UK Govt Says Websites Alone Should Not Attract Tax Under OECD Rules

Andrew Mair, Tax-news.com

18 April 2000

In an effort to kick start the international policy debate on internet taxation, the UK Treasury last week said that overseas companies that have e-commerce websites in the UK should not attract UK tax under the OECD's permanent establishment rules.

Speaking at a conference in Lisbon, the Director of the Inland Revenue's International Division, Gabs Makhlouf, said that the UK Government has taken the view that a web site or server of itself is not a permanent establishment under the OECD's model tax treaty, regardless of whether the server is owned, rented or otherwise at the disposal of the business.

Mr Mahhlouf also said that it is clearly the time for the debate to begin on this issue as businesses know where they stand in order to make investment decisions and calculate their tax liabilities.

"The OECD has been reviewing with the business community the long term future of the `permanent establishment' concept - the threshold in the OECD's model tax treaty below which a country will not tax non- residents carrying on a business in that country. This is crucial work. And it is important that it is carried out with due consideration, and in partnership between representatives of Government and business", Mr Mahhlouf explained. "Governments and businesses need an outcome that allows e-commerce to flourish, that keeps down compliance costs, and that is enforceable."

But the UK's statement was received with caution by the OECD, which is due to make its final determination on the tax status of e-commerce websites later this year. "I would see the UK statement as a way of trying to influence the direction the consensus should go, but I don't think one should necessarily assume it will move in the direction they would want," an OECD spokesman said.

The OECD recently published a 2nd draft of a consultation note clarifying the position on the status of web sites and servers which said that a non-resident business should only be taxable in a foreign country to the extent that it is carrying on business there through a permanent establishment, which it defines as "a fixed place of business through which the business of an enterprise is wholly or partly carried on".

The revised permanent establishment consultation note is available from OECD's web site: http://www.oecd.org/daf/fa/treaties/art5rev_3March.pdf

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