21 – 27 February 2001

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OECD reaches e-commerce tax consensus
- overseas servers taxable, while web sites hosted abroad non-taxable

By David Lindsay

The Organisation for Economic Co-operation and Development (OECD) have been debating exactly how business conducted through the Internet should be taxed for a number of years.
Now, as a result of recent meetings, the OECD has reached a consensus on the hotly debated issue – potentially providing for a prime opportunity for Maltese ISP's, should they choose to capitalise on it.
The OECD has agreed that owning a server in an overseas country is a taxable presence, while having a web site is not.
Accordingly, a company will not be liable for tax in a country where a web site has been accessed and an e-tailer using an ISP will not be taxed for the arrangement.
In 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. The OECD, which includes representatives from 30 industrialised nations, have agreed that the location of a server in another country does constitute a "permanent establishment", but a number of countries, in particular the United Kingdom, disagree.
The meeting, first proposed at the Malta Meeting of Commonwealth Finance Ministers, was hastened by a controversial 1998 report on harmful taxation by the OECD that listed a number of countries as "tax havens" and "harmful preferential tax regimes" and threatened sanctions if they did not agree to adjust their tax structures.
Despite the consensus, experts suggest progress on the international standards for taxation of e-commerce is emerging slowly and in piecemeal fashion.
While recognising the significant progress made, it has been noted that deep divisions, not only between countries but within them, mean that some of the most important issues have still not been settled. And while the Europeans and the Americans wrangle, they run an increasing risk of losing not only the revenues but the industries as well.
Meanwhile, according to the British press, the United Kingdom Government disagrees with the decision to tax servers in other countries.
One recent article reports two issues of concern; the tax applicable "if a UK company's web site is run from hardware located overseas", and the decision to tax a company who locates a servers in another country.
"The upshot of the OECD decision", one paper reports, "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."
In fact, the Committee spent considerable time debating the question of tangible assets, arguing that a web site, "which is a combination of software and electronic data, does not in itself constitute tangible property. It therefore does not have a location that can constitute a place of business as there is no facility such as premises or, in certain instances, machinery or equipment as far as the software and data constituting that web site is concerned."
On the other hand, the server on which the web site is stored and through which it is accessible is a piece of equipment having a physical location and such location may thus constitute a "fixed place of business" of the enterprise that operates that server.
The committee added that a company using an ISP is not considered to operate at the location of the ISP. However, if the company has direct access to the server, the location of that server is considered a "place of business." In order to constitute a fixed place of business for the purpose of taxation, a server will need to be located at a certain place for a sufficient period of time.
Another dilemma for the committee was the issue of e-tailers. In that case, the enterprise is not in "the business of operating servers and the mere fact that it may do so at a given location is not enough to conclude that activities performed at that location are more than preparatory and auxiliary."
Many experts, meanwhile, agree that the fact that the OECD's decision does not need new legislation in member countries to become effective makes this an immediate issue for any business trading electronically.
However, the OECD realises that businesses aware of this rule will simply relocate their equipment elsewhere. This decision seems most likely to catch the uninformed and those who, for whatever reason, cannot move their servers.
Even for this latter group, there may be an escape route - as business will almost invariably not have a taxable presence if the web site is hosted by an ISP.

The Business Times, Network House, Vjal ir-Rihan San Gwann SGN 07
Tel: (356) 382741-3, 382745-6 | Fax: (356) 385075 | e-mail: editorial@networkpublications.com.mt