Digital Permanent Establishments

Table of Contents

1 Introduction

1.1 Research Questions

1.2 Objectives

1.3 Material and Methodology

1.4 Applied Definitions

1.5 Delimitation

1.6 Outline

2 Digital Economy and digitalized Business Models

2.1 Definition and Characteristics of the Digital Economy

2.1.1 Definition of the Digital Economy

2.1.2 Characteristics of the Digital Economy

2.2 Digitalized Business Models

2.3 The Value Creation Process

2.3.1 Global Value Chains in Transfer Pricing

2.3.2 Value Creation Process in a digital(ized) Company

2.3.3 The Value Chain

2.3.4 The Value Network

2.3.5 The Value Shop

2.4 Interim Conclusion

3 Overview of Initiatives of International Organizations and unilateral Actions undertaken by Countries

3.1 Initiatives of International Organizations

3.1.1 OECD Initiatives

3.1.2 EU Initiatives

3.2 Unilateral Measures by selected Countries

3.3 Interim Conclusion

4 The Concept of Permanent Establishment

4.1 Traditional Definitions (pre-BEPS)

4.2 BEPS Action 7 – Amendments with regard to PE Definitions

4.2.1 Preparatory and Auxiliary Activities

4.2.2 Dependent Agent PE

4.3 Attribution of Profits to a PE

4.4 Interim Conclusion

5 A new PE Nexus based on non-physical Economic Presence and its Impact (post-BEPS Action 7)

5.1 OECD Proposals on Corporate Taxation of a Significant Economic Presence to trigger a digital PE

5.1.1 Public Consultation Document

5.1.1.1 User Contribution

5.1.1.2 Marketing Intangibles

5.1.1.3 Significant Economic Presence

5.1.2 OECD Work Plan

5.1.3 Unified Approach under Pillar One

5.1.3.1 Scope

5.1.3.2 A new Nexus Rule for the Taxpayers in the Scope

5.1.3.3 Expected Impact Analysis

5.1.3.4 Analysis of comments given by different stakeholders

5.2 EU proposal on corporate taxation of a Digital Service Tax and Significant Digital Presence

5.2.1 Short-term measure: Digital Services Tax

5.2.2 Long-term measure: Significant Digital Presence

5.3 Interim Conclusion

6 Court Cases

6.1 Court Case India

6.2 Interim conclusion

7 Challenges, Recommendations and possible Solutions with regard to MNEs operating in Switzerland

7.1 Challenges

7.2 Recommendations

7.3 Possible Solutions

7.3.1 Stay with the Status-quo (post-BEPS Action 7 / pre-BEPS Action 1) – BEPS 1.0

7.3.2 Planning and anticipating taking into consideration possible amendments proposed by the OECD

7.4 Interim Conclusion

8 Final Conclusion and Outlook

8.1 Final Conclusion

8.2 Outlook

Objectives and Topics

This master thesis aims to analyze the challenges posed by new OECD and EU digital permanent establishment proposals, particularly for Swiss-headquartered multinational enterprises, and to develop practical recommendations and solutions from a consulting perspective.

• The impact of digitalized business models on international tax frameworks.
• OECD/G20 BEPS Action 1 developments regarding significant economic presence and nexus rules.
• Unilateral measures implemented by various countries and their implications for cross-border operations.
• Strategic planning, value chain analysis, and tax defense mechanisms for multinational enterprises.

Excerpt from the Book

Summary of Chapters

1 Introduction: This chapter introduces the BEPS project, the significance of the digital economy in international tax, and the research objectives regarding Swiss MNEs.

2 Digital Economy and digitalized Business Models: This section defines the digital economy and explores key business models through value creation frameworks like the value chain, network, and shop.

3 Overview of Initiatives of International Organizations and unilateral Actions undertaken by Countries: It provides an overview of OECD and EU tax initiatives and highlights various unilateral measures adopted by different states to tax digital activities.

4 The Concept of Permanent Establishment: This chapter details traditional PE definitions and the amendments introduced by BEPS Action 7, including preparatory and auxiliary activity rules.

5 A new PE Nexus based on non-physical Economic Presence and its Impact (post-BEPS Action 7): It analyzes the proposed OECD Unified Approach and EU measures, focusing on the new nexus rules and significant economic presence.

6 Court Cases: This chapter examines recent case law, specifically a case from India, to illustrate the complexities of determining PEs in cross-border transactions.

7 Challenges, Recommendations and possible Solutions with regard to MNEs operating in Switzerland: It outlines the specific challenges for Swiss MNEs and offers practical recommendations, such as value chain analysis and simulation, to mitigate tax risks.

8 Final Conclusion and Outlook: The concluding chapter summarizes the findings and provides an outlook on the upcoming international developments in 2020 and 2021.

Keywords

Digital Economy, Permanent Establishment, BEPS, OECD, Transfer Pricing, Nexus, Value Creation, Multinational Enterprises, Switzerland, Significant Economic Presence, Tax Law, Pillar One, Digital Services Tax, Intangibles, Profit Allocation

Frequently Asked Questions

What is the core focus of this research?

The research examines the impact of new international tax proposals—specifically digital permanent establishment concepts under OECD BEPS Action 1—on Swiss-headquartered multinational enterprises.

What are the primary thematic fields covered?

The work covers digital business models, the evolution of the permanent establishment concept, OECD and EU tax policy initiatives, and unilateral tax measures implemented by various countries.

What is the main objective of this thesis?

The objective is to analyze how proposed digital tax concepts affect Swiss multinational enterprises and to provide professional recommendations for these companies to navigate tax exposure.

Which scientific methodology is utilized?

The study relies on desk research, evaluating recent reports from international organizations like the OECD and EU, academic articles, and professional commentary from consulting firms.

What topics are discussed in the main body of the work?

The main body covers definitions of the digital economy, value creation processes, the historical and revised concepts of permanent establishment, and specific strategies for managing international tax compliance.

Which key terms define this work?

The core keywords include Digital Economy, Permanent Establishment, BEPS, Nexus, Transfer Pricing, and Multinational Enterprises.

How does the concept of "Significant Economic Presence" (SEP) work?

The SEP proposal suggests that a company can have a taxable presence in a jurisdiction based on digital interaction and revenue factors, even without a physical office or branch.

Why is the "Unified Approach" considered critical for MNEs?

The Unified Approach aims to reallocate taxing rights to market jurisdictions, which could significantly increase the tax compliance burden and risk of double taxation for multinational groups.

What role does Switzerland play in these international discussions?

As a country with many export-oriented multinational headquarters, Switzerland is deeply concerned with the impact of these changes on tax competitiveness and seeks to advocate for balanced, multilateral solutions.