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Özgür Biyan¹ and Güneş Yılmaz

A Taxation Problem Caused by Digital Economy: Definition of Virtual Establishment

Abstract: The permanent establishment has been one of the critical issues in international taxation for years. The concept of the permanent establishment has gained a new dimension with the widespread use of the internet. Economic activities in the digital environment have begun to create problems in the tax systems and have caused tax-free areas to appear. In this study, how the virtual establishment concept should be handled is examined by literature review using international developments and comparative law. The proposal for the concretisation of the virtual establishment concept has been given.

Keywords: Digital Economy, Virtual Establishment, Taxation, Tax Law

JEL Codes: K34, H20, F62

1 Introduction

While the extent of the trade carried out through the internet, amongst other economic activities, has reached dramatic levels every year, the disruptions encountered in taxation, insufficient regulations in the face of the transformations and problems manifest themselves intensively both nationally and internationally. The term “workplace/establishment”, particularly in the economic activities carried out in the electronic environment, contains some uncertainties as to which country shall be entitled to use the power of taxation, for the reason that traditional definitions remain incapable in terms of scope and comprehension, which in turn undermines the foundations of the principle of fairness in taxation and leads to some non-taxable areas. International aspect and impact of the subject have increased so much so that even the international organisations had to carry out some activities as to how the concept of “workplace” had to be dealt with in the digital activities. Especially, the works that began towards the 2000s continue nonstop. In this context, the European Union took some actions to resolve such problems by itself. On the other hand, although Organisation for Economic Co-operation and Development (OECD) offered some proposals by issuing reports for the member countries, it turns out that the problem persists. Aware of the significance of the subject in question, our study underlines that the ←11 | 12→concept of “workplace” should be redefined in terms of the economic activities carried out in electronic environment, in accordance with the developments in the international arena; it discusses the assessments in line with the approaches of the international organizations as well as the opinions in the doctrine and proposes some solutions. It also addresses the existing situation in the Turkish Tax System and future works.

The term “Digital” means “the display” or “displaying the data electronically on a monitor” (www.tdk.gov.tr). In this sense, all of the electronic activities that are performed in the electronic environment through a computer today can be accepted as the digital economy. Therefore, all types of goods and services, offered via the internet as part of economic activity through mobile devices (mobile phone, tablet, etc.), particularly the computers, are included in the scope the digital economy. The digital economy, for which the legal regulations established according to traditional economic activities remain incapable, and which require particular arrangements, are closely related to the taxation that is an important area.

Particularly the development of information and communication reshaped the organisational structures, production techniques, decision-making processes and marketing strategies of the businesses. Further to that, the most significant change is that the virtual businesses have become a part of our daily lives. So, the concepts of virtual businesses, virtual traders, virtual workplace/establishment or in other words, the concepts such as e-business, e-trade, e-workplace have to be redefined, and all applications and legislative works have to be carried out accordingly (Gencer, 2013:21).

Therefore, the first assessment that can be made should be on the concept of “digital activity” and activity must satisfy the following elements to be regarded as a digital activity, according to the OECD (Hongler & Pistone, 2015: 30–31):

(1) Whole enterprise or a vast majority thereof should rely on the trading of digital goods and services.

(2) The goods and services delivered differently from the existing ones, such as the commercialisation, processing and collection of the location-related data, other IT tools, websites, server maintenance or operation should be the physical elements and activities that do not include real/material creation.

(3) Agreements should generally be finalised via the internet or phone remotely.