Taxation in a Global Digital Economy

1. S. 106Rationale for Having a New Nexus

As the economy has become digitalised, business structures of companies, especially multinational enterprises (MNEs), have changed dramatically. Massive use of technology enables MNEs to carry on their business activities without any physical presence in the market jurisdiction and hence avoid a PE status there. In addition, the digital economy has caused another stark change of business models which is the massive usage of consumers’ data. Although a part of the profits of MNEs is likely to be derived from data of consumers in the market jurisdiction, the market jurisdiction is not entitled to tax such activities under the current international tax rules.

Technically, the ability of digital enterprises to avoid a PE status and the use of data in the digital economy are not categorised into a BEPS issue but, instead, into one of the broader direct tax challenges caused by the development of the digital economy. In order to deal with it, in the OECD/G20 BEPS Project Addressing the Tax Challenges of the Digital Economy Action 1: 2015 Final Report (the ‘final report of BEPS Action 1’), the OECD suggests four alternatives, (i) modifications to the exce...