The OECD'S Flawed and Dated Approach to Computer Servers Creating Permanent Establishments

39 Pages Posted: 29 Apr 2014 Last revised: 26 May 2015

See all articles by Monica Gianni

Monica Gianni

California State University Northridge

Date Written: April 26, 2014


As the digital economy changes the way that we do business, tax laws have been challenged to adapt appropriately to this nontraditional business method. International tax rules were developed in a different technological era. To accommodate electronic commerce, existing tax rules either have to be applied to electronic-commerce transactions, or new rules have to be developed. The Organisation for Economic Co-operation and Development ("OECD") has taken the lead in studying and recommending appropriate international taxation rules for electronic commerce.

This Article focuses on the original central tax issue that the OECD considered — jurisdiction to tax income from electronic commerce based on the presence of a server in a jurisdiction. In pre-electronic commerce days, a sale normally could not be consummated without an enterprise having some physical presence at the locale of the customer. Income taxation rights of a country are currently premised on this model, such that an enterprise is not taxed in a country unless it has a sufficient physical presence within a country for that country to exert taxing rights over the income generated by the presence. Since the early days of electronic commerce, it has been argued that tax nexus based on geographical fixedness might no longer be applicable or relevant.

Various alternatives have been proposed to tax electronic transactions. These include residence-based taxation, source- or consumption-based taxation, a bit tax on digital data transmitted through the internet, and a virtual permanent establishment concept. Projects of the European Union and the OECD Base Erosion and Profit Shifting (BEPS) are steps in the right direction to consider these and other options to resolve an untenable situation, which was built on a cautious strategy by that OECD that includes a now-dated and fundamentally flawed focus on computer servers. The OECD recognized early on that the current rules regarding servers should be monitored to determine whether they raise practical difficulties or concerns. As seen from the difficulties discussed in this Article, the OECD should focus on a larger solution for taxable presence for electronic commerce, and revoke its guidance on computer servers creating permanent establishments, laying to rest the notion that a computer server can create a taxable presence. The time has come to move forward with another strategy at this "turning point in the history of international co-operation on taxation."

Keywords: permanent establishment, server, OECD, BEPS

JEL Classification: K34

Suggested Citation

Gianni, Monica, The OECD'S Flawed and Dated Approach to Computer Servers Creating Permanent Establishments (April 26, 2014). 17 Vand. J. Ent. & Tech. L. 1 (2014), Available at SSRN:

Monica Gianni (Contact Author)

California State University Northridge ( email )

David Nazarian College of Business and Economics
18111 Nordhoff
Northridge, CA 91330-8372
United States
8186772449 (Phone)

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