Attribution of Profit to a Permanent Establishment Involved in Electronic Commerce Transactions a Discussion Paper from the Technical Advisory Group on Monitoring the Application of Existing Treaty Norms for the Taxation of Business Profits

3 Foreword 1. To date, much attention has been focused on the question of in what circumstances do electronic commerce activities, especially the operation of a server in a particular jurisdiction, lead to the recognition of the existence of permanent establishment in that jurisdiction (the threshold question) under Article 5 of the OECD Model Tax Convention. Indeed, the Committee on Fiscal Affairs has recently published a Report adding to the existing Model Commentary on Article 5 to clarify the application of the provisions of the Article in respect of web sites and servers. The clarification will be incorporated in the next update of the Model Tax Convention. 2. Now that the threshold question has been settled, at least in respect of the application of the existing rules, attention turns naturally to what profits can be attributed to e-commerce activities that have passed the threshold of Article 5 so that a permanent establishment is held to exist. The allocation of the taxing rights between the jurisdiction of the enterprise and the jurisdiction of the permanent establishment are determined under Article 7 of the OECD Model Tax Convention. This discussion paper is a first attempt at exploring the interpretation and application of Article 7 to a PE carrying on retail e-commerce activities (" e-tailing "). 3. The discussion paper has been produced by the Technical Advisory Group on Monitoring the Application of Existing Treaty Norms for the Taxation of Business Profits (" Business Profits TAG "). This group was set up to assist in implementing the Ottawa Framework Conditions with a mandate to examine how the current tax treaty rules for the taxation of business profits apply in the context of electronic commerce and to consider proposals for alternative rules. This paper is a discussion draft only and does not represent a consensus view of the government or business members of the Business Profits TAG. However, the intention of releasing the discussion paper is to stimulate debate on how to attribute profit to a permanent establishment in an e-commerce context. This should assist in the ultimate development of an internationally agreed consensus on the interpretation and application of Article 7 amongst business, OECD Member and non-member Governments. 4. Accordingly, comments on this discussion paper are invited, and indeed, positively encouraged by 30 June 2001. Areas where comments would be particularly welcome are referred to directly in the text. Comments can be posted …