1. Introduction

The OECD's BEPS Action item 1 Final Report (published in October 2015) recognizes that digitalization presents important challenges in the field of international taxation. It is also generally acknowledged that the current rules have not been able to keep pace with the evolution of the digital technologies and business models. The OECD's interim report (March 2018) notes that in view of the pervasive nature of digitalization, it is at least difficult - if not impossible - to ring-fence for tax purposes the digital economy from the rest of the economy.

The OECD will present a final report in 2020, which is expected to provide a consensus-based solution for bridging various jurisdictions’ divergent positions in respect of taxation of incomes of the highly digitalized enterprises. But, in the interim, many jurisdictions have either already introduced or are contemplating measures to impose tax on the highly digitalized companies. For instance, India has already introduced equalization levy. The United Kingdom is considering the concept of ‘significant digital presence’ (similar to the concept of ‘significant economic presence’). The European Union (EU) has recently passed a resolution on the concept of ‘digital permanent establishment’.

 

This article focusses on the EU’s version of a digital permanent establishment. Before discussing that aspect, it would be helpful to take into account the basis for various jurisdictions’ claim for entitlement to tax the highly digitalized companies’ incomes and the limitations of the contemporary international tax system.