The OECD yesterday announced that its 29 member nations have
reached consensus on a number of e-commerce taxation issues.
On-line transactions will not make a company liable to taxation in
the country from which the web site is accessed.
The Organisation for Economic Co-operation and Development
represents the leading industrial nations of the world.
Under existing tax laws, a company’s profits are liable to
taxation in any country where the company has a “permanent
establishment.” The new guidelines agreed by the OECD will be used
to determine whether a company conducts its business through a
permanent establishment in a particular country – which therefore
determines whether that country is entitled to tax the company.
Under the guidelines, a web site of itself will not constitute a
permanent establishment for tax purposes and a web site hosting
arrangement typically will not result in a permanent establishment
for the company that carries on business through that web site.
The guidelines also provide that an ISP will not, except in very
unusual circumstances, constitute a dependent agent of another
company so as to constitute a permanent establishment of that
company.
In addition, while the location of a server may in certain
circumstances constitute a permanent establishment, this requires
that the functions performed at that place be significant as well
as an essential or core part of the business activity of the
company.
It is therefore expected that if a server takes orders from web
site customers or processes credit card details, it will be
conducting an essential or core part of the business activity, and
the server’s location will give rise to a tax liability in that
country.
However, where the server has no other function than to act as a
conduit for information that will be processed elsewhere, it will
not be considered a permanent establishment.
