Digital business and permanent establishment, by Jean-Louis MEDUS


(some critical comments of BEPS’ proposals to regulate digital business)

This paper analyses why the digital economy and digital business models are so different from classic business and as a consequence how existing tax rules could be irrelevant to regulate this activity. The OECD, through BEPS (Base Erosion Profit Shifting) project, has identified and addressed the main tax challenges arising from the digital economy. Our article focuses on one of these tax challenges frequently named “taxable nexus” and on the difficulty to define the tax jurisdiction due to the structuration of their assets and activities by multinational digital companies to circumvent the permanent establishment (“PE”) status. One main characteristic of digital business is the cross-border dissemination of assets through various jurisdictions and a sort of fragmentation of activities entailing a tax-optimized location of profits and permitting digital companies through treaty shopping to avoid from establishing a permanent establishment (thus subject to taxation) in consumer markets and to attribute the main part of their profits to specific entities and jurisdictions (especially those providing IP (intellectual property) favourable tax regimes). We explain how OECD without defining a real new tax paradigm applicable to digital economy nor a concept for value creation in digital business, has nevertheless proposed some amendments to the existing international rules to up-date the permanent establishment status and to tackle tax avoidance practices of digitalization economy. We are concluding with some critical comments about the OECD proposals and with a short review of alternative solutions.

Jean-Louis MEDUS
Professor of Law at Paris University
Attorney at Law – Archers
PhD In Law – MBA HEC