Taxation in a Global Digital Economy

1. S. 188BEPS Action 7 and the Revamp of the Specific Activity Exemptions Clause

Business profits of a non-resident enterprise are taxable in the source State if they are attributable to a permanent establishment (PE). The general rule of Article 5(1) OECD Model Convention (MC) defines a PE as ‘a fixed place of business through which the business of an enterprise is wholly or partly carried on.’ Article 5(4) OECD MC contains a list of exceptions commonly referred to as ‘specific activity exemptions’. If a fixed place of business is used solely for any of these exceptions, a PE is deemed not to exist. This potentially allows multinational enterprises (MNEs) to artificially prevent the creation of a PE by fragmenting activities among their affiliates.

More than 60 years have passed since the OECD published its first draft of the PE article in 1956. With digital sales on the rise, the PE concept that has been around for so long was in dire need of rejuvenation. Under the modern business models that are part of the digital economy, the specific activity exemptions provide greater potential for loss of revenue. Activities which were formerly characterised as preparatory or auxiliary (e.g., dist...