DIFFERENCES IN APPROACHES TO DETERMINING A NON-RESIDENT’S PERMANENT ESTABLISHMENT: BETWEEN DEVELOPED AND DEVELOPING COUNTRIES

Abstract

A non-resident’s permanent establishment is one of the fundamental institutions of international tax law, as it is through this that tax jurisdiction is apportioned between the state of residence and the source state. Despite the long evolution of this concept, current practice in its application reveals significant theoretical and practical problems, caused both by differences in the approaches of international model conventions and by the transformation of global economic processes, in particular digitalisation. The aim of the study is to identify and systematically analyse the differences in approaches to defining a nonresident’s permanent establishment in the OECD Model Tax Convention and the UN Model Tax Convention, as well as to assess their impact on striking a balance between the tax interests of developed and developing countries. The methodological framework comprises comparative-legal, systemic-structural and functional methods, which have enabled not only a comparison of normative constructs but also an exploration of their economic and legal purpose. The article argues that the OECD and UN approaches reflect different models of tax jurisdiction allocation: whilst the OECD model focuses primarily on the interests of the states of residence, the UN approach aims to expand the source state’s ability to tax the income of non-residents. It has been established that the expansion of the criteria for permanent establishment within the UN approach (lowering time thresholds, including service, agency and insurance permanent establishments, and revising the list of exclusions) is systematic in nature and aimed at minimising opportunities for artificial avoidance of tax presence. The scientific novelty of the study lies in the comprehensive justification that the UN approach forms a more effective toolkit for protecting the source state’s tax base through an expanded understanding of a non-resident’s economic presence, as well as in identifying the interconnection between the evolution of the permanent establishment concept and the development of the digital economy. It is further argued that the traditional model of permanent establishment is losing its ability to adequately reflect modern business models, necessitating a rethinking of the criteria for tax nexus. The study concludes that it is advisable to further transform the concept of a permanent establishment by integrating elements of a ‘virtual’ or ‘digital’ presence, which will ensure a fairer allocation of taxing rights in a globalised economy. The practical significance of the findings lies in their potential application to improving the treaty practices of states, particularly Ukraine, as well as in shaping national tax policy in light of the current challenges of international taxation.