PE (III)

Policy aspects
From a tax policy standpoint, I tend to favour a restrictive definition of the PE in the framework of electronic commerce. Indeed, in most – if not all – cases, a
website or a server should not constitute a PE under the current definition of article 5 of the OECD model.
Under article 7 of the OECD model, the state of the PE has the right to tax the
profits of an enterprise which are attributable to that PE. This rule is based upon
the principle that the enterprise has a substantial presence in that state. The concept of PE was developed at the end of the 19th century16 during a period when the world economy was based on physical transfers of tangible goods. Thus, the most logical and appropriate way to define the minimum threshold of taxation of the profits of a foreign enterprise was to rely on the physical presence (“place of business”) of that enterprise.
As many have observed, this approach is no more appropriate for the new
economy. Electronic commerce exists within a completely different technological environment (website, servers, ISP, etc.). In particular, the functions of the server are defined according to computer programs. In addition, the physical location of the server is of little relevance for the enterprise operating the website, and of no importance at all for the customer. The server may be placed anywhere in the world (including a tax haven or a satellite). The substantial presence test, under which the PE concept is based, is neither appropriate nor relevant in the field of electronic commerce.