The UK Paymaster General Dawn Primarolo today publicly welcomed
OECD recommendations on the tax treatment of e-commerce, despite
the UK taking a significantly different approach from the consensus
reached by other members of the Organisation.
Dawn Primarolo said:
“This is a global issue and no one country
can afford to 'go it alone'. It is important for countries to work
together and the efforts of the OECD are to be welcomed, especially
the way business has been involved in the work. I am particularly
grateful that the UK has been able to provide a lot of input into
these final reports.”
However, the Inland Revenue has indicated that it will ‘go it
alone’ on one of four proposals agreed by the OECD which consists
of the 30 leading industrialised nations in the world. The
proposals are on how to apply a rule under international tax
treaties that determines a country’s right to tax profits from
e-commerce.
In the UK and the other OECD countries, the profits of any
business are taxed wherever it has a “permanent establishment”.
Until now, there has been some ambiguity about the taxation of
internet businesses. This is because these companies can operate in
one country but locate the servers that host their web sites in a
different country. The question arose, does the location of a
server in another country constitute a “permanent establishment”?
The OECD members agreed this month that it should – but the UK
disagreed.
The OECD countries agreed that a web site in itself cannot
constitute a permanent establishment. Also, where, for example, one
company’s web site is hosted by an internet service provider, the
service provider’s hosting will not create a permanent
establishment for the company paying the service provider, except
in very unusual circumstances. The UK agreed with these points.
Most significantly, the OECD also decided that the place where
computer equipment, such as a server, is located can amount to a
permanent establishment for a company, provided the purpose of the
server is significant and an essential part of its business. The UK
government disagrees with this part of the OECD’s decision.
Nevertheless, the decision can now be considered a tax rule in all
OECD countries except here. It is not a new tax law but simply an
agreement on how to interpret existing laws. So the effect of the
announcement is immediate.
The upshot of the OECD decision is that in most of Europe and
the US, but not in the UK, the location of a server which hosts a
web site is likely to lead to a tax liability in that country if it
takes orders from on-line customers or if it processes credit card
details. This is because these functions are likely to be essential
to the business activity.
John Salmon of OUT-LAW.COM said:
“If a business pays an internet service
provider to host its web site, it probably won’t be affected by the
OECD decision. But many internet businesses with large web sites
use their own servers or rent servers from third parties to host
the site. Internet service providers themselves should also take
note because it could affect them.
“There is now an incentive for any UK
business that owns or rents a web server overseas to relocate its
equipment in the UK if it would not otherwise go through the
expense and hassle of completing tax returns elsewhere.”
In today’s announcement, the only reference to the UK’s
differing position was a footnote by the Inland Revenue saying
that:
“The UK… stands by its point of view that in
no circumstances do servers, of themselves or together with web
sites, constitute permanent establishments of e-tailers. This view
will provide certainty on a complex issue on which business has
been consulted and fully supports.”
Further information is available on the OECD’s web
site
