Significant Economic Presence (SEP): Threshold to Taxing Digital Profits

By Allison Christians and Kimia Towfigh

In our last entry, we discussed the definition of digital services taxes and excluded the nexus-expanding concept of significant economic presence from scope on the grounds that this idea does not constitute a new tax at all; rather, it is a redefining of the level of contact necessary to expose a taxpayer to existing domestic tax obligations. We still want to explore the significant economic presence concept, however, given its potential to increase local taxation of foreign taxpayers with or without a separate tax aimed at digitalized firms. In this Entry, we will have a look at the developments to date and consider the legal implications of their adoption.

The first mention of significant economic presence in the OECD work on BEPS can be found in the 2015 Final Report on Action 1, on Addressing the Tax Challenges of the Digital Economy. The Report mentions the concept by way of dismissing it as an option, together with withholding taxes on digital transactions and equalisation levies (such as India then adopted the following year). But the OECD Report nevertheless cracked open a door of opportunity. It noted that nexus-expanding options for taxing the digital economy were not recommended because “among other reasons, it is expected that the measures developed in the BEPS Project will … mitigate some aspects of the broader tax challenges, and that consumption taxes will be levied effectively in the market country.” Even so, the Report noted, countries could adopt any of these measures “as additional safeguards against BEPS, provided they respect existing treaty obligations or [adopt changes] in their bilateral tax treaties.”

As international tax experts know all too well, those obligations include the definition of a permanent establishment as “a fixed place of business through which the business of an enterprise is wholly or partly carried on,” with a long list of exceptions for things that have been defined as preparatory and auxiliary functions. That threshold seems increasingly too high and those exceptions too broad in a world in which major conglomerates routinely engage in the economic life of a jurisdiction without ever coming close to the threshold, when what might have once been commonly viewed as peripheral is now a core business model for some of the world’s biggest and best known brand names. As the OECD picked up its work on the digital economy in 2018, the G24 again proposed a significant economic presence rule, but the proposal did not make the cut as the Secretariat coalesced around what it considered a viable consensus.

The goal of adopting a significant economic presence rule is to draw more non-resident businesses into the domestic income tax net, even if there is already a consumption tax in place on the goods or services rendered to the local population. The entire point of substantial economic nexus, like that of other digital taxes, is that the jurisdiction of the users or consumers (as the case may be) considers that it has contributed to the profit-making of the firm, so it is not content to merely tax the value of transfers to local consumers. In contrast to a DST, which continues to treat the firm as foreign but claims part of the income as an effectively domestic source, the significant economic presence test folds some firms into the arms of the tax authority by redefining the threshold to tax residence.

Per the OECD Action 15 report linked above, the definition could capture any business with a digital or automated platform that has a “purposeful and sustained interaction” with the local economy. Several pertinent factors may be holistically assessed to establish nexus, as depicted in the graphic below.

Industries that are likely subject to a significant economic presence threshold include those providing streaming services, search engines, transportation services and accommodation services that operate on a digital platform.

We surveyed the significant economic presence rules announced to date (at least, those described as such by adopting governments) and found some common characteristics. While some countries (Nigeria, Indonesia, Slovak Republic, Turkey) have implemented modified definitions in legislation, others (Israel, India, Saudi Arabia) have proposed it as a viable solution to address gaps in taxation within the digital market. Across jurisdictions, a broad range of different approaches to SEP and virtual PE have been proposed, with distinct revenue requirements and other conditions to meet the taxable income threshold. We provide a comparison below.

Although distinct in that it was adopted for purposes of enforcing subnational sales taxes, we include the U.S. reconceptualization of state nexus as a comparator because we think it provides some precedential value given the federal government’s vocal objection to gross basis DSTs.

SEP Conditions Across Jurisdictions


Annual Revenue Threshold in Jurisdiction

SEP Definition



25 million


A non-resident company with purposeful and sustained interactions with persons in Nigeria

Digital activities targeting Nigerian consumers, including (1) streaming or download services; (2) data transmission; (3) goods and services; (4) intermediary services


50 million

(USD $57M)

with worldwide turnover over €1.12 billion (USD $1.12B)

A significant and continuous economic presence in the territory of the state built in such a way as not to result in any physical presence in the same territory

Sale of goods and/or provision of services that are purchased on a digital platform in Italy operated by an MNC


20 million

(USD $3M)

Activities allowing profits derived from e-commerce activities without a physical presence in Turkey

Use of internet or telecommunication for commercial, industrial or professional activities


To be determined

A foreign company with a significant digital presence in Israel and conducts activity on the ground in Israel, even if activity is of a preparatory or auxiliary character only

Internet or digital services adjusted for Israeli users (e.g. use of Hebrew language, use of Israeli currency, etc.)


To be determined

A non-resident without a physical presence in Indonesia on the income arising from their e-transaction business

Trades through electronic systems, including (1) group consolidated gross turnover; (2) sales; (3) active digital media users

Slovak Republic

To be determined

Non-resident operators that regularly facilitate the conclusion of contracts for providing transportation and accommodation services via a digital platform

Digital platforms without the physical presence of an operator

United States (state-specific since US Supreme Court decision Wayfair)

$100k USD

Out-of-state retailers who have considerable amount of business without a physical presence in the taxing state

Mail order or Internet sales through electronic channels


Finally, let us take a moment to consider the legal implications of these developments. It is entirely clear that the world did not need the Action 15 Report to tell it that expanding the definition of nexus is something a country is free to do; nor is the OECD the arbiter of what happens when countries violate their treaties by overriding existing deals on jurisdictional thresholds. Consider the first proposition: what is the international law of nexus, as it applies to tax? The only clear answer is that in the absence of a treaty there is no clear authority. The most plausible limit on the scope of authority of a sovereign state is its practical ability to enforce its will on those it would call its taxpayers. But even lacking the ability to enforce does not actually negate the ability to claim such authority: in truth, any government that seizes the reins of control over a territory can declare its authority to regulate at will.

It then falls to treaties as the ground on which countries negotiate their respect for each other’s potentially expansive tax jurisdiction claims. The treaty definition of a permanent establishment is not a nexus-granting provision. Like all the other elements of treaties, it is a voluntary constraint on an otherwise expansive right to tax whatever is handy. Nothing stops each country from renegotiating their acceptance of the terms that came before, but also: nothing actually stops countries from unilaterally overriding their treaties, either.

We can see the reality of this in that most of the time, when countries override their treaties, their treaty partners might complain a bit, but they eventually renegotiate the treaty terms to catch up to the new normal. This was seen on a broad scale when the United States imposed its desire for nonreciprocal expanded information collection and sharing obligations on all of its treaty partners, just before the BEPS initiative began, but it has happened many times before and it will happen again so long as there is no multilateral tax body with dispute resolution procedures that transcend the decisions of local officials. That does not mean that overriding treaties is a good or fair thing to do; many would rightly point to the Vienna Convention of the Law of Treaties to show that overriding one’s agreements is disfavored. But history teaches that there are no practical consequences for a tax treaty override.

As such, there is little doubt that as a matter of law, any country currently considering various strategies to tax the profits of highly digitalized firms could expand their nexus rules to include the targeted firms, and it is a matter of debate whether they might still do so even if it should violate their existing treaties. In a recent Afronomics blog post, Abdul Muheet Chowdhary of the South Centre Tax Initiative argued that a significant economic presence rule is “the most important requirement for effective taxation of the digitalized economy.” Many would no doubt agree with this observation, even if the prospects for designing a workable regime are mixed. As between redefining nexus and adopting a gross-basis tax on income flows earned by foreign taxpayers, the decision to adopt a substantial economic presence rule might even be the more conventional approach in the sense of being less susceptible to complaints based on terms in free trade agreements. We will return to that subject in a future DT Log Entry.


Allison Christians and Kimia Towfigh, CTF Digital Tax Log, Entry #4, 21 August 2020, at

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