OECDrules on e-commerce tax

International e-business: Tax and dispute issues resolved but survey finds crime on the Web is rife

International e-business: Tax and dispute issues resolved but survey finds crime on the Web is rife

Hazel Ward

The Organisation for Economic Co-operation and Development (OECD) has begun discussing ways in which to tax business carried out over the Internet to standardise the approach taken by international tax authorities.

In a landmark ruling announced last week, the OECD's committee on fiscal affairs laid down a set of guidelines about how to apply existing tax rules to electronic commerce.

Under OECD taxation rules, a government has the right to tax all profits deriving from business activities carried out through a permanent establishment, but until now there has been no ruling determining what constitutes a permanent business establishment in the world of e-commerce.

One of the provisions agreed by the committee was that a Web site does not constitute a permanent establishment, so a company offering goods or services over the Internet would be exempt from the tax laws in any country where the Web site was accessed.

Equally, the agency determined that the location of an Internet service provider (ISP) does not represent a permanent business establishment, meaning that a foreign company using that ISP would not be liable to taxation by the host country's government.

By contrast, a server performing actions considered "significant as well as an essential or core part of the business activity of the enterprise" would constitute a permanent establishment, and would be liable for taxation.

The OECD said the ruling was an important clarification of the fiscal terms which would apply to e-commerce, and said it was likely to foster further growth of the sector.

Michael Everett, tax director, e-business, at KPMG, said the OECD ruling was not as clear as had been hoped for. "It is supposed to be an agreement but it does not really give us the clarity we were looking for," he said.

"What this ruling means is that a Web site which is giving or collecting information is not considered to be a permanent establishment, and it should be exempt from tax. But if the server is making transactions or signing contracts, then it constitutes a taxable presence," Everett explained.

"If the UK has got someone trading in Germany, do they tax that business in the UK, in Germany or in both? It is still not clear how much revenue the tax authorities are losing through e-commerce," he said.

"The important question still remains: what in practice can the tax authorities do when someone is trading through a Web site?"

Members of the world's leading industrialised economies were meeting in Dubai earlier this week for an emerging market forum on electronic commerce.

The two-day conference, which was co-hosted with the Dubai Government, was aimed at finding an effective policy for international co-ordination within e-business.

The OECD was unavailable for comment.

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