Back to basics: online tax in the UK

This week, why the UK isn't such a bad place to do ecommerce after all

As a brave new world of ecommerce emerges, an interesting fiscal challenge faces governments: how should they view the status of websites and servers? It's a crucial question for any government interested in encouraging companies to set-up operations within their borders.

Some European countries, including the UK, have clarified their positions. With ecommerce in Europe already worth E17bn (£10.5bn)- a figure that's predicted to rise to E340bn (£210bn) by 2003 - the potential revenue stream from taxation is enormous.

The UK and other countries frequently enter into double tax treaties, which aim to protect companies from being taxed twice on the same profits, and to provide consistency for cross-border activity.

Many double tax treaties contain a concept called 'permanent establishment'. Broadly speaking, this is a fixed place of business through which an enterprise operates. With old economy businesses, these places have included places of management, branches, offices, factories, workshops and even places where mineral resources are extracted.

The golden rule is that the profits of an enterprise of one country shall only be taxed in that country unless the enterprise also carries on business in another country through a permanent establishment there.

But how does that apply to web servers? In April this year, the UK Inland Revenue (IR) set out its views on the tax status of websites and servers. The director of the IR's international division, Gabs Makhlouf, said at a conference in Lisbon: "The OECD has been reviewing with the business community the long term future of the 'permanent establishment' concept - the threshold in the OECD's model tax treaty below which a country will not tax non-residents carrying on a business in that country.

'Permanent establishment' is a long-standing concept. It is tried and tested. And it is widely supported. As yet, we do not know enough about how ecommerce will develop for anyone to make reasoned decisions on whether or not to move away from it. But now is clearly the time for the debate to begin.

"In the UK, we take the view that a website of itself is not a permanent establishment," Makhlouf added. "And we take the view that a server is insufficient of itself to constitute a permanent establishment of a business that is conducting ecommerce through a website on the server. We take that view regardless of whether the server is owned, rented or otherwise at the disposal of the business."

This makes it clear that merely owning, renting or using a server in the UK does not constitute permanent establishment.

Non-UK companies which sign up to a UK ISP to host their website, but have no other UK connection, do not, therefore, set themselves up as having a permanent establishment in the UK.

What additional UK connection is allowed before there is a permanent establishment is, unfortunately, still unclear.

It should be noted that there are differing views among OECD member countries on whether a server may be a permanent establishment. The view has been expressed, for example, that a server can be a permanent establishment if it is fixed.

From the viewpoint of a non-UK company conducting ebusiness, therefore, the UK has adopted a stance that, in most cases, should prove beneficial.