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LINKS IN THIS SECTION

- Executive Summary
- US Sales and Use Taxes and E-commerce
- European Union VAT and E-commerce

RELATED SECTIONS

- Regulation of Offshore E-commerce
- Offshore E-commerce Facilities
- Offshore Professional and Financial Services
- Offshore E-commerce Applications

Corporation tax (income tax) is levied on the profits of an incorporated business. Some countries tax companies based on place of incorporation (legal establishment), but more usually tax applies to a 'permanent establishment'. As with individuals, the taxing country will normally attempt to tax a company's world-wide income once it has demonstrated permanent establishment. Income arising in other countries is often subjected to local withholding taxes before remittance; or of course it can easily happen that more than one country will assert permanent establishment, leading to double taxation. These situations are sorted out through the network of double taxation treaties which most high-tax countries have entered into.

IOFCs, International Offshore Financial Centres, often do not have double tax treaties, not least because they usually have very low or no corporation tax. Companies have often attempted to escape tax by earning profits in subsidiary companies in IOFCs and not remitting it to the mother company; however, almost all high-tax countries have anti-avoidance 'controlled foreign company' laws which attribute such income to the mother company.

Within this (highly over-simplified!) framework, what is the effect of e-commerce? Whereas previously, in order to trade in a country, it was necessary to have some or all of staff, an office, a warehouse, and means of delivery, these things can be to some degree avoided with e-commerce. A customer can inspect and buy goods or services on a company's Internet site, using money from an offshore account or an electronic credit card, and delivery of the goods can be outsourced to a third party. In fact, in most countries, a simple warehouse and delivery operation does not constitute a permanent establishment so that the outsourcing may not be necessary.

However, in 2005, Jersey and Guernsey fell foul of UK-based retailers, which objected to businesses such as Tesco, Amazon, Asda and Woolworths establishing warehouses and mail order operations on the islands in order to take advantage of the provision in European law which states that retailers operating outside of the European Union can sell products priced at under GBP18 to EU consumers free of VAT.

Both jurisdictions were obliged to clamp down on such activity in order to pacify the UK, with Jersey's Chief Minister Senator Frank Walker announcing that only UK retailers seeking to establish "legitimate operations", which employ islanders and pay Jersey taxes, will be permitted to locate mail order operations on the Island.

"The publicity we have received regarding this practice has been very unwelcome. It is a real concern - it has been damaging," he explained.

With regard to corporate income tax, the placing of the Internet server from which (on which, if you like) the e-commerce transaction happens, is probably important. Of course, the server can be anywhere, and specifically, it can be offshore.

The OECD in 2000 established a working party to study the question of web servers and the possibility of re-defining the concept of the permanent establishment. It conducted two rounds of consultation, and announced, in a December 2000 report entitled 'Clarification on the Application of the Permanent Establishment Definition in E-Commerce', that:

"As this document shows, the Committee has been able to reach a consensus on the various issues concerning the application of the current definition of permanent establishment in the context of ecommerce...This consensus includes the important views that a web site cannot, in itself, constitute a permanent establishment, that a web site hosting arrangement typically does not result in a permanent establishment for the enterprise that carries on business through that web site and that an ISP will not, except in very unusual circumstances, constitute a dependent agent of another enterprise so as to constitute a permanent establishment of that enterprise."

"However, Spain and Portugal do not consider that physical presence is a requirement for a permanent establishment to exist in the context of e-commerce, and therefore, they also consider that, in some circumstances, an enterprise carrying on business in a State through a web site could be treated as having a permanent establishment in that State."

As well as 'dematerialising' transactions to a certain extent, the Internet allows a company to have its various departments scattered almost anywhere, but permanently connected through the web. It will become increasingly difficult to say exactly where a company has its 'main' base, because it often won't have one. In an extreme case, a company can base itself entirely in one or more IOFCs, outsourcing all those elements of its business which require physicality.

Governments have, as e-commerce has continued to develop, expressed concern regarding their ability (or lack thereof) to collect tax on profits resulting from transactions which they can't see or measure, carried out by a companies which don't exist physically on their soil, and have attempted with varying degrees of success to legislate on this matter.

Of course, eventually a solution will be found to tax Internet transactions in a fair way, and it is no doubt correct that this should be the case; but while the search continues there are going to be multiple, completely legal ways for companies to take advantage of the confusion in order to reduce their tax bills, provided that they are nor starting from a position of being firmly rooted in a high tax country.

Some of these are explored in other parts of this section. See Offshore E-commerce Applications in particular.

LINKS IN THIS SECTION

- Executive Summary - A quick overview of major developments in the taxation of E-commerce with special reference to offshore e-commerce.
- US Sales and Use Taxes and E-commerce - US taxation of onshore and offshore e-commerce transactions including recent legislative developments.
- European Union VAT and E-commerce - EU taxation of onshore and offshore e-commerce transactions including recent legislative developments.


 

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