Jurisdiction to tax non-residents on income from e-commerce sales and services : a normative framework

• Main Author: Carroll, C.
• Published: University of Cambridge 2006
• Subjects: 381
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.597311

The validity of permanent establishment (PE) as the decisive condition for source state jurisdiction for business profits depends on the practical and normative importance of an enterprise’s physical presence on foreign markets. E-commerce enterprises can operate in foreign markets without physical presence there. It is therefore necessary to assess alternatives to PE and to do so in accordance with appropriate normative and policy criteria. The historical context does not illuminate criteria because the PE rule is a product mainly of now obsolete economic and political conditions and the fiscal self-interest of capital exporting nations. Any normative principle of fiscal jurisdiction must explain power to tax and how to avoid overlapping powers to tax. Benefit theory does so best. Benefit theory supports source-based taxation of business profits generally and particularly provides that a country hosting a consumer market has jurisdiction for income of non-resident e-commerce enterprises that is attributable to the sales functions involved in e-commerce transactions. This requires a ‘virtual’ PE fiction in tax treaties. Neutrality and administrative considerations might militate against that in treaty relations between developed nations. However, inter-nation equity affects relations involving developing countries. ‘Inter-nation equity’ is an ethical concept of fairness requiring that allocation of taxing rights should benefit developing countries. Accordingly, as changes to the OECD Model have reduced source-based taxation of e-commerce compared to equivalent ‘traditional’ commerce and as most developing countries will remain ‘source’ countries vis-à-vis e-commerce, so the PE rule infringes inter-nation equity. Inter-nation equity overrides neutrality and administrative considerations. It is for developing nations to decide whether to tax e-commerce at source. Collection of revenue by the residence country followed by transfer of the revenue to source countries would best achieve that.