The Permanent Establishment challenges in the digital economy: Current and Emerging Strategies for Effective Solutions

Abstract

The aim of this thesis is to address the evolution of the permanent establishment (PE) concept over these past few years, its regulatory treatment, proposed solutions and future outlook. Through an interdisciplinary approach encompassing legal, economic, and policy perspectives, we will also shed light on the raising challenges and opportunities involving this tax concept. In the first chapter, an historical overview of the PE will be provided, and the key elements and criteria involved in identifying a PE will be tackled. Firstly, we will explore the concept of permanent establishment, emphasizing its significance in international tax law. It delves into the evolution of the PE concept, highlighting the historical development and its adaptation to accommodate the changes brought by digitalization and global business practices. Furthermore, the chapter discusses the primary factors that contribute to the identification of a PE. It examines the significance of a fixed place of business, the duration of activities, and the presence of personnel. Additionally, it explores the role of dependent and independent agents and the attribution of activities to determine the existence of a PE. The second chapter critically examines the challenges posed by the Permanent Establishment in the context of digital economy and explores the genesis of the OECD/G20 BEPS Project. Specific focus will be given to BEPS Action Plans 1, 7 and 8-10, designed to address these challenges, the PE avoidance status and the new Transfer Pricing guidelines. This study also investigates the limitations of the BEPS reforms and highlights post-release developments in the global tax landscape, such as the introduction of the BEPS 2.0 project, encompassing Pillar One and Pillar Two proposals. These include measures such as the Global Minimum Tax, which emerged as powerful tools to combat PE avoidance and modernize international tax rules to reflect the changing realities of the digital economy. Finally, in the third and last chapter, we will analyze the holistic approach solution to fight and prevent the PE evasion and frame the future evolution of the challenges associated with permanent establishment in the digital economy, with a particular focus on remote working. The solutions included in the holistic approach are not limited to tax issues. They also encompass broader policy considerations, including the need for international cooperation and coordination among governments to establish a fair and consistent framework. Harmonizing tax rules and ensuring a level playing field for both traditional and digital businesses is crucial to maintain the integrity of the global tax system and prevent harmful tax practices.