Virtual Permanent Establishment For Digital Economy

Digital economy has changed the character of business so that the values of the transactions and the market capitalization have increased in huge numbers. Cross border transactions in the digital economy can be lack of permanent establishment in a source country, consequently, the source country cannot execute tax revenues generated in its jurisdiction territory. The sourcing theory, the benefit theory, the entitlement and the pragmatic considerations can be regarded as fundamentals that the source country has right to impose tax revenues in its territory. For this reasons, the concept of permanent establishment should be modified. By using theoretical qualitative research methods, this paper compares some hypothesis of a new concept of permanent establishment regarded to digital economy and proposes a new hypothesis for the concept. According to the character of digital economy, it proposes that the relation between a seller and a buyer can be deemed as a virtual permanent establishment. The main point is how to determine that the relation has been occurred. Some literatures propose the relation has happen if there are the interactions through a website by more than 1,000 users a month, the interactions for more than six months via a website and the existence of a website. This paper proposes that a virtual permanent establishment has been occurred if a seller has used bandwidth in certain number of bytes in the source country. The number of bytes are stated by bilateral treaty. This paper suggests that the threshold is 500 gigabytes of bandwidth. This research can be a reference for tax authorities, especially in Indonesia, to redefine the permanent establishment concept in tax regulations. For the entrepreneurs in e-commerce, this research can be a reference in making strategic decisions in source country.