Abstract

Tax treaties and domestic laws distinguish between domestic and foreign-sourced income to limit the taxing rights of source countries, while simultaneously allocating taxing rights over active business income to source countries through the concept of a permanent establishment (PE). However, ambiguous regulations regarding PEs in tax treaties and corporate tax laws often lead to tax jurisdiction conflicts with foreign governments and legal disputes with foreign corporations seeking to minimize their global tax burden. The case of Bloomberg Limited Partnership, analyzed in this study, symbolically illustrates the difficulty in determining the existence of a PE, as evidenced by conflicting judicial rulings. Specifically, the courts differed on whether the employees or agents of a foreign corporation performed essential and significant business activities—rather than merely preparatory or auxiliary ones—through a fixed place of business. This discrepancy highlights how subjective interpretations of specific facts can determine the nature of business activities. Furthermore, this study analyzes issues related to the VAT agency collection system and the methods for calculating profits attributable to a PE. While the VAT agency collection system aims to maintain neutrality and equity by requiring tax-exempt entities to collect and pay VAT on services provided by non-residents without a PE, it fails to achieve these effects when the service recipient is a non-business entity. Moreover, it may lead to a fallacy of composition where the benefits of export promotion are offset globally, suggesting that a destination-based taxation principle should be reconsidered. Regarding profit attribution, the profit-based method is often preferred over the transactional method due to practical constraints in applying the latter, as seen in the Bloomberg case. However, the profit-based method has inherent limitations as it is heavily influenced by market conditions, such as product life cycles and competition, which contradicts the arm's length principle that relies on the comparability of products or functions. Therefore, it is desirable to prioritize the transactional method through active benchmarking of comparable transaction prices to better adhere to the arm's length principle.

Keywords

• Permanent Establishment
• Agency Collection
• Transactional Method
• Profit-based Method

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