The general rules of PE

　　The term of “Permanent establishment” is only a fiction for the purpose of application of taxation jurisdiction in cross-border businesses. There is on a specific entity called PE in the real world.

　　In international tax law, the concept of PE determines where the profits of a multinational company will be taxed. If the company has a PE in a foreign jurisdiction, taxation of profits will be source-based, enabling the foreign jurisdiction to tax profits arising through the PE. If the company dose not have a PE, then taxation of profits will be residence-based. This regime was established to avoid double taxation.

　　What constitutes a PE varies according to specific treaties. Article 5 of the OECD Model Convention and UN model both defines a PE as:[1] a fixed place of business through which the business of an enterprise is wholly or partly carried on. A PE generally has the following characteristics:

　　(a) The existence of place of business;

　　(b) Fixed place of business. It has two aspects: that of space as well as that of time. For example, the third paragraph of article 5 of OECD Model Convention provides: “ a building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months.” ;

　　(c) Carrying on the business of the enterprise through the fixed place of business, i.e. substance over form.

　　The plight of the existing principle of PE and the new theories

　　The term of E-commerce, according to the statement of The World Business Agenda for Electronic Commerce, is defined as the performing commerce activities through the internet. In light of the content of the E-commerce, it can be classified the following two classifications[2] : the direct way (off-line sale ) and indirect way (on-line sale ). If the wholly proceeding of a transaction, including order, delivery and so on, is finished through the internet, the deal is performed by direct way. The software downloaded by the internet is the use of the direct way. In this condition, the recognition of the PE is difficult because there is no longer a fixed and existing place of business as the traditional transaction. Using the indirect way, the tangible products, for example the fresh apple, is ordered. However, the delivery has to be made throng the traditional approach. The method is similar to the old transaction. So the existing principle of PE can be applied well. The article chiefly focused on the first way, i.e. the direct E-commerce.

　　The impact of the cross-border business through internet to the existing principle of PE is mainly the following:

　　(a) whether a server constitutes a PE;

　　(b) do a web site constitute a PE?

　　(c) do the personnel is the requirement to constitute a PE?

　　There are three typical theories about the issues: abolition, maintenance and modifiability.

　　Abolition. The concept of the existing international tax is outdated and does not accommodate the requirement in the E-commerce. We should seek to build up a new source-based international tax law system.[3] For the propose is too radical, few country accepts it.

　　Maintenance. The existing principle should be remained, while, a new tax should be imposed to the transaction by the internet, for example, the bit tax[4] . The idea of a bit tax was originally conceived by Arthur J. Cordell and Thomas Ranald Ide, and was first put forward in their paper "The New Wealth of Nations," which was presented at the Club of Rome in 1994.2 In 1996 and again in 1997, the European Commission appointed a high-level expert group (HLEG) chaired by Professor Luc Soete to advise on the social and societal aspects of the information society. This group recommended that further research be conducted on the bit tax proposal to examine whether such a tax could be designed effectively to accommodate Internet communications and information flows. Subsequently, the bit tax proposal has been widely condemned and almost universally rejected by most governments and international bodies that have considered it. The other tax proposed is such as Pc tax, transaction tax, turnover tax and so on.

　　Modifiability. The idea support that an interpretation should be made to lead the existing system of PE to accommodate the new condition. Even someone conceived the concept fictitious PE.

　　Country applications of PE

　　India.[5] In a report on the taxation of electronic commerce issued in September 2001, a committee consisting of senior Indian government and industry officials recommended that India do away with the concept of permanent establishment. In the committee's view, the existing rule, which provides the right to tax by the source state and which depends on the existence of a permanent establishment, has no rational basis in the era of e-commerce. Historically, largescale sales of goods and services in a country were not possible without some permanent physical presence. International electronic commerce makes it possible, however, for a nonresident seller to increase its level of sales in a country without increasing its physical presence. The committee was concerned that this new way of doing business would lead to a serious erosion of the tax base for countries that are net importers, such as India.[6] But India government does not adopt the suggestion now, since many of these contentious issues are being debated worldwide.

　　Germany[7] : Following the release of the OECD's reports in February 2001, the German Federal Ministry of Finance confirmed its position that a server used for e-commerce does not in itself create a permanent establishment. It appears, however, that the German courts have taken the opposite view.

　　In a case not involving servers, but using similar analysis, the German Supreme Tax Court ruled that a Dutch corporation that supplied oil and oil products through underground pipelines in Germany had a German permanent establishment for the purpose of the German Net Worth Tax Act. The Dutch company had no employees in Germany, and independent contractors did all maintenance and repairs of the pipelines in Germany. The court upheld the position of the lower court11 that fully automated equipment would constitute a permanent establishment. Similarly, the court takes the position that a server can constitute a PE.

　　American. The US is the place where the E-commerce originates. And the government has issued a set of rules related to the E-commerce. Its position is that the E-commerce should be tax-free, while US advocates his suggestion in the world. As a country that there are large amount of E-commerce activities, tax-free is beneficial to the US. But this may corrode the tax basis to the most countries, in particularly, the developing countries.

　　OECD. The organization is an international organization formed to help governments tackle the economic, social, and governance challenges of a globalized economy. In 22 December 2000, OECD Committee on Fiscal Affairs issued “ Clarification on the application of the permanent establishment in E-commerce: Changes to the commentary on the model tax convention on article 5”. The changes add ten paragraphs, i.e. 42.1 to 42.10, after 42 of paragraph using the title “E-commerce”. There are no substantial changes to the existing principle. The recognition standard is still as same as the existing principle: “existing” , “fixed”, “through”. It indicates that where a server or web site may constitute a PE [8]and the personnel is not the requirement constituting a PE[9] .

　　The practice related to the issue in our country

　　Since the first e-mail is delivered over the Great Wall by internet in 20 September 1987, the history of development of the E-commerce has had nearly 20 years. According to the report about the analysis of the E-commerce market in 2005 issued by Internet Research Central of China Society and Science, the deal amount by E-commerce had reached to 13.5 billions RMB in 2005, increased by 280% compared with 2004. The report shows that the netizens that once chose to buy something by internet amount to 22,000,000. the amount exceeds the average level in Asia. [10] Though the increase in E-commerce is quickly, the amount is still very small compared with the amount of traditional commerce.

　　On the other hand, the absence of law related to the E-commerce is serious. [11]The only law in this field is the Electrical Signature Law enforced in 2005. The experience in respect of the PE mainly follows the OECD Model or UN Model. At present, the indirect E-commerce is tax-free in our country.

　　In the future, the country should strengthen the study to the issues, seeking theoretic support to taxing the E-commerce and specific measure to really obtain the revenues. Now , the E-commerce is still developing. Both the theory and approaches monitoring the activities are lack. Therefore, the existing principle of PE should be adopted. If an new system is introduced hastily, it will not only destroy the old principle that has been performed well but also probably lead to largely messes in the international world. The tax-free in E-commerce has more significant for us because the taxing the E-commerce may impede its development.

　　Conclusion.

　　The technology monitoring the traditional commerce and the effective imposition approach are the premise that the existing principle can perform well since the concept of PE created. Similarly, the solution to these issues related to the PE under cross-border E-commerce background, determines the technology progress rather than the theories consisting of concepts. Only if the above technology and approach is resolved, the different idea is meaningful. The remainder is merely to choose a interpretation in the light of the consideration of country benefits