The key objectives of this work is to outline the impact respectively challenges of the proposed new digital PE concept, notably on Swiss headquartered MNEs and to derive recommendations and potential solutions for these enterprises from a consulting standpoint.
The OECD/G20 as well as the Inclusive Framework on BEPS are currently aiming to find an international tax consensus for a long-term solution, which could have a significant impact on the international corporate tax and transfer pricing landscape. The on-going tax challenges raised by the digital economy emphasize the fundamental tax policy issues. The new proposal by the OECD and EU would alter the current permanent establishment ("PE") concept in a significant way and thus have a strong influence on cross-border transactions of multinational enterprises ("MNEs").
These developments, which relate mostly to the terms nexus and profit allocation under international tax law, may affect many MNEs respectively their businesses. The outcomes may reshape the international allocation of profits (and losses) mechanism, and, moreover, the (re-)allocation of those profits (and losses) between the residence jurisdictions and the source or market/user jurisdictions. While big user/consumer markets are often located in emerging states, which are pushing for a bigger stake in global tax revenues, Switzerland as a relatively small country with stark export activities seems to be strongly affected.
Recommendations for multinational enterprises in light of the new permanent establishment developments under OECD / G20 BEPS Action 7 and Action 1.
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
2.1.1 Definition of the Digital Economy
There is no international agreed definition on the notion “digital economy” but according to the International Monetary Fund (“IMF”), the digital economy is sometimes defined “narrowly as online platforms, and activities that owe their existence to such platforms, yet, in a broad sense, all activities that use digitized data are part of the digital economy: in modern economies, the entire economy.”34
Compared to the IMF definition, the OECD gives the following definition of the digital economy:
“The digital economy is the result of the widespread and transformative process brought on by Information and Communication Technology (ICT). All sectors, ranging from retail, financial services to education and broadcasting and media have been transformed by ICT technologies. So much so, that the digital economy is increasingly becoming the economy itself. It would therefore be difficult, if not impossible, to ring fence the digital economy from the rest of the economy for tax purposes.”35
Therefore, the OECD clearly states that the digital economy encompasses not only the digital industry sector (i.e. technology companies) but also the whole economy.
As outlined in Chapter 1.4, the terms “digital economy”, “digitized economy” and “digitalized economy” are interchangeably applied in this Thesis.
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.
- Citar trabajo
- Lukas Staehli (Autor), 2019, Digital Permanent Establishments, Múnich, GRIN Verlag, https://www.grin.com/document/537066
