The concept of permanent establishment (PE) is important in determining where the profits of an international business will be taxed. If the multinational business has a PE in a country, it will be subject to source-based taxation in that country. On the other hand, if the company�s activities in the foreign country do not create a PE, residence-based taxation will apply. Tax treaties are important to the determination of whether a company has a PE and is thus, subject to taxation of business profits generated in the foreign country. Such treaties set out the minimum level of presence and activity needed to constitute a PE. Under the OECD Model Tax Treaty (Article 5), a PE includes physical facilities, such as a place of management, a branch, or a factory. It does not include the use of facilities for the sole purpose of storing, displaying or delivering goods or a place used solely for purchasing goods or collecting information. An agent that has the authority to conclude contracts for the multinational company can create a PE for the company.

The e-commerce business model has called into question tax rules that are dependent on location because e-commerce businesses can operate with fewer physical locations than under the "bricks-and-mortar" model. Some business operations that were previously carried on through a physical location, such as a store, can now be carried on by processing orders through a computer server located anywhere in the world. Servers are fairly easy to move and the data stored on them is often even easier to move without disrupting operations or the sources of revenues.

To address the PE issues generated by e-commerce, a Working Party subgroup of the OECD Committee on Fiscal Affairs issued a proposed "clarification" to the commentary on Article 5 of the OECD Model Tax Convention in September 1999. The draft begins with the premise that the concept of PE should continue to apply to e-commerce business models. The draft does not address the matter as to how much income should be attributed to e-commerce operations that are carried on through computer equipment that constitutes a PE. Some of the highlights of the draft commentary include:

� A web site is not tangible property and thus, cannot create a PE by itself.

� "Automated equipment that does not require on-site human intervention for its operation may still constitute a permanent establishment."

� A server is only fixed if it is located at a particular place for a "sufficient period of time."

� Computer equipment that is "fixed" may constitute a PE if the other requirements of a PE are satisfied.

� Generally, web sites hosted by third party Internet Service Providers will not create a PE because the ISPs are not authorized to conclude contracts on behalf of the business.

Observations: While a computer server is a physical asset that must be present somewhere, it is different than other types of stand-alone, automated business equipment, such as a vending machine, that can create a PE. A vending machine is purposefully placed in a particular location in order to serve customers at that location. On the other hand, a server can be located anywhere and can serve customers located anywhere in the world who are able to connect to the Internet. Also, as Internet technology continues to evolve, servers (or their equivalent) might be located on satellites, rather than at a physical location on Earth. The difference between a server and a vending machine is significant and should be recognized in the OECD Model Tax Convention itself. Certainty and a better determination of where business profits should be taxed would be provided by stating that a server alone cannot constitute a PE.

Providing that a server alone cannot create a PE would also make more sense from an economic perspective because the operations associated with a server are minimal. Instead, business operations are still comprised of the headquarters and manufacturing and sales operations that host personnel who are the real engines of revenue generation.