The OECD’s Flawed and Dated Approach to Computer Servers Creating Permanent Establishments

Monica Gianni · 17 Vand. J. Ent. & Tech. 1

Abstract

As the digital economy changes the way that we do business, tax laws have been challenged to adapt appropriately to this nontraditional business method. International tax rules were developed in a different technological era. To accommodate electronic commerce, existing tax rules either have to be applied to electronic commerce transactions, or new rules have to be developed. The Organisation for Economic Co-operation and Development (OECD) has taken the lead in studying and recommending appropriate international taxation rules for electronic commerce. This Article focuses on the original central tax issue that the OECD considered—jurisdiction to tax income from electronic commerce based on the presence of a server in a country. In pre-electronic commerce days, a sale normally could not be consummated without an enterprise having some physical presence at the locale of the customer. Income taxation rights of a country are currently premised on this model, such that an enterprise is not taxed in a country unless it has a sufficient physical presence within a country for that country to exert taxing rights over the income generated by the presence. Since the early days of electronic commerce, it has been argued that tax nexus based on geographical fixedness might no longer be applicable or relevant. Various alternatives have been proposed to tax electronic transactions. Projects of the European Union and the OECD Base Erosion and Profit Shifting are steps in the right direction to consider these and other options to resolve an untenable situation, which was built on a cautious strategy by the OECD that includes a now-dated and fundamentally flawed focus on computer servers.