European Commission's proposal to implement a new permanent establishment nexus based on significant digital presence - Is it compliant with the EU Law and international tax principles?

Abstract: The taxation of the digital economy has become a relevant subject, as business models and value creation chains of all sectors have been transformed bringing challenges to the international tax system and parameters for the allocation of taxing rights between source and residence jurisdictions. In view of these changes, the European Commission has published two proposals for directives on the taxation of digital activities, proposing solutions to be harmonized into the system of direct taxation of Member States. From the analysis of these directives, the new proposal for the implementation of a new PE nexus based on significant digital presence stands out. The present work aims to develop a critical assessment of its legal basis and to answer the question of whether the change of the permanent establishment nexus should be treated as an internal market initiative instead of an international agreement and whether the proposal respects proportionality in light of other possible measures, according to the EU law and other international principles. The paper intends to provide a broad overview of the theme, starting from the validity of the source taxation rules in the digital economy and the connection of the concept of permanent establishment with the allocation of taxing rights. Following, the details of the proposal, its motivations and the potential impact on the international tax system will be exposed. Finally, other possible solutions to tackle the challenges of the digital economy will be examined combined with the assessment of the proportionality of the proposal and its compatibility with the Ottawa Principles.