Digital Permanent Establishment (Digital PE) : A Road Ahead for E-Commerce Taxation

Paper by: Sagar Wagh

With nations all over the world raising concerns over tax avoidance due widespread e-commerce

transactions, it is essential to analyze the shortcomings in the existing law and find practical solutions to plug the issue of revenue leakage.

Any domestic tax statute gets the teeth to impose tax on the people (taxpayers) by the virtue of charging section in the tax statute. The primary requirement to be fulfilled by a contracting state for putting a particular transaction to tax whether domestic or cross-border is to define the incidence & scope of charging section in its domestic tax law. This means that, the contracting state should provide for express provisions in its domestic tax statue in respect taxation system it has adopted (i.e. Incidence of tax / jurisdiction to tax – territorial or worldwide residence taxation).

In case of cross–border transactions, especially the ones in which the income arises in contracting state to resident of other contracting state, the domestic tax laws of the contracting state define the degree up to which the contracting state seeks to levy charge of tax on resident of other contracting state. The provisions of this nature can be termed ‘scope provisions’.

The ‘scope provisions’ in domestic tax law generally correspond with the income heads of the distributive articles of Double Taxation Avoidance Agreements (DTAAs). The true role of DTAAs is to impose limitations on the application of ‘source provisions’ in domestic laws of contracting state. Hence, it can be said that, the application of DTAA will kick in only when the ‘scope provision’ is wider than DTAA and brings within its ambit the transactions/situation which are not provided in DTAA….

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