Does the taxation of permanent establishment ensure source-based taxation on business profits? - An analysis of cross-border services
Abstract: Services belong to the business sector which contributes most to the world’s economy. Despite that there is no specific provision in the OECD Model Tax Convention which concerns the taxation of business services specifically. Instead, taxation on business services is connected to the taxation of business profits, to which the residence state of the business has the primary right. The source state may be allowed to tax business income only if it is decided the income originates from a permanent establishment in that state. However, the lack of physical presence in the source state and harmonization in the international tax may lead to tax base erosion by avoiding a permanent establishment in the source state. The OECD issued the Action Plan on Base Erosion and Profit Shifting in 2013 and the final report of the Action 7 to prevent the artificial avoidance of permanent establishment status of the Base Erosion and Profit Shifting in 2015. Then, the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting in 2016, and lastly the revision of the OECD Model Tax Convention in 2017. These measures mainly aim to tackle the problem of tax base erosion from tax avoidance. The amendment of the permanent establishment definition under Article 5 of the OECD Model Tax Convention on 21 November 2017 broadens the scope of the permanent establishment threshold for the source state. However, it may be inadequate to ensure the source-based taxation on cross-border services. In addition, an obsolete PE concept may lead to situations which suggest further non-harmonization of taxation among countries.
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