Attribution Of Profit To A Permanent Establishment Involved In E-commerce Activities

In order to examine the issues covering the attribution of profit to a permanent establishment which involves electronic commerce activities, a detailed analysis of the steps are necessary to attribute, in accordance with the arm’s length principle, profit to a permanent establishment that would be considered to exist under Article 5 of the OECD Model Tax Convention2 as a result of the use by an enterprise of a stand-alone computer server in a foreign jurisdiction in the course of processing online retail transactions. The assumption that the operation of a computer server by an enterprise in a country can give rise to a permanent establishment in that country is based on the conclusions reached by Working Party No. 1 on Tax Conventions and Related Questions, particularly, on the recently released additions which have proposed to the Commentary to the Model Tax Convention.

The following questions have been addressed in this article:

What would be the result be under alternative interpretation, whereby the permanent establishment is considered to be instead an “independent service provider”?
What about the profit attributable to the Permanent Establishment where personnel are present?
What is the attribution of profit to the permanent establishment under the last variation (in-house development of server and web site) which was examined under Article 7 of OECD?
Is the UN Model Convention different than OECD Model Tax Convention with respect to the attribution of profit to a permanent establishment?

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