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OECD Proposes New Web Server Tax Rules

21 October 1999

An OECD working group has issued draft recommendations on the important issue of whether a web server located in another country will attract income tax for the company in that country. The group considered the question of whether the presence of a Web server in a country constitutes a "permanent establishment" under the OEDC's Model Tax Convention, particularly in relation to web hosting and agents, making the important distinction between the location of computer equipment in a country and web sites involving data and software only. They concluded that a Permanent Establishment exists only where the equipment use to host the web site is owned or rented by the company and that web hosting alone does not constitute a Permanent Establishment unless the hosting company is owned by, or is an agent of, the company owning the web site. Under the recommendations, a company resident in one country cannot be subject to income tax on business profits earned in a second country when there is an OECD-model tax treaty between the two countries unless the company has a Permanent Establishment in the second country. The group did not, however, address the issue of taxation where there is no tax treaty between the two countries, and or the proportion of income to be attributed to e-commerce transactions where it has been established that a Web server constitutes a Permanent Establishment. The OECD's Model Tax Treaty (Convention) is the basis of most international tax treaties. Although the US does not use the OECD Convention, many of the articles in U.S. tax treaties are substantially similar and US courts have in the past referred to OCED Commentaries on the Convention in interpreting tax treaties between the United States and other countries. The draft recommendations have been issued by the OECD for comment by tax professionals and can be read at


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