OECD continues clarifying e-commerce taxation

The Organization for Economic Cooperation and Development (OECD), a grouping of the world’s advanced economies, is continuing work to untangle the thorny questions surrounding taxation of cross-border electronic commerce transactions.

“We’re taking the issue seriously; it is one of the top four projects that we’re looking at, so we have quite a lot of resources devoted to examining the issues,” said David Partington, principal administrator for the OECD’s tax treaty unit.

Member countries of the OECD’s Committee on Fiscal Affairs agreed this week to a series of guidelines on how to apply existing tax treaties to Web transactions.

Among other provisions, the committee agreed that a Web site does not in itself constitute a permanent business establishment for tax purposes. The location of an Internet service provider (ISP) does not, except in “very unusual circumstances,” place a business using that ISP under the host country’s tax jurisdiction.

“While a place where computer equipment, such as a server, is located 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 enterprise,” the OECD said in a statement.

Worldwide, there are about 1,500 tax treaties, which allocate rights to tax business that takes place in more than one country. Both OECD member states and non-member states rely on the OECD Model Tax Convention, first published in 1963, to help negotiate and interpret those treaties.

The Model Tax Convention was last updated in April 2000 and is due for another update in two to three years, said Partington, but added that interim agreements are usually applied almost immediately. “For the time being the report is out there, so countries can take account of that when applying tax treaties. When courts are making a decision on an issue relevant there, they will look to the proposed changes to the commentary.”

Member states are not required to adopt every provision worked out by the OECD committee, and some have expressed concerns with certain items. Spain and Portugal, for example, have said they do not consider physical presence in a country to be a requirement for the existence of a permanent establishment, so that under some cases a company conducting business in a country via a Web site could be considered to be established in that country for tax purposes.

The U.K., on the other hand, insists that under no circumstances do servers or Web sites constitute a permanent establishment, and objects to the room for exceptions carved out in the report.

Observers said much work remains to be done to clarify e-commerce tax issues.

“Regulations in general around e-commerce are still pretty vague, or it’s not defined as to how much (existing rules) apply to the Internet,” said e-commerce analyst Abigail Leland of Forrester Research BV in Amsterdam. “I think we’re still a long way away from having any real clarity, but that’s not stopping most retailers today, because interpretation of law is a pretty subjective thing in the end, and what these companies are doing today is that they’re forging ahead with a reasonable assessment of what the risks are, until the regulations do become clearer.”

The OECD will further examine e-commerce taxation, along with issues such as security, privacy, content, and intellectual property rights, at a forum on Jan. 16 to 17 in Dubai, United Arab Emirates. The purpose of the forum, which focuses on emerging market economies, is “to help governments and the private sector create a favorable and coherent environment for global e-commerce,” the organization said.

The OECD, in Paris, can be reached at http://www.oecd.org/.

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