handbook-tb

Protecting the tax base in the digital economySome BEPS structures designed to circumvent the PE statusrely on a highly technical, legalistic interpretation of the definition ofPE and taxpayers’ contractual arrangements. Examples are the commissionairearrangements and limited-function distributorship witha subsidiary in the market country. Developing countries can protecttheir tax base from erosion by adopting a purposive interpretation ofthe PE definition and a substance-over-form construction of taxpayers’contracts, or by invoking domestic general anti-avoidance rules.Through such interpretation approaches, it is probable and reasonablethat a non-resident online seller of tangible goods or online provider ofservices might be treated as an entity with a PE in the market jurisdictionwhere the non-resident uses the sales force of a local subsidiary tonegotiate and effectively conclude sales with prospective large clients(that is, B2B transactions).The option of modifying Article 5 has the advantages of beingevolutionary. It does not require any radical departure from the existingPE test and is applied to all forms of business activities. The disadvantageof this option is that it cannot deal with fully digitized, onlinebusinesses, which are discussed in the following section. 884.3.2 Virtual PE or “significant digital presence”Moving away from a physical footprint, a website or other formsof digital presence in the market jurisdiction can be considered toexhibit a sufficient nexus — a virtual PE — for sourcing the profit tothat jurisdiction for tax purposes. 89 The virtual PE option seeks to88The EC Commission Expert Group on Taxation of the Digital EconomyReport, supra note 13, recommends that the realities of digital transactionsbe taken into account when defining exceptions to the PE (section 5.2.3.2). Itagrees that a revision of the PE concept in itself may not have a big impactsince the question remains how much taxable income can be allocatedto such PE.89The OECD Public Discussion Draft on BEPS Action 1 includes severalpotential options for alternative PE thresholds that were considered by theOECD Business Profits Technical Advisory Group (TAG) “for the sake ofcompleteness” only. See OECD, Action 1 — 2014 Deliverable, supra note 3,paragraph 217.441