e-Tax: Permanent Establishment

Under the OECD model treaty, a permanent establishment or PE is defined as being a “fixed place of business through which the business of an enterprise is wholly or partly carried on”. Questions immediately arise as to:

* Can a computer server or web site be regarded as a fixed place of business given the technological possibilities of local caching, replication and proxy servers?
* Can a business be carried on via a server or a website in terms of automated order acceptance, processing and payment? What about the offer and acceptance aspects and ratification or conclusion of contracts?

On 11 April 2000 the UK Inland Revenue set out its guidance as to the tax status of web sites and servers. The UK takes the view that a web site of itself is not a PE. Also, a server is insufficient of itself to constitute a PE of a business that is conducting e-commerce through a web site on a server. For full report see www.nds.coi.gov.uk

In January 2001, the OECD published the outcome of discussions on the concept of PE for e-tailers. There is now broad agreement that:

1. A web site cannot, of itself, constitute a PE;
2. A web site hosting arrangement typically does not result in a PE for the enterprise that carries on business through that web site;
3. An ISP will not, except in very unusual circumstances, constitute a dependent agent of another enterprise so as to constitute a PE of that enterprise;
4. While a place where computer equipment, such as a server, is located may in certain circumstances constitute a PE, this requires that the functions performed at that place be significant as well as an essential or core part of the business activity of the enterprise.

Significantly, with regard to point 4 above, the UK continues to hold the view that in NO circumstances do servers, of themselves or together with web sites, constitute PEs of e-tailers.

This makes the UK as excellent jurisdiction, compared with other EU countries, for hosting e-tailing operations. Particularly in the case of retailing of digital products in the EU, it is more cost-effective to have a UK entity with a UK VAT registration than to try to comply with 27 Member States’ VAT rates and rules as would otherwise be required under the Special Scheme. (see article on Digital Services VAT Directive).

For other tax, VAT and commercial advantages of e-tailing from the UK and for detailed guidance on how to establish e-tailing operations in the UK as a springboard for Europe, a huge market of 450 million consumers, contact us.