OECD Reaches Consensus On Taxation Of E-Commerce

Jason Gorringe, Tax-News.com, London

11 January 2001

The OECD's Committee on Fiscal Affairs has adopted some changes to the Commentary on its OECD Model Tax Convention as regards the definition of a permanent establishment in the context of e-commerce, as recommended by its Working Party No 1 on Tax Conventions and Related Questions.

Although the Working Party's changes are significant, and helpful, they have only temporary relevance, pending the report of the OECD's TAG (Technical Action Group) on Monitoring the Application of Existing Treaty Norms for the Taxation of Business Profits in the Conext of Electronic Commerce, and the report of Working Party No 6 on the Taxation of Multinational Enterprises, both of which address the more fundamental question of whether the 'permanent establishment' itself should be re-defined or even abolished in favour of a more modern and flexible approach to corporate taxation.

Anyway, Working Party No 1 has got in first, and with some disagreement from Spain and Portugal has reached the clear view that the hosting of a web-site does not create a permanent establishment for the enterprise that carries on business through the site, and that an ISP will not normally constitute a dependent agent of the remote enterprise, so as to constitute a permanent establishment.

However, the Working Party does not go so far as to say that a permanent establishment can't exist without human intervention, and allows the possibility that a sufficient complex of activities carried on through a server could amount to a permanent establishment. In its proposed amendments to the commentary on Article 5 of the Model Treaty, the Working Party goes deeply into the circumstances in which a server and associated software could constitute a permanent establishment, distinguishing between 'preparatory or auxiliary' activities and those which are more central to a company's business.

A company would be liable to tax if the server was performing functions that formed a core part of its business activity, such as downloading software from databases. The OECD has offered a limited exemption in cases where the server has no other function than to act as a conduit for information destined to be processed elsewhere.

The UK goes further, however, and states that a server or servers, with or without web-sites, never constitute a permanent establishment for an e-tailer.

The OECD said that the new rules and commentary would help standardise the approach taken by national tax authorities, some of which had raised questions on how to interpret tax treaties with other nations. 'What's crucial is the clarification,' said Jacques Sasseville, the head of the OECD's tax treaty unit. 'That's the one [point] that's really practical.'

The full text of the OECD's announcement is available in Tax-News Resources or at http://www.oecd.org/daf/fa/treaties/Clarif_e.pdf

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