Volume 46 (2018) / Issue 6/7

Anandapadmanabhan Unnikrishnan, Meyyappan Nagappan, 'Virtual Permanent Establishments: Indian Law and Practice' (2018) 46 Intertax, Issue 6/7, pp. 520–540


The virtual permanent establishment (virtual PE) was first proposed to tackle growing concerns that multinationals could artificially avoid PE status by rendering cross border supplies of goods and services through electronic means. The virtual PE concept therefore sought to link taxation with value creation: in most cases, this involved the application of source taxation to non-resident entities that had no physical presence in the source state. With increasing digitalization, the virtual PE concept has become crucial to addressing tax avoidance and base erosion, particularly by multinational enterprises and cross border suppliers of goods and services.

 This article traces the evolution and treatment of the virtual PE concept under Indian law against the background of the broad framework prescribed under international and comparative tax law. Based on an analysis of Indian judicial precedents on the topic, the authors believe that Indian courts have progressively watered down the requirements necessary to trigger the existence of a PE. Although the lowering of thresholds is in the context of digital businesses where the courts have sought to tax income in India through any tangible or physical nexus, the lower thresholds could arguably be applied in other situations. Furthermore recent reservations by India to the revised OECD Model Tax Convention on Income and on Capital (OECD Model) and changes in the domestic tax laws introduced in the 2018 Budget also indicate an intent to lower the threshold for the creation of nexus, for both digital and other businesses operating in the Indian market. This potentially raises the level of uncertainty with regard to many transactions which, in the past, were not questioned as being undertaken by a PE and which may, in certain instances, lead to absurd results.

Additionally, the struggle between adopting a multilateral solution such as the virtual PE appears to be slowly giving way to uncoordinated and unilateral levies, such as India’s recent equalization levy. Several European countries are now considering similar unilateral measures. This would lead to double taxation, have a chilling effect on cross border trade, and undercut the foundation of the international tax order by bypassing a stable and clear treaty network. Therefore, there is a need to address the complexity of the concept of a virtual PE and achieve consensus before the world crosses a tipping point, after which unilateral solutions may become the norm. From an Indian perspective as well, this is crucial if India is to achieve its publicly stated goal of a USD 1 trillion digital economy in the next four years.

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ISSN: 0165-2826
ID: TAXI2018054