A Framework to Manage a Penetration of Digital Systems into Physical Society

Today, Internet-connected computers are rapidly penetrated into our lives, making an intricately intertwined digital and physical economy. A digitalized economy should be equally regulated as the traditional physical one because digitalization does not mean being provided with special benefits. Thus, a behavior regulated in the physical world should be also regulated in the virtual world at the same level. However, realities are sometimes different because unseen behaviors of digital systems are difficult to be conscious before they are implemented and work. Thus, regulations tend to fall behind digital innovation. Due to ease of integration of multiple digital systems compared with physical ones, digitalization also causes unexpected side effects. To smoothly integrate a digital system into the traditional physical one without causing unexpected side effects of digitalization, this paper proposes a framework to grasp behavior of a digital system without depending on physical presence. Also, this paper demonstrates effectiveness of the proposed framework by applying it to a permanent establishment (PE), which is a fundamental concept of the contemporary international tax system, and Facebook’s Libra, which brings about integration of cross-border payment system and transfer of personal information.