On-line businesses can no longer afford to ignore the tax consequences of where they locate their equipment says PricewaterhouseCoopers following the recent announcement from the Organisation Economic Co-operation and Development OECD on the taxation of websites and servers. The announcement means that many businesses could face the prospect of completing tax returns and paying tax in countries where they did not expect to do so.
Bernard du Plessis, Partner in the e-business tax team at PricewaterhouseCoopers said:
"Deciding whether the presence of a website or server in another country results in a taxable presence is a serious issue for any on-line business. The fact that the OECD`s decision does not need new legislation in member countries to become effective makes this an immediate issue for any business trading electronically.
"The good news for business is that the consensus finally reached by the 30 member countries of the OECD does give some much needed clarity in this area (see note to editor 1). The bad news is that the consensus says that if a business sells its products from a website on a server that it owns or rents in another country it could have a taxable presence in that country (see note to editor 2). Having a taxable presence means filling in a tax return and potentially receiving a tax bill.
"Any business that sells or is planning to sell online must now think very carefully about the tax consequences of whether or not it wants to own or rent its servers and, if so, where they should be located. The consensus reached by the OECD also makes clear that web-based service providers, such as Internet Service Providers (ISPs), who use servers in other countries to provide services such as web site hosting will be viewed as having a taxable presence where their servers are located."
The guidelines come at an appropriate time when South Africa is also considering the implications of electronic commerce on taxation. Comments have been requested on the Green Paper on Electronic Commerce issued last year, which also includes a section on the taxation of e-commerce in South Africa.
Says Du Plessis: "Given the expertise, effort and considerable time that went into reaching agreement on the guidelines issued by the OECD it is essential that South Africa take cognisance of the guidelines in formulating its own country policy on taxation. This will ensure compatibility of South African provisions with developing international policy and will be an enhancement of the efficiency of the newly introduced residence basis of taxation in an electronic business environment. This will also help to protect the South African tax basis in an increasingly electronic business world."
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1. The OECD Committee on Fiscal Affairs noted that the new commentary interprets the current model income tax treaty, but that it expects to receive recommendations from a business-government Technical Advisory Group (TAG) regarding whether the existing rules for determining taxable presence should be modified or, in fact, abandoned.
2. The consensus reached by the OECD means that if a business conducts an essential and significant part of the business activity through a server it owns or controls, rather than mere preparatory and auxiliary activities, the server may create a taxable presence even if no personnel of the enterprise are required at the server`s location
3. PricewaterhouseCoopers (www.pwcglobal.com) is the world`s largest professional services organisation. Drawing on the knowledge and skills of more than 150,000 people in 150 countries, we help our clients solve complex business problems and measurably enhance their ability to build value, manage risk and improve performance in an Internet-enabled world. PricewaterhouseCoopers refers to the member firms of the worldwide PricewaterhouseCoopers organisation.