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Exporters Using E-Commerce Face Tax Risks

Jason Gorringe, Tax-news.com, London

01 June 2000

Writing in the Financial Times today, London barrister Jonathan Schwartz reviews the state of tax law as it applies to e-commerce sales.

The article considers whether the location of a server can create a permanent establishment, and hence on its own lead to corporation tax being assessed on e-commerce sales to a foreign country. The UK has followed the US in stating that the mere location of a server is not enough to create a liability to tax; however the OECD is still considering the issue, while some other countries have taken the opposite view. Therefore exporters from the UK need to be careful where they site overseas servers or mirror sites, lest the profits associated with the sales they serviceshould be taxed in the foreign jurisdiction concerned. The tax may be fully or partly recoverable through double tax treaties, but there is considerable administrative hassle involved.

Another danger for any company selling digital goods (music, software etc) into foreign jurisdictions is that some of them impose withholding taxes on payments made for intellectual property rights, which may well catch such sales. If they are made to individuals, it is not practicable to impose the tax, but foreign corporate customers may well be obliged to withhold, and many double tax treaties give only partial relief for such taxes.

Sales of digital goods made by an EU company within the EU will be treated for VAT purposes as a supply of services, which may impose considerable administrative burdens; e-commerce sales of tangible goods are treated in a similar way to existing mail-order sales and if they reach a certain, quite low limit in a particular member state will require local VAT registration.

In order to minimise problems with corporation tax and VAT, many companies are beginning to realise that it can pay to establish part or all of a e-commerce operation in a low-tax jurisdiction.

Although 'Controlled Foreign Company' legislation may reduce the tax savings, there are still many possibilities.

See the E-Commerce section of www.lowtax.net for an extensive analysis with case studies of how companies can take advantage of offshore jurisdictions in this way.

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