ABSTRACT
The implication that existing tax principles can be made to fit the new technology of the Internet starts from a premise that there is consensus over the ascendancy of the residence principle. This is in essence the basis of international tax treaties that follow the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention on Income and Capital. The OECD Model Tax Convention provides that a country may tax the business profits of an enterprise in its jurisdiction on the principle of residency. If, however, the jurisdiction can prove that the business has a ‘permanent establishment’ within its jurisdiction, taxation may be levied under the source principle. The principle of residency is usually predominant as a measure of allocating taxing rights to jurisdictions and was established when there was a necessarily close physical link between a business activity and its management. The technology and fluidity of the Internet challenges the foundations on which international taxation principles are based. Existing principles, definitions and concepts cannot be simply adapted to the new conditions created by the Internet. Some commentators see the residency principle as weakening. Flint (2000) comments that the undermining of fundamental principles by electronic commerce leads to taxation on the basis of residence beginning to look “shaky”.
