Permanent Establishment and the Digital Economy: How is International Tax Law Adapting to New Business Realities? • How do current PE rules deal with electronic transactions? • Are we moving towards the introduction of the virtual PE concept? • How do proposed OECD guidelines impact tax treaties and domestic tax legislation? Paul Morton, Director of Tax, Reed Elsevier

1. Permanent Establishment And The Digital
Economy: How Is International Tax Law
Adapting To New Business Realities
Paul Morton
Head of Group Tax
Reed Elsevier Group plc

2. Outline
• How do current PE rules deal with electronic
transactions?
• Are we moving towards the introduction of a virtual PE
concept?
• How do proposed OECD guidelines impact tax treaties
and domestic tax legislation?

3. Current PE and Other Rules
• Clearly there are problems
• Sometimes a matter of perception
• Sometimes a matter of application
• Sometimes conceptual
• Some of the uncertainties are much wider than BEPS
and should be tackled on a larger canvas
• The big question is whether other BEPS action items will
solve the problem or whether special solutions are
required

4. Digital Publishing
Author:
Sweden
Author:
Denmark
Editor: UK Contracting
entity:
Netherlands
Customer: Italy
Sales office:
France
Software
coding: India
Platform
development:
Netherlands
Datacentre:
US
Production:
Philippines
Review board:
Various
User on holiday:
Hawaii
User on
secondmen:
Japan
Authors are third parties
Sales support
Review board members
are third parties
Contracts with all global customers
Normally uses publications
In Japan
Actually uses publications
In Hawaii but using the
Japanese VPN but his Italian
subscription agreement
The editor has unique
knowledge
and is responsible for this
database
The platform cost $500 million
and was cost shared by five operating
companies – UK, US, France, Netherlands
and Japan

5. Questions
• The Customer
• Where is the customer?
• Who is the customer?
• Where is the customer using the service?
• How can we know?
• The Revenue
• Where should the revenue (gross proceeds) be
recognised?

6. More Questions
• The costs
• How should the costs be allocated?
• How should the costs of developing the technology be
amortised?
• If there is a digital PE how should costs be allocated to
it?
• The editor
• If the editor moves to France has there been a disposal
of an intangible by the UK? Or does the UK company
now have a PE in France?

7. Impact of the User
• Users may be based in many countries
• User activity will improve the product as the search
algorithm and user interface learn from customer
experience
• The more users sign up the better the experience for all
of them – they can also use a social networking facility
within the product to interact with their peers

8. Questions
• Where is value created?
• Where the users are based? Digital PEs?
• Where the customers are based? (maybe different from
where the users are based)
• Where the platform was produced?
• Where the servers are located?
• Where the contracting entity was based?
• How much value is created?
• How do we measure the value created/taxable profit per
location?
• If the customer contracts for an amount of capacity (rather
than actual use) do we measure value by capacity or actual
use?

9. Scenario 3
• Year 1: Operating companies in US, UK, France,
Netherlands and Japan contract to jointly develop a new
platform
• Year 2: Development begins – led by a team in the
UK, on US servers, with coding undertaken in India
• Year 3 – 5:Development continues
• Year 6: First roll out in US
• Year 7: First roll out in UK
• Year 8: First roll out in France
• Year 9: Japan decides that the platform is no longer
required

10. Cost allocation
• For business reasons the costs are held on the balance
sheet in the UK until the platform is rolled out in a
particular territory.
• However, costs are allocated from year 1 based on
reasonably anticipated digital revenues in year 10 (when
it is thought that all operating companies will use the
platform)

11. Questions
• Do we reallocate past costs as reasonably anticipated share
of year 10 digital revenues change or are the shares fixed?
• Do shares of cost translate into share of ownership of
platform?
• Are platform contribution transaction payments required every
year?
• When Japan decides to withdraw does it still have to pay its
costs (still accumulated on UK balance sheet)? If not, who
does?
• If digital revenues in year 10 turn out to be quite different from
reasonably anticipated position is there a retrospective
adjustment? Are there platform contribution transaction
payments or royalties?

12. Work of the OECD
• Action item 1 of BEPS Action plan
• Unlike the others – really a study of the issues rather
than an action item
• The Digital Economy Task Force has undertaken an
analysis of the digital economy
• All of the economy is digitised, impossible to separate
• New challenges have emerged
• Some new ideas are floated
• Some of the concerns may be addressed by other action
items

13. The Way Forward
• See how far the other action items address BEPS issues
• Continue the ongoing work through 2015 in some format
• If problem areas remain we remain very cautious about
the new ideas:
• Digital presence
• Digital permanent establishment
• Withholding taxes
• Consumption taxes

14. The Digital Permanent Establishment
in Practice
• A digital business can sell into every country in the world
– say 190 countries
• One country might propose a transfer pricing adjustment
• How do you deal with 189 corresponding adjustments?
• What if 190 countries propose adjustments?