Concepts of legal regulation of cross-border tax relations in the digital economy

Abstract

The subject of the article is the analysis of alternative concepts of permanent establishment in the era of the digital economy in order to clarify the general and specific features of presented proposals. New trends, along with the potential for tax base erosion and profit shifting, have necessitated the renewal of the international tax system to address the challenges posed by the digital economy’s development. The article analyzes the approaches to the concept of permanent establishment in the digital economy on the examples of the proposals by the Organisation for Economic Co-operation and Development and the European Commission, as well as individual states. The variety of proposals presented is driven by discussions on whether the classical concept of permanent establishment remains the solution for determining the right to tax at source in the digital era. The differences between the proposals on the introduction of the concept of significant economic presence and the traditional concept of permanent establishment are considered. The features of the digitalization of the economy, which play a decisive role for international tax policy, are highlighted. The main characteristic of the digital economy, which is important for tax law, is the absence of the need for the physical presence of companies in a particular state. Meanwhile, it is noted that corporate tax systems are still based on the economic reality of the 1920s, when the current tax systems based on territorial and resident principles were created. As a result, there is a discrepancy between the places of profit creation and taxation. In this regard, the institution of digital permanent establishment is an effective legal tool for the taxation of digital transnational corporations. Based on the results of generalization of the proposals for reforming the concept of permanent establishment, the author defines the general criteria for determining permanent establishment. It is noted that the need to prepare responses to the challenges of the digital economy in the new environment is beyond dispute. The effectiveness of the new rules can be achieved only if the measures implemented in the legislation of as many States as possible are harmonized. Otherwise, it will be impossible to ensure uniform regulation of cross-border tax relations.

Keywords:

tax law, corporate taxation, permanent establishment, profit distribution, digital economy, European Union