Server Location Is An Absurd Basis For Tax'

Jason Gorringe, Tax-News.com, London

16 January 2001

The OECD's decision to recommend that the carrying out of a material transaction out on a server should create the presumption of a permanent establishment in the country where the server is based has quickly run into heavy flak.

In a letter to the Financial Times businessman Gregory Adams-Tait, writing from Spain, says that the use of the location of his company's three servers (which he himself isn't even sure about) to determine the basis of his company's taxation 'is an absurd concept that defies reality'. He says that his company is 'no more located in those places than it is located in France when our telephone conversations are routed through a cable that runs across that country.'

Mr Adams-Tait point is that the portability of servers is very great, and that such a rule as proposed by the OECD would quickly lead to clustering of servers in the lowest-tax areas, which would indeed be the contrary of what the OECD hopes to achieve. Mr Tait speculates that the proposed rules would encourage the development of sites that have no location at all: 'The attempt to treat a computer as being the location of a business is a huge mistake for governments . . . It would also stimulate the creation of websites that do not have a fixed location. We would see the rise of a Napster-style service that would move websites invisibly across computers that were virtually impossible to trace and a rise in false reporting automatically generated by the computers.'

Of course, the location of a transaction is one thing; it doesn't change the location of the company that carried out the transaction. The OECD would therefore say, OK, you can move your server, but you are still a British/Spanish/German company or whatever, and if you put your transactions in a place where there is no tax (eg Bermuda) then there is no tax treaty and you will simply pay corporation tax on the profits when they are repatriated to your home country.

Let's ask a typical company a question: if all your transactions are taking place on servers outside high-tax areas, then why would you want to remain based in Britain/Spain/Germany? Going to Bermuda may be a bit extreme, but the Isle of Man or Madeira or Liechtenstein are waiting for you.

The OECD's ideas are not as unworkable as some people are making out, but neither are they a satisfactory, let alone final solution to the problem, as even the OECD admits. It's a pity that these very partial proposals have been trumpeted as final conclusions when they are nothing of the sort.

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