Are Physical Presence and Permanent Establishment Standards Still Effective in Cross－border e－Business?

This paper reviewed the current U.S. tax regime, treaty rules and related court cases of PE and physical presence standards, analyzed the current problems and related changes of PE and physical presence standards, and evaluated the validity of the alternatives for taxing cross－border e－business profits. The results of the research are as follows. First, in Lanco, the New Jersey Supreme Court interpreted Quill’s physical presence requirement is applied only to ‘state sales and use taxes’ and not to ‘state business franchise and corporation net income taxes’. In 2007, the Supreme Court of the U.S. denied the petition for writ of certiorari. Therefore, the principle that state income tax can be levied without physical presence has been accepted. We can see this as important evidence in that the physical presence requirement is inadequate in the new economy. Second, in 2003, the OECD Model Treaty Commentary was changed so that a location where a computer server is operated by an enterprise may constitute a PE in the country where it is situated. These changes may have some effects in solving the nexus problem of e－business profit. However, these changes would not be helpful in solving the fundamentals of the nexus problem of e－business profit, because the location of the server can be easily changed. Third, the Virtual Presence that is proposed in the Report of OECD is almost the same concept of economic presence in the previous literature. If the compliance problem of this approach can be reduced to a reasonably acceptable level, the economic presence can be a comprehensive alternative of physical presence. In addition, the Virtual Agency that is also proposed in the Report can partly address the current problems of PE in e－business.