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Alternatives to the concept of permanent establishment : e-commerce and taxation

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Alternatives to the Concept of Permanent Establishment ALTERNATIVES TO THE CONCEPT OF PERMANENT ESTABLISHMENT** CHARLES E. MCLURE, JR.* Introduction he question, “What are the alternatives to the concept of permanent establishment?” could be interpreted in a variety of ways, among them: • What are the alternatives to source-based income taxation, in which the concept of perma- nent establishment (PE) plays a central role? • What are the alternatives to the concept of PE, if the objective is to implement source-based income taxation? • What are the alternatives to the definition of a PE found in the OECD Model Tax Treaty? I limit my discussion to the first two or these.1 It is not at all clear how electronic commerce should be defined for the purpose of this discus- sion. The Organisation for Economic Co-operation and Development (OECD) has defined electronic commerce as “business occurring over networks which use non-proprietary protocols that are established through an open standard setting process such as the Internet.”2 Virtually all inter- national commerce involving business-to-business transactions – the vast majority of all international trade – will soon fall within this definition. Yet lim- iting the definition to sales of tangible products and digital content downloaded from the Internet is too narrow. Fortunately, for present purposes a precise definition is not needed. Why it matters The advent of electronic commerce has caused some to question the continued viability of source- based taxation. The U. S. Treasury, in its 1996 report entitled Selected Tax Policy Implications of Global Electronic Commerce, suggested: The growth of new communications technologies and electronic commerce will likely require that principles of residence-based taxation assume even greater importance. In the world of cyberspace, it is often difficult, if not impossible, to apply tradition- al concepts to link an item of income with a specif- ic geographical location. Theref

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