(a) Under Pillar One, three proposals have been articulated to develop a consensus based solution on the tax challenges in the digital economy to give taxing right to jurisdictions where the income is earned from. The three proposals are namely,

1. The user participation” proposal: This proposal addresses the activities and participation of users of certain highly digitalized businesses that contribute to the creation of a brand; and generate valuable data for these digital businesses. The proposal considers allocation of an agreed percentage of residual profit (profit split method) using predetermined metrics (such as revenue) to allocate profits to user jurisdictions
2. the “marketing intangibles” proposal: This proposal addresses situations where MNEs develop an intrinsic functional link with the customers in a jurisdiction by reaching out through a limited local presence or limited risk distributors The proposal is expected to modify current profit allocation and nexus rules. These require that non-routine (or residual) income of the MNEs that are attributable to marketing intangibles, and their attendant risks, be allocated to the market jurisdiction in which the MNEs operate
3. the “significant economic presence” proposal: This proposal looks at instances where digital businesses are involved in the economic life of residents of jurisdiction without having a physical presence in those jurisdictions. The proposal contemplates that the allocation of profit to a significant economic presence could be based on a fractional apportionment method, which requires the following three successive steps: The identification of the tax base which is determined by the global profit base of MNEs the determination of the allocation keys to divide that tax base among the jurisdiction, and the weighting of these allocation keys.

The nexus rule proposal are basically based on sales thresholds and when the thresholds are met it could make a digital business to have taxable presence in a contracting states

These options and issues are expected to include: Changes to be made to current taxing rules

1. This would require an evaluation of the relative merits of alternative approaches, including the making of recommendations on:
2. a. Amending Articles 5 and 7 of the OECD Model Convention to deem a PE to exist where an MNE exhibits a remote yet sustained and significant involvement in the economy of a jurisdiction and to accommodate the new profit allocation rules. b. This would also require a consideration of any impact of such an amendment on other provisions that use the PE concept such as Articles 10,11,12,13,15,21,22, and 24 c. Alternatively, introducing a new standalone provision giving market jurisdictions a taxing right over the measure of profits allocated to them under the new profit allocation rules, which would require

i. identifying and defining a new non-physical taxable presence separate from the PE concept;

ii. identifying and defining a new concept of income taxable in the source jurisdiction (i.e. income derived from a particular source in a jurisdiction); and

iii. the interaction between the new taxable presence or source income and existing provisions (including especially provisions governing nondiscrimination).

(b). This question required candidates to analyze how current taxing rule that is used to determine the taxable presence of a non-resident person as impacted by the use of the internet such as the website, the computer server and the internet service provider etc.

In the instance case, regarding the issue, the following are considered. Art 5(1) defined a PE to mean fixed place through which business is carried out wholly or partly. Computer Server The use of computer equipment or a server

i. A computer or equipment can be considered to have fixed place through which business is carried on. This falls within the meaning provided for in article 5(1).

ii. Where the server is located can give a distinctive clearance on the availability of permanent establishment.

iii. The location of the computer equipment or automated equipment is very relevant in determining the taxability of the business income derived from online transactions.

iv. OECD position on this is explained in paragraph 42.2 of the commentary to the Article 5 as “the server is a piece of equipment that has a physical location, that location may constitute a fixed place of business of the enterprise that operates that server”.

v. For instance where an enterprise conducts a business through a website hosted on server located; say in South Africa, the PE may be said to be located in that country.

The use of a website

i. The website is software or data located on a server. It is available on the World Wide Web that a customer may be able to access. Website does not constitute a fixed place of carrying on business and it does not have a location that can be said to have a facility which is premise, machinery or equipment.

ii. At best it is auxiliary and preparatory (art 5(4)) to the core business of a person.

iii. In fact the OECD position on this is that Internet web site, which is a combination of software and electronic data, does not in itself constitute tangible property. It therefore does not have a location that can constitute a “place of business”.

Internet Service Provider (ISP)

i. An ISP is a company that provides internet connections for fees. The main function that ISP undertakes is hosting of website of another enterprise. ISP is said to carries on business in its own course of business as an independent person.

ii. According to article 5(6) where a person other than a dependent person carries on business in its own course of business activity, the person is not deemed to constitute be a PE of the nonresident person.

iii. According to the commentary to UN and OECD paragraph 32 of article 5 of the OECD Model Tax convention, a person is considered to be deemed as a PE of a foreign partner where it has the authority to conclude contract on behalf or in the name of the enterprise.

iv. ISP does not conclude contract in the name of an enterprise nor do their activities contribute significantly towards the conclusion of a contract. v. As such, ISP cannot be considered as a PE, rather it is an independent person carrying on business on its own course.