Permanent Establishment in Digital Economy: The Conundrum of Proving Nexus for Taxation

Taxes augment socio-economic development of a nation. The source-based model of taxation extends taxing rights to the jurisdiction where value is created, by establishing nexus between the source country and income earned due to existence of taxpayer's 'Permanent Establishment' in the source State. Thus, some 'physical presence' in the source State is essential to establish its right to tax. However, digitalisation of economy has virtualised the world enabling enterprises to make money in foreign jurisdictions without having any tangible physical presence in their territory. This has posed concerns about the efficacy of physical presence based 'Permanent Establishment' rule for taxation of the digitalised economy. The focus of this paper is to study the applicability and relevance of Permanent Establishment rule in the digital economy, and critically analyse national and international initiatives undertaken to modify the rule.