E-Commerce Taxation Not Developing Fast Enough Says IOD

by Caroline Maxwell, Tax-news.com, London

19 June 2001

According to the UK arm of the worldwide organisation, the Institute of Directors (IoD), the framework for the taxation of e-commerce is not being developed fast enough to keep up with the speed of its adoption in industry. Although the OECD reached a partial consensus in January of this year regarding the imposition of existing tax guidelines on e-commerce, they have been unable to reach a decision on a number of key aspects of e-commerce taxation.

The Director General of the IOD says: 'Tax authorities have to face up to the fact that a framework of taxation which was designed for older business models needs to be changed urgently,' he said. 'If they do not get their act together, they will simply be overtaken by events.'

The head of the Institute's policy unit, Richard Baron, is of a similar opinion, and believes that there are several ambiguous areas in the current legislation which need to be urgently addressed. Although the OECD has tackled the problem of defining a 'permanent establishment', the criterion used to decide whether a government can tax the profits of a company in that country, the mere availability of a website in a country does not constitute a permanent establishment there, and thus a company's taxation status can be blurred.

The advent of e-business has also thrown the rules governing company structure into disarray. In the past, disputes about a company's place of residence for taxation purposes have been settled by determining the location of the organisation's 'effective management'. However, where a firm is run cross-border, by executives who mainly liaise online, this tie-breaker criterion is no longer appropriate.

Ironically, Baron believes that it is the OECD's own structure that prevents it from moving decisively and quickly on the issue of e-commerce. 'The problem is that it's an organisation confined to governments, and as we all know, each government moves slowly; it's also a consensus organisation, so it has to wait until all the countries are in agreement,' he explained.

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