Digital Permanent Establishments

Contents

• Management Summary
• Contents
• List of Figures
• List of Tables
• List of Abbreviations
• Introduction
• Research Questions
• Objectives
• Material and Methodology
• Applied Definitions
• Delimitation
• Outline
• Digital Economy and digitalized Business Models
• Definition and Characteristics of the Digital Economy
• Definition of the Digital Economy
• Characteristics of the Digital Economy
• Digitalized Business Models
• The Value Creation Process
• Global Value Chains in Transfer Pricing
• Value Creation Process in a digital(ized) Company
• The Value Chain
• The Value Network
• The Value Shop
• Interim Conclusion
• Overview of Initiatives of International Organizations and unilateral Actions undertaken by Countries
• Initiatives of International Organizations
• OECD Initiatives
• EU Initiatives
• Unilateral Measures by selected Countries
• Interim Conclusion
• The Concept of Permanent Establishment
• Traditional Definitions (pre-BEPS)
• BEPS Action 7 – Amendments with regard to PE Definitions
• Preparatory and Auxiliary Activities
• Dependent Agent PE
• Attribution of Profits to a PE
• Interim Conclusion
• A new PE Nexus based on non-physical Economic Presence and its Impact (post-BEPS Action 7)
• OECD Proposals on Corporate Taxation of a Significant Economic Presence to trigger a digital PE
• Public Consultation Document
• User Contribution
• Marketing Intangibles
• Significant Economic Presence
• OECD Work Plan
• Unified Approach under Pillar One
• Scope
• A new Nexus Rule for the Taxpayers in the Scope
• Expected Impact Analysis
• Analysis of comments given by different stakeholders
• Digital Presence
• EU proposal on corporate taxation of a Digital Service Tax and Significant
• Short-term measure: Digital Services Tax
• Long-term measure: Significant Digital Presence
• Interim Conclusion
• Court Cases
• Court Case India
• Interim conclusion
• Challenges, Recommendations and possible Solutions with regard to MNES operating in Switzerland
• Challenges
• Recommendations
• Possible Solutions
• Stay with the Status-quo (post-BEPS Action 7 / pre-BEPS Action 1) — BEPS 1.0
• Planning and anticipating taking into consideration possible amendments proposed by the OECD
• Interim Conclusion
• Final Conclusion and Outlook
• Final Conclusion
• Outlook
• Bibliography
• Appendix A: Article 5 of the OECD MTC 2017
• Appendix B: Article 5 of the UN MTC 2017

Objectives and Key Themes

This Master Thesis aims to analyze the impact of the proposed new digital permanent establishment (PE) concept on Swiss headquartered multinational enterprises (MNEs) and to derive recommendations and potential solutions from a consulting standpoint. The work focuses on the challenges posed by the evolving international tax landscape, particularly in light of the OECD/G20 Base Erosion and Profit Shifting (BEPS) initiatives.

• The impact of the new digital PE concept on Swiss MNEs
• The challenges of digitalization for international tax law and transfer pricing
• Recommendations and potential solutions for Swiss MNEs in light of the proposed changes
• The role of international organizations like the OECD and the EU in shaping the new tax landscape
• The importance of aligning business models and transfer pricing documentation with the evolving PE rules

Chapter Summaries

• Introduction: This chapter sets the stage for the research by defining the scope, research questions, objectives, methodology, and key definitions. It also outlines the structure of the thesis.
• Digital Economy and Digitalized Business Models: This chapter explores the characteristics of the digital economy and the evolving nature of digitalized business models. It discusses the implications of these changes for value creation processes, global value chains, and transfer pricing.
• Overview of Initiatives of International Organizations and Unilateral Actions: This chapter provides an overview of the key initiatives undertaken by international organizations, including the OECD and the EU, to address the tax challenges posed by the digital economy. It also highlights the unilateral actions taken by certain countries.
• The Concept of Permanent Establishment: This chapter delves into the concept of permanent establishment (PE), outlining traditional definitions and the amendments introduced by BEPS Action 7. It discusses the challenges associated with applying these rules in the context of digitalized businesses.
• A New PE Nexus Based on Non-Physical Economic Presence and its Impact (post-BEPS Action 7): This chapter examines the OECD proposals on corporate taxation of a significant economic presence to trigger a digital PE, including the public consultation document, the OECD work plan, and the unified approach under Pillar One. It also reviews the EU proposal on a digital services tax and a significant digital presence.
• Court Cases: This chapter analyzes key court cases, such as the Court Case India, that illustrate the evolving interpretation and application of PE rules in the context of digital businesses.
• Challenges, Recommendations and Possible Solutions with regard to MNES Operating in Switzerland: This chapter identifies the specific challenges faced by Swiss MNEs in light of the proposed changes to the PE concept. It then provides recommendations and potential solutions for these enterprises, including staying with the status quo or planning and anticipating amendments proposed by the OECD.

Keywords

The main keywords and focus topics of this Master Thesis include digital permanent establishment, BEPS Action 7, international tax law, transfer pricing, digital economy, multinational enterprises, Swiss MNEs, OECD, EU, unilateral measures, business models, value chains, and tax challenges.

Frequently Asked Questions

What is the concept of a Digital Permanent Establishment (PE)?

A Digital PE refers to a new nexus rule in international tax law that allows countries to tax profits of foreign companies based on a significant digital or economic presence, even without a physical office or branch.

How does digitalization impact international corporate tax?

Digitalization allows companies to operate in markets without physical infrastructure, challenging traditional tax rules that rely on physical presence for profit allocation and taxing rights.

What are the OECD/G20 BEPS initiatives mentioned in the work?

The work focuses on BEPS Action 1 (Tax Challenges of the Digital Economy) and Action 7 (Preventing the Artificial Avoidance of PE Status), which aim to modernize tax rules for multinational enterprises.

How are Swiss headquartered MNEs affected by these changes?

Swiss MNEs, often being export-oriented from a small home market, face significant risks of profit reallocation to larger consumer or market jurisdictions under the new OECD and EU proposals.

What is the "Unified Approach" under Pillar One?

It is an OECD proposal to create a new taxing right for market jurisdictions, allocating a portion of residual profits to countries where users or consumers are located, regardless of physical presence.

What recommendations are given for companies operating in Switzerland?

The thesis suggests proactive planning, anticipating OECD amendments, and closely aligning business models with evolving transfer pricing documentation requirements to mitigate tax risks.