E-Commerce Tax Planning
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Connecting with E-Commerce
E-commerce continues to change all parts of a business's supply chain from procurement, research and development, to manufacturing, distribution and sales. But unwitting tax exposure may be created and equally costly efficiency opportunities may be lost if the implications of any change are not considered properly. For a multinational group, the opportunities and advantages produced by new business patterns can be significant. For example:
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The greater connectivity offered by e-commerce allows for manufacturing and distribution arrangements to be made more tax efficient.
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Shared service centers, contract research and development, etc., also offer significant tax savings opportunities.
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There is often considerable flexibility in locating servers, web sites, call centers, etc., to minimize taxation burdens at point of sale.
Tax planning structures that take advantage of these mechanisms are considerably more robust when aligned to and complementing an evolving business model. model. Thomas Borstell Borstell (Germany), (Germany), Hanspeter Kurz (Switzerland) Kurz (Switzerland) and John Dixon Dixon (UK) look at the main issues in this constantly evolving area. area. When a business trades across borders and sells goods or services over the Internet, in what circumstances can the country in which the customer is located levy taxes on the profits of the supplier of those goods and services?
Double tax agreements (DTAs) based on the OECD model will provide that a business conducted by a resident one jurisdiction should only be subject to tax in the other jurisdiction to the extent that it trades in This website stores dataofsuch as thatessential jurisdiction through a permanent establishment (P/E). Put another way; in what circumstances can it be cookies to enable site functionality, asargued well asthat marketing, a P/E is created when sales are made electronically? personalization, and analytics. You may change your settings at any time What's a "fixed place of business"? The difficulty here is that with the exception of certain agency or accept the default settings. relationships the definition of P/E in OECD model-based DTAs traditionally focuses on the concept of a
"fixed place of business". There are some obvious problems in seeking to consider whether a trader creates
Privacy Policy a fixed place of business when it trades electronically. Marketing This is an important issue that goes to the root of international norms relating to the taxation of cross border business. Countries that are net importers of goods and services have cause for concern as they may find Personalization that tax revenues fall as the tax base is eroded by e-commerce. The flexible manner in which an e-
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commerce trade can be organized and the lack of substance or infrastructure that needs to be established in
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the jurisdiction of the customer in order to ensure that a sale occurs means that any "solution" to avoid or
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lessen base erosion will be arbitrary at best and will not necessarily find favor with net exporting countries such as the US. The German view. Even though governments have largely delegated the task of deciding on an approach to the OECD, in reality the need for decisions is overtaking the debate. Continued... Continued... For example, the German definition of a permanent establishment is laid down in S12 of the German Fiscal Code, and is broadly similar to the definition given in Art. 5 of the OECD Model Treaty. There is at least one difference: Under the German tax code, a permanent establishment is also considered to exist if the activities performed are of an auxiliary or preparatory nature. In practice, however, the definition in the relevant DTA would take precedence. Is e-commerce "permanent"? The German authorities have not published final regulations on whether ecommerce activities constitute constitute a permanent establishment. But in 1998 a regional tax authority published a specific ruling dealing with the question of whether the installation of a server constitutes a permanent establishment . The case concerned an offline structure in which the activities were restricted to advertising, providing communications links and for information purposes. The authorities decided that the server did not qualify as a permanent establishment in the sense of Art. 5 of the OECD Model Treaty, but the activities were "preparatory and auxiliary" according to Art. 5 (4), so under domestic legislation a permanent establishment would exist. Even before this case, the German supreme tax court decided (in what is known as the "pipeline decision" of 1996) that a permanent establishment might be constituted if the business is carried on with automatic equipment that does not require human intervention. intervention. It follows from this case that a server, which works automatically, might also be considered as a permanent establishment if the functions carried out on this server are "core functions" of the enterprise. The concept of residency. Another matter of concern is the concept of residency. With increased use of email and video conferencing, it is often proving difficult to determine where a company is controlled and managed. This concept is used by a number of jurisdictions in a variety of guises to determine where a company is resident for tax purposes and the concept of "effective management" is also used in DTAs based on the OECD Model to determine where a company is resident for treaty purposes.
This website stores data such as cookies to enable essential site Characterizing Income Income functionality, as well as marketing, personalization, and analytics. You Where digitized product may change your settings at any time such as software is "sold" over the net, what is the tax treatment of the transaction? In particular: Is it a sale, or license or service? or accept the default settings. Despite the fact that the legal form of the transaction may be viewed as a license because rights to some
Privacy Policy intellectual property are retained by the supplier, in economic terms the transaction may be more akin to a sale. The problem is compounded if a bundle of items are delivered. Marketing
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The potential of double taxation. The difficulty here is that the direct tax profile of the transaction can
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change dramatically depending on how the transaction is viewed. This can give rise to the potential of double taxation: What if the jurisdiction of the customer classifies the transaction as a license and requires a
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withholding tax on gross royalties, yet the country of residency of the supplier views the transaction as a sale? For instance, the payments derived from e-commerce activities might be qualified under the German tax code as trading income, rental income (license) or other income. Specific regulations concerning ecommerce activities do not exist yet. The "satellite case." However, last year, the German supreme tax court decided the so-called "satellite case," in which a German television company engaged a foreign satellite operator to transmit its programming to German TV viewers. Both parties agreed that the operator should work with a specific satellite-transponder. The issue in this case was whether the television company's payment to the foreign satellite operator was trading, rental or other income. The German tax court decided that it qualified as trade income, because the main content of the agreement between both parties was to guarantee that viewers could receive the TV company's programs and not the right to use the equipment of the satellite operator. Application of VAT. As always, from a VAT point of view, the critical distinction is between the provision of goods and the provision of service, with most of the difficulties relating to the latter. As far as the provision of services is concerned, the "place of supply" determines the application of VAT. There is no uniform rule for all services. Where the place of supply is the jurisdiction of the customer, business-to-business transactions are dealt with under the "reverse charge" by which the customer effectively accounts for VAT. In the business-toconsumer area, however, the potential for VAT leakage occurs. Recently, the UK's Customs and Excise succinctly described the problem, as follows: "In contrast to goods that cross borders physically and can be identified easily, digitized products can be bought and sold acros across s borders without any obvious indicat indication ion of a transaction having taken place. For businesses that are required to keep books and records, and where the government has a right of audit, this does not present obstacles. On the other hand, sales from mother countries to private consumers can cause problems. It is important to find simple and effec effective tive ways in which VAT c can an be self
This website stores data such as assessed and collected on digitized products." cookies to enable essential site functionality, as well as marketing, requirements. personalization,Formal and analytics. You From a VAT perspective, great care needs to be taken that the formal requirements of invoicing import/export documents are fulfilled; in most cases, this necessitates physical paperwork— may change your settings and at any time or accept the default even ifsettings. all of the information flows, the invoicing and the payments are electronic.
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Not everything changes because of e-commerce, however. Companies should not lose sight of the straightforward planning issues that affect any structure. For example, a group might consider Switzerland
as a location for a profitable venture. In many cases, it may be possible and very advantageous to get a Marketing ruling for taxation according to a privileged tax status (domiciliary or mixed company), resulting in an
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effective tax rate of between 8% and 10% on income from non-Swiss sources.
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The availability of these tax privileges makes Switzerland a very attractive place to locate an e-business operation. But in the start-up phase, most e-business ventures result in losses that may be substantial. Since the loss carry-forward period in Switzerland is restricted to seven years, loss planning becomes a critical task and it is important that the opportunities offered by the Swiss tax laws regarding capitalization and depreciation are seized at the optimum moment.
Interaction with Customers and Suppliers: Transfer Pricing Pricing One area in which e-commerce is clearly changing is how companies interact with customers and suppliers. This has a knock-on effect on the business processes within the company: Electronic order acceptance has implications for where and how contracts with customers are concluded. concluded. Many sales contracts once concluded locally will be made through a centralized on-line ordering facility that can be located almost anywhere, with little or no human intervention. Order fulfillment is changing too, in response to heightened customer expectations arising from electronic ordering. This calls into question the role of the local sales subsidiary, which once made sales in the local market and probably acted either as a buy-sell distributor or possibly a commissionaire. Today, there is a trend for it to act increasingly as a service provider—and, frequently, it will not be necessary or desirable for it to participate directly in making sales. The rise of intranets. The development and use of intranets between affiliated companies has resulted in a growing trend: greater collaboration between group members on the production and sale of a particular good or service. This potentially puts further pressure on transfer pricing methodology and the objective of remunerating group members on an "arm's length" basis. In many cases, it becomes increasingly difficult to measure the contribution by separate parts of a global business in "traditional arm's length" terms, as comparables are often not available. "Profit split" method. Under these circumstances, sometimes as a matter of expediency, "profit split" methods increasingly come into consideration. Unfortunately, this increases the risk of disagreement between jurisdictions, not only to the use of a profit split method but also regarding the factors to be applied in determining an allocation of profits. Certain jurisdictions are noticeably more antagonistic to profit split
This website stores data such as approaches than others. cookies to enable essential site functionality, as well as marketing, theanalytics. procurement personalization,On and Youside, a huge amount of purchases will be made on-line in future, often through electronic or markets. On-line auctions are delivering huge price reductions and are bound to may change your settingsexchanges at any time or accept the default settings. grow rapidly. These new electronic purchasing tools profoundly affect how companies plan and execute their procurement strategies.
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Tax directors need to participate in the development of these new processes and tools. There is a window of
opportunity to structure these processes in a tax efficient way and to ensure that new tangible and intangible Marketing assets that are created are owned and exploited tax efficiently.
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This website stores data such as cookies to enable essential site functionality, as well as marketing, personalization, and analytics. You may change your settings at any time or accept the default settings.
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