Evensmallbusinesseswherevertheyarelocatedcouldselltheirproductsandservicestoacustomerinaremoteplacearoundtheclock.Thesocalledelectroniccommerce,althoughnotpreciselydefinedordefinedvaryingly,involvestheapplicationofnewICTtoabroadrangeofproductionanddistributionactivitiesbeingconductedonaglobalscalethroughchannelswhicharedigitalandpermittodobusinessinteractivelyatanytime,atanyplace.ThebasiccharacteristicsofElectroniccommerceare:simultaneous,dismantlinggeographicaldifference,lackofcentralcontrol,global,anonymous,untraceable,etc.Thesecharacteristicshavetheirtaximplicationsandexplainwhysomanyareconcernedabouttaxissuesoftheinternet,whythemostfundamentalincometaxchallengesofecommerceisjurisdictional.Oneelementaddstothecomplexityofthisproblemisthatecommerceisstillgrowingrapidlyandbecomesmainstreambusinessinaglobalscale.SeetheChartbelow.
   
   
   
   
    Note:Thelargestimpactsyettobefelt.MostoftheworldisstillonthebottomoftheScurve.
   
    The2000marketcorrection(.comto.bomb)merelyslowedthegrowthofe-commercefromunbelievablyfasttoexceptionallyrapid.
   
   
   
    ConcernsoverthepossibleerosionoftaxbasebyinternationalelectroniccommercehaveinspirednumerousliteraturesanddiscusspaperssincethefirstreleaseofUSTreasuryPaperSelectedTaxPolicyImplicationsofGlobalElectronicCommerce.Nationalgovernments,internationalorganizationsandtaxexpertsreachedaConsensusthatitwouldnotbeeasytoapplycurrentPEruleinelectroniccommercewhichitisnotdesignedfor.Thedifficultiesare:thewebsiteisbyitselfcombinationofsoftwareanddigitaldatastoredintheserveranddoesnotamounttotheplaceofbusiness,thevisibilityofwebsitewillnoleadtotheexistenceofPE,thelocationofserversaretooeasytobemanipulatedtobefixed,theautomationofwebsiteandservernormallydoesnotconstitutecarryingbusinessactivities,websitesarehostedbyInternetServicesProviderandthebusinessdoesnothaveatitsdisposaltheserverandthelocationoftheserver,thetelecomscompanyandISPprovidesonlyinternetaccess,datestorage,transitorotherauxiliaryservicesandcouldnotbeanagencyPEoftheforeignvendor.
   
   
   
    SomecommentatordescribestheprocessofapplyingcurrenttreatynotionstoelectroniccommerceasthestoryofCinderella,tryingvariousshoesononefoot.Butwhatifthefootiswhattheshoemakersdidnotenvisage?CurrentPEruleisdesignedinatraditionalenvironmentandattachesgreatimportancetophysicalpresencesuchasplaceofbusinessandagents.Thestrongmarketpenetrationeffectsofelectroniccommercearenotwhatithasoroughttohavecontemplated.
   
   
   
    InviewoftheineffectivenessofPEruleintheelectroniccommercecontext,internationalcommunitieshaveproposedavarietyofpolicyoptionstoaddressthisissue.DependingontheextenttowhichthesepolicyoptionsdeviatefromtheexistingPErule,theyareclassifiedasrevolutionaryorconservative.RevolutionaryapproachesincludenewtaxessuchasBITtaxadvocatedbyCanadiantaxexpertA.Cordell,withholdingtaxproposalbyRLDoernbergandthesocalledabandonmentofPE.Incontrast,somecommentatorsareratherconservativeinevenproposingapossiblesolutiontothisproblem.Tothem,goodtaxesareoldtaxes.Astatusquoorhands-offapproachwouldbethebestwaytodealwiththechallengesbyinternationalelectroniccommercewhichmerelyrepresentsthenaturalevolutionofconventionalchannelstoconductbusiness.Acompromisebetweenthesetwoextremes,namelyvirtualPE,isadvocatedbyProfessorL.Hinnekens,UnversityofAntwerp.
   
   
   
    Notsurprisingly,currentdiscussionmainlyfocusesonthedeterminationofPEintheelectroniccontext.Theprofitallocationissuesarementionedonlyincidentally.SinetheprofitsallocationissuesariseonlyifandwhenaPEisfoundtoexist,whichrarelyoccursinanelectronicenvironment.
   
   
   
    III.OECDasinternationalforuminthetaxationofelectroniccommerce
   
    (i)Theappropriateforumtoaddressthechallenges
   
    OECDhasbeenplayinganimportantroleintheprocessofre-evaluationandmonitoringofthecurrentinternationalbusinesswithaviewtoestablishingataxframeworkthatenablessuchbusinesstodeveloptoitsfullpotentialwhileprotectingthetaxrevenuebasisoftheconcernedStates.ItofferstheappropriateforuminconjunctionwiththecontributionofotherinternationalorganizationsuchasEuropeanCommunitytocoordinategovernmentresponsetothistaxchallenge.OECDTurkuReportenvisagesthisprocessasfollows:‘Thisplaninstitutesavirtualorganizationbydrawingonthestrengthofexistingorganizationswhileavoidingthecreationofanewsupervisorybody.Inessence,thisapproachmirrorsthatundertakeninMemberStateswherevariousdepartmentsandministerscometogethertoforgeinternationalorregionalpolicies.Thehorizontalnatureandspeedofelectroniccommercenecessitateasimilarstrategyattheinternationallevel.’
   
   
   
    TheOECDministerialconferenceinOttawa(1998)“ABorderlessWorld:RealisingthePotentialofElectronicCommerce”hasproducedfruitfulresults.Amongthemisthemostdesirableconsensus,namely,‘TaxationFrameworkConditions’whichestablishesthebasicprinciplesthatshouldguidethee-commercetaxation.Theseprinciplesincludeneutrality,efficiency,certainty,simplicity,effectiveness,farness,andflexibility.
   
   
   
    InordertoimplementtheOttawaFrameworkConditions,theCommitteeofFiscalAffairssetupfiveTechnicalAdvisoryGroups(TAGs)withamandatetotakethecoordinationprocessforwardwiththeinvolvementofthebusinesssectorandnon-membercountriessoastocomeupwithgloballyacceptablewell-consideredsolutions.OfparticularrelevancetoourdiscussionistheTAGonMonitoringtheApplicationofExistingTreatyNormsfortheTaxationofBusinessProfitsinthecontextofElectronicCommerce.(HereinafterreferredtoasBusinessProfitsTAG).ThisTAGhasasitsmandatetoexaminetheapplicationandclarificationof,andassessmentofthealternativestoexistingtreatykeyconceptsrelatinginparticularto:
   
    -theconceptof‘placeofeffectivemanagement’
   
    -theconceptofapermanentestablishment(PE);
   
    -theattributionofprofittoaserver-PE,and
   
    -transferpricingissues.
   
   
   
    TheBusinessProfitsTAGwouldprovidetheirinputintothedeliberationsofWorkingPartyNo.1onTaxConventionsandRelatedQuestions.
   
   
   
    (ii)RecentworkundertakenbyOECD
   
    FollowingtwopreviousdraftswhichwerereleasedforcommentsbyWorkingPartyNo.1inOctober1999andMarch2000,CFAadoptedthechangestotheCommentaryontheOECDModelTaxConventionconcerningtheissueoftheapplicationofthecurrentdefinitionofpermanentestablishmentinthecontextofe-commerceon22December2000.Thechangesdrawsadistinctionbetweenbusinessesthatoperatetheserver(usuallyISPs)andthosecarriesonbusinessviawebsite(usuallyvendors)inthatthelatterdonothaveattheirdisposaltheserverandthelocationoftheserversincethelatter’swebsitesarenormallyhostedbythefirst.Therefore,vendorsingeneralwillnotconstituteaPE.Thechangesalsoclarifywhatthepreparatoryorauxiliaryactivitieswouldbeine-commercecontext.Generally,theprovisionofcommunicationlinksbetweensupplierandcustomer,advertisementsforgoodsorserviceandgatheringmarketinformationforthebusinesswouldbetreatedastheexceptionalactivities,unlesstheseactivitiesorcombinationoftheseactivitiesamounttoanessentialandsignificantpartofthebusiness.Inaddition,anagencyPEwillalsobeunlikelytoarise.
   
   
   
    Nowthatthethresholdquestionhasbeensettled,atleastinrespectoftheapplicationoftheexistingrules,attentionturnsnaturallytowhatprofitscanbeattributedtoe-commerceactivitiesthathavepassedthethresholdofArticle5sothatapermanentestablishmentisheldtoexist.TheBusinessProfitsTAGthenattemptstoexploretheinterpretationandapplicationofArticle7ofaPEindigitalenvironmentandpublishesadiscussionpaperentitledAttributionofProfittoaPermanentEstablishmentInvolvedinElectronicCommerceTransactionsforpubliccommentspriorto30June2001.Althoughthediscussiondealswithonlythecaseofe-retailingmodel,itperformsafactualandfunctionalanalysisanddistinguishesdifferentvariationsdependingonthenatureandscopeoffunctionsperformedandthenumberofserverPE’sinvolved.Forexample,astand-aloneserverprocessesonlinetransactionswithconsumersanddeliverstothemdigitizedproductsbymeansofautomatedfunctionswithoutinterventionofpersonnelinthePE.Theserver-PEthusperformsonlyroutinefunctionsandreliesonotherpartsoftheenterprisetoprovidetheintangibleassetsnecessarytoperformitsfunctions(mostlysoftware,hardwareandmarketingintangibles).Theseslimitedfunctions,undertheworkinghypothesisemployedinthisreport,arecomparabletothoseofa‘contractserviceprovider’arrangementswhichleavesassetsandriskswiththeheadofficeandattributestothePEonlytheprofitassociatedwiththephysicaloperationofacomputerserver.AsnotCUP’smaybeavailable,anarm’slengthfeewouldbedeterminedundertheTransferPricingGuidelinesaccordingtothecostplusmethodappliedtothedirectandindirectcostsincurredbytheprovider-PE.Basedonthisvariation,thereportalsoexaminesothervariationswhichperformmorefunctionsorinvolvemoreservers(multi-server).ThemethodologyprevailsinthisreportisananalogicalapplicationoftheOECDTransferPricingGuidelinesforMultinationalEnterprisesandTaxAdministrations.
   
   
   
    IV.Comments
   
    ThechangestoCommentaryofArticle5recognizedthepossibilityofaPEinthecontextofe-commercebutitseemstobeexceptionotherthanthenorm.Thereporthasbeenfilledwithrestrictivewordingsuchas‘onlyinexceptionalcases’,‘inveryunusualcircumstances’(isaPElikelytoexist.)oritwouldbethatinordertoconstituteaPEine-commerce,anumberofstrictcriterianeedtobemet.(inatypicale-commercecase,thesetestsarenotlikelytobemetinthemeantime)
   
   
   
    Regardingtheprofitallocationissues,theroleandprofitoftheserver-PEhasbeenreducedtothatofaserviceproviderentitledtothecostpluswhichacontractserviceproviderwouldearnoranindependentserviceprovider,whosefeeisultimatelynotmuchbetterasitistobereducedbyanarm’slengthchargesfortheuseoftheintangiblesofwhichtheheadofficeistheeconomicowner.TAGthusdeniesthePEanymainstreamtradingfunctionandrelatedprofitmargin.Thisminimalisticapproachtothefunctionandcorrespondingarm’slengthprofitattributiontothePEmaynotproperlyreflecttheactivitiesofthePEanditseffectivepenetrationofthemarketviathenewchannels.Thevaluecreatedwiththehelpofwebsitehasexceededthatofasimplycommunicationtool,butcontributesubstantiallytothecompany’scommercialandresidualprofits.
   
   
   
    Insummary,itcouldbeseenthatOECDtakesanapproachthatseemstofallintotheconservativecategory.ThoseConservativefirmlybelievethatgoodtaxesareoldtaxes.Moreover,currentPErulehasproveditseffectivenesssinceitsfirstappearanceininternationalarenaandhasformedpartofinternationalconsensusandshouldbeclarifiedandadaptedtocharacteristicsofthenewmediumratherthanbeabandoned.Theprincipleofneutralityisfrequentlycitedasoneoftheargumentsforsuchanapproach.Itseems,tothem,e-commerceismereaccelerationofnaturalevolutionofcommercialchannels.SimilarconservativeattitudesarealsosharedbynationalgovernmentssuchtheUnitedStates,theNetherlandsandCanada.
   
   
   
    Underlyingsuchaproposalisamotiveforgeo-politicalinterests.Theconservativeapproachwillinpracticeleadtooneeffect—furthertheshiftingoftherighttotaxe-commerceprofitsfromthesourcestatetotheresidencestate.Whentheflowsofcapitalinvestmentsandtradeareinbalance,theshiftdoesmakesensebecauseitonlychangesthedirectionoftaxationandsimplifiesthetaxationbyreducingthesourcetaxation.However,iftheflowsareinimbalance,theresultwouldbethattheresidencestateunilaterallybenefitsfromsuchashift.Thatexactlyexplainswhye-commercenetexportingcountriessuchastheUnitedStateshaveheldsoconservativeattitudetowardstaxationofe-commerce.
   
   
   
    However,inordertoimplementthepolicygoal,thatis,toprovideafiscalclimatewithinwhichelectroniccommercecanflourish,weighedagainsttheobligationtooperateafairandpredictabletaxationsystemthatprovidestherevenuerequiredtomeetthelegitimateexpectationsofcitizensforpubliclyprovidedservices.”,aninternationalconsensusshallbeaboveallthemostimportant.AsisrecognizedbyOECDinitsreports,theconsensusismoreimportantthantheruleitself.Anysolutionthusmustproduceafairsharingofthetaxrevenuearisingfromcross-bordere-commerceamongconcerningstates,especiallybetweensourceStatesandresidentStates.Fromthisstandpoint,theconservativeapproachisbynomeanstheproperonetosuchaneffect.
   
   
   
    Itshouldbealsonotedthat,BusinessProfitsisnowinitsworkingprojectonexaminingtheapplicationofcurrenttreatynotionstoe-commerce.Itwillexplorethepossibilityofconsideringalternativestothesenotions.ItstillremainstobeseenwhatapproachandattitudetheBusinessProfitsTAGwillpossiblytakeinitsfuturework.
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
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    IhavebeenengagedintheresearchofinternationaltaxissueofElectronicCommerceandCyberlawunderthesupervisionofProf.Liaosince1998whenIwasanundergraduatestudent.Someofmyresearchpapershavebeenpublishedinestablishedcorejournals,suchasInternationalTaxation,JournalofInternationalEconomicLawofChina,etc.However,itneedstobementionedthatmyarticlehereisnotmeanttobeanin-depthanalysisofthisissue,butratheraninformationalsummaryandcommentsontheveryrecentprogressmadeinthisfield.Anycommentsandsuggestionsareverywelcome.Pleasemailtolawbig@vip.sina.com.
   
    KlausVogel,onDoubleTaxationConventions,KluwerLawInternational,ThirdEdition,1997,p280.
   
    UNModelTaxConventionhasadoptedabroaderdefinitionoftheterm“permanentestablishment”thanOECDModelTaxConventiondoes.Forthepurposeofreference,theauthorusesOECDModelasthebasisofanalysisinthisarticle.AndsinceOECDhasbeenfrequentlyupdatedovertheyears,unlessotherwiseindicated,allreferenceismadeto2002OECDModelasamended,whichisavailableathttp://www.oecd.org/daf/fa
   
    OECD,ChangestoCommentaryonArticle5,firstvisitedonJanuary18,2001,http://www.oecd.org/daf/treaties/clari-e.pdf
   
    HelmutBecker,TaxationofElectronicBusinessinaGlobalizingWorld—TenDemandsforanAdaption,Intertax,VOL26,Issue12,1998,p.410.seealso,GarySpragueandRachelHersay,LettertoOECDreElectronicCommerce,Intertax,VOL27,Issue2,1999,p40.
   
    Forasummaryofthesedifficulties,pleaseconsulttheauthor’sarticleInquireintotheDeterminationofPermanentEstablishmentintheContextofElectronicCommerce,publishedinPekingUniversityInternationalandComparativeLawReview,VOL1,2002,also,ApplicationofPERuleinElectronicCommerce,tobepublishedinJournalofInternationalEconomicLaw,VOL5,LawPress,2002.
   
    Foracomprehensivereviewoftheseapproaches,seeLucHinnekens,LookingforanAppropriateJurisdictionalFrameworkforInternationalElectronicCommerceintheTwenty-firstCentury,Intertax,VOL26,Issue6-7,1998.seealso,theauthor’sarticleonthesameissue,whichhasbeeninspiredbyProfessorHinnekensbuthasitsownstandpointinelaborateonthediversityincharacterizingthechallengesofelectroniccommerce,supranote.
   
    Hinnkens,HowOECDProposestoApplyExistingCriteriaofJurisdictionaltoTaxProfitsArisingfromCross-borderElectronicCommerce,Intertax,VOL29,Issue10,2001,p322.
   
    Ibid.
   
    OECD,ElectronicCommerce:TaxationFrameworkConditions,1998,http://www.oecd.org
   
    ThemandateofthesefiveTAGwasoriginallytwoyearsandelapsedin2001,howevertheirmandatehasbeenextendedtoputtheworkforward.1.WorkingPartyNo.1onTaxConventionsandRelatedQuestionsisasubsidiarybodyoftheOECDCommitteeonFiscalAffairsandisresponsiblefordraftingchangestotheOECDModelTaxConvention.
   
    OECD,ClarificationontheApplicationofthePermanentEstablishmentDefinitioninE-Commerce:ChangestotheCommentaryontheModelTaxConventiononArticle5,December22,2000,http://www.oecd.org/daf/fa
   
    OECD,AttributionofProfittoaPermanentEstablishmentInvolvedinElectronicCommerceTransactions,February2001,
   
    Fordetaileddiscussion,seeOECD,supranote.
   
    OECD,TransferPricingGuidelinesforMultinationalEnterprisesandTaxAdministrations,1999.ItsChineseTranslationshavebeendonebymycolleaguesandI,editedbyProf.Liao,tobepublishedbyPekingUniversityPress,2002.
   
    SomeargumentshavealsobeenraisedagainstthevalidityoftheanalogicaluseofTPG.see,Hinnekens,supranote8.
   
    USTreasury,SelectedTaxPolicyImplicationsofGlobalElectronicCommerce,Intertax,VOL25,Issue4,1997.AdvisoryCommitteeonElectronicCommerceofCanada,ElectronicCommerceandCanada’sTaxAdministration,http://www.rc.gc/ca/ecomm.,1998.
   
    ]OECD,,ElectronicCommerce:TaxationFrameworkConditions,1998,http://www.oecd.org
    【写作年份】2002【学科类别】国际法->国际经济法