Generally, taxation of international business transactions rests on the principle that a company must have a permanent establishment in a particular country or territory to be subject to taxation in that particular jurisdiction.
But first, it is important to understand the concept of a permanent establishment in the context of taxation of international companies.
A US multinational company doing business in foreign countries or a foreign international company doing business in the United States is typically subject to the tax laws of the countries where the company engages in business activities.
For example, if a US company is doing business in the US and in Amsterdam, the Netherlands, then the company is subject not only to US tax laws but also to Dutch tax laws. However, if the company’s home country has a tax treaty with the host country, then the treaty will usually provide that the company is protected from the host country’s taxation of its business activities if such business operations do not create a permanent establishment in the host country.
Using the example above this means that if the US and the Netherlands have a tax treaty, then the US company’s business operations in the Netherlands will not be subject to the Dutch tax law as long as those activities do not create a permanent establishment in the Netherlands. Next to discuss is if physical or digital presence is considered permanent establishment.
Generally, tax treaties define a permanent establishment as a fixed place of business (branch or office, place of management, factory, oil and gas well or workshop) within the host country or when a company operates through a dependent agent in the host country. However, in today’s globalized world and one coping with the COVID-19 pandemic many international companies operate in the digital world.
To address the expansion of digital operations, some countries have moved away from the concept of permanent establishment and defined taxable presence as a digital or physical connection (or nexus) between a company’s activities and a country. Other countries have suggested that the operation of a digital platform creates a virtual physical presence.
The DTS focuses on taxing a company based on an end user’s consumption. In fact, about half of all European OECD countries (Organization for Economic Co-operation and Development) have already announced, proposed, or implemented unilaterally a digital services tax. Some of these countries include France, Austria and Hungary.
However, the U.S. position regarding a global DTS framework is that there is nothing to gain from it because most of the world’s largest search engines (Google, Bing), online marketplaces (Amazon, Walmart, eBay) and social media platforms (Facebook, Youtube) are owned and operated by U.S. companies. The U.S. in fact has threatened to impose retaliatory tariffs arguing that digital service tax targets U.S. multinational corporations.
However, as companies worldwide expand digital services, (and partially in response to the pandemic) the world of international business transactions will enter a new era and possibly a new taxation regime although global economic consequences remain unknown.
How can Malescu Law assist?
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