The Traditional Concept Of Permanent Establishment And The New Economy - The Position Taken By The OECD And The Issues Faced By The Brazilian Tax System

Roberto Greco de Souza Ferreira1

With the development of the Internet and the growth of e-commerce transactions, many legal questions have emerged, including tax issues surrounding this new form of conducting business.

In most circumstances, transactions over the Internet never take place in a physical location, but rather in an almost untouchable world - cyberspace. For example, to what extent does the existence of a computer server located in a foreign jurisdiction constitute a permanent establishment for the purposes of applying bilateral tax treaties? Should the fact that a website in which the residents of a foreign jurisdiction have access, and even conclude transactions, trigger taxation in the that jurisdiction due to the existence of a permanent establishment?

The purpose of this paper is to examine whether the traditional permanent establishment principles can be extended to e-commerce transactions, focusing on the view of the Organisation for Economic Co-operation and Development (OECD) and the challenges faced by the Brazilian legal system.

The Traditional Concept of Permanent Establishment

The concept of permanent establishment is extremely important for relieving double taxation in cross-border activities. According to this concept, a non-resident doing business in a foreign jurisdiction only will be taxed in that jurisdiction to the extent that he carries out activities through a permanent establishment. More importantly, the profits arising from such activities must be attributable to this permanent establishment. The concept of permanent establishment, however, only comes into effect when there is a bilateral tax treaty between two countries.

A permanent establishment is "a fixed place of business through which the business of an enterprise is wholly or partly carried on."2 It includes a place of management, a branch, an office, or a factory; all of them having a physical location with a certain degree of permanence.3 In some circumstances, a permanent establishment also may exist by imputation of the activities of certain agents.4

Based on the theory of realization, in which a company's profits are not directly attributable to the existence of any physical installation in the foreign jurisdiction, there are some exceptions to the concept of permanent establishment. These exceptions generally involve activities of preparatory or auxiliary character, including, for example, storage, display or delivery of goods...

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