IN THIS SECTION
- European Union VAT
- Corporation Tax and
of Offshore E-commerce
Professional and Financial Services
Offshore E-commerce Applications
US and Canada are the main sales tax jurisdictions.
The operation of such consumption taxes depends
heavily on the ability of the taxing authority
to find traces or records of transactions, thus
motivating taxpayers to comply with the law
because of the near-certainty that they will
be found out if they don't. It is obvious that
once an individual consumer can buy and receive
digital but taxable goods or services through
the Internet, then it is going to be hard to
collect tax if the seller is outside the tax
taxing authority won't know and can't know about
the transaction unless the consumer chooses
to tell them, which history says is not likely!
supply of goods ordered and paid for from a
distant seller and requiring physical delivery
within the taxing jurisdiction is a simpler
case, because a cross-border transit is necessary.
The supply is taxable only when there is nexus,
and even then enforcement can be patchy; but
Internet sales of this type are no different
from existing mail-order catalogue sales.
traders within the US who obey local tax laws,
the Internet has been an almost tax-free zone
because of the moratorium on Internet access
taxes and the ban on taxation of inter-state
supplies of products and services where there
the supplier has no taxable 'nexus' in the destination
state, something which previously only benefited
President Bush had expressed his support for
a permanent extension of the moratorium on Internet
access taxes, the chances of a compromise being
reached in the Senate over the issue seemed
unlikely at the end of 2003. The House of Representatives
had passed legislation extending the moratorium
on a permanent basis to all forms of internet
access, and removing the grandfather clause
contained within the temporary moratorium which
allowed the 10 states which began to levy taxes
on internet access prior to the enactment of
the moratorium to continue to do so, but a similar
bill stalled in the Senate over concerns about
the potential cost to state authorities.
Lamar Alexander (R-Tennessee), one of the main
opponents of the Senate bill, which was sponsored
by Senators Ron Wyden (D-Oregon) and George
Allen (R-Virginia), had put forward proposals
whereby the language of the lapsed temporary
moratorium would be extended by two years, and
would be changed to cover DSL internet connections.
However, the grandfather clause allowing his
and other states to collect internet access
taxes would have remained.
stand-off continued in 2004, and by mid-year
is still seemed that an extension of the moratorium
would be hard to achieve. The same applied to
the attempt to repeal the ban on sales taxes
on interstate supplies, which the states hoped
would be accepted by Congress in response to
the SSUTA initiative to create a harmonised
sales tax regime. By July, 2004, 46 states had
joined the initiative, and most were working
to bring their laws into compliance with SSUTA's
standardized regime. Once states representing
20% of the population are fully in compliance,
the initiative will come into force, something
that happened in 2005.
November, however, in a 'lame duck' session
of Congress, the Senate voted unanimously to
extend the moratorium on the taxation of internet
access for four years. Under the legislation,
local and state governments are restricted from
levying taxes on internet access services, including
broadband and wireless services.
other services such as internet mobile phones
remain outside of the legislation’s remit,
as will the sale of goods and services made
over the internet. Expanded provisions covering
high speed broadband services had initially
sparked fears from local officials that their
ability to collect taxes at the local level
would be severely curtailed, although a last
minute provision allowing them to continue assessing
existing telephone taxes assuaged these fears
House followed the Senate, and in December,
2004, George W. Bush signed the bill into law.
The moratorium will be in place until November
1 2007, and is also retroactive to cover the
year of 2003, during which the previous moratorium
had lapsed. In fact, the states had by and large
refrained from imposing new access taxes during
move was welcomed by internet service providers
such as America Online and Time Warner, as well
as by representatives of the telecommunications
industry. “With forward-looking policies
that encourage real competition, like the Internet
tax moratorium, consumers and the nation’s
economy will benefit from increased investment
and innovation in the telecom sector,”
enthused Walter B. McCormick, Jr., President
and CEO of the United States Telecom Association,
shortly after Mr Bush signed the bill.
not everyone was happy with the access tax ban
on internet services, especially municipal and
state governments, which were particularly upset
over the expanded provisions covering broadband
response of the states to losses of sales tax
revenue on Internet commerce was to band together
in the Streamlined Sales Tax Project (SSTP),
which resulted in the Streamlined Sales and
Use Tax Agreement (SSUTA).
the SSUTA, states are required to establish
uniform definitions for taxable goods and services,
and maintain a single statewide tax rate for
each type of product. The project also seeks
to simplify tax reporting requirements for online
US states had passed legislation to join the
SSTP (Streamlined Sales Tax Program) by March
2005, with a further ten states well ahead in
the legislative process, and virtually all states
having announced their agreement in principle.
July, 2005, the SSTP made further progress when
tax officials, state lawmakers and industry
representatives agreed to establish an 18-state
network for collecting taxes on internet sales
in a deal that they hoped would encourage online
retailers and Congress to adopt the national
online sales tax framework.
vote is a culmination of over five years of
hard work by states, local governments and businesses
interested in seeing the complexity in sales
tax [reduced]," noted Stephen Kranz, tax
counsel for industry trade association the Council
on State Taxation.
a result of the agreement, software vendors
contracted by the Streamlined Sales Tax Project
began on October 1 of that year to provide free
tax collection and remittance software and services
to online merchants who had voluntarily agreed
to collect taxes on all online sales on behalf
of the 18 participating states.
June, 2006, meanwhile, the United States House
Judiciary Committee approved legislation which
aimed to simplify the application of business
taxes across state lines.
Business Activity Tax Simplification Act sought
to resolve the issue of states seeking to collect
business activity taxes from businesses headquartered
in other states by setting out specific guidelines
for when an out-of-state business may be charged
a tax for doing business in a state.
US Taxation of Foreign E-commerce
regards international transactions, the existing
rules are clear about sales of physical products
delivered in the United States: if the seller
is in a country with which the United States
has a double tax treaty (almost all high-tax
countries) then there is no sales tax unless
the company has a "permanent establishment"
in the United States; for other countries (including
almost all offshore jurisdictions) products
are taxed on arrival if the sale is "effectively
connected with the conduct of a US trade or
is little certainty about the effect of current
US legislation on the taxation of sales made
from non-US web-sites. Some indications given
here are not definitive answers, and any trader
should seek professional advice relevant to
their own particular situation.
location of the server in or on or with which
a contract was concluded has an uncertain impact
on taxability. It is thought unlikely that a
server based in the US constitutes a 'permanent
establishment', but sellers are well-advised
to avoid such if possible. Even if the server
is not a problem, the server's host might be
an 'agent', who can be deemed a 'permanent establishment'.
A host who also provided transaction-processing,
support and marketing functions would probably
cross the line into being a permanent establishment,
especially if the host does not have many clients.
is also unlikely that the positioning of a server
in an offshore jurisdiction by a "treaty
country" business would change the origin
of the sale, but no one knows for sure. By the
same token, it is unlikely that an offshore
(non-treaty) company could avoid taxability
by using a server in a high-tax (treaty) country.
for physical products, the conclusion seems
to be that e-commerce doesn't really change
much, unless a company moves from a treaty to
a non-treaty country. Usually this would happen
in order to gain corporation tax benefit and
that benefit would have to be set against the
taxability of US B2B sales.
digital products other than software there is
the additional difficulty that it is not clear
what is being sold. The rules for software say
that it is delivered where it is downloaded,
and taxed accordingly, as if it was a physical
product. Other types of download may be treated
equivalently to software, but may instead be
treated as generating royalty income, which
would be taxable regardless of whether or not
there is a permanent establishment in the US.
There are as yet no rules. The normal rate of
tax (to be withheld by the US buyer) would be
30% on royalties, which could be partly reclaimed
by the seller if in a treaty jurisdiction. But
it seems most improbable that a private buyer
of, say, recorded music in the US is going to
deduct and remit tax on purchases from a remote
vendor, and only slightly less improbable that
a business would do it unless they are buying
on a large and noticeable scale.
problem for a business selling downloadable
products into the United States, and not needing
to allow for tax as things stand, is evidently
that retrospective legislation may make it liable
for large amounts of tax on past transactions.
Businesses will have to make their own decisions
about what to do. For a small business with
occasional US sales, the danger can probably
be disregarded, but for a larger business with
a substantial Internet trade in the European
Union, there is a real chance that the IRS will
come after them one day.
IN THIS SECTION
Summary - A quick overview of major developments
in the taxation of E-commerce with special reference
to offshore e-commerce.
- European Union VAT
and E-commerce - EU taxation of onshore
and offshore e-commerce transactions including
recent legislative developments.
- Corporation Tax and
E-commerce - The impact of corporate taxes
(income or corporation tax) on the profits of
e-commerce, the location of servers and business
units onshore and offshore.