Server site becomes key to e-tax costs

By PETER GRIFFIN

Online businesses are being urged to look closely at the implications of moving their computer equipment overseas after an overhaul of OECD guidelines on the taxation of web sites and servers.

The OECD's committee on fiscal affairs last week ruled that a web site does not constitute a "permanent establishment" and is therefore not taxable, but a server could be if it is deemed an essential part of an online businesses' activities.

The decision means internet service providers or e-commerce providers with servers based overseas may have to file tax returns in the country where their equipment is based, even if the company does not base staff there.

Kathryn Roberts, a tax expert at PricewaterhouseCoopers, said the ruling should prompt New Zealand businesses to consider where they place their servers.

"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 explosion in growth of e-commerce has fuelled the debate as to how online trading should be taxed.

The identification of "permanent establishment" is the main criterion used in deciding a country's rights to tax an online business.

"The OECD decision is focused on jurisdictions for whom 'permanent establishment' is the relevant taxing concept," said Ms Roberts.

"This does not apply to most jurisdictions which have a source basis of taxation, for example Hong Kong."

Several New Zealand providers did not know of the OECD decision when contacted by the Herald, although several of them use servers based in other countries, mainly the United States.

But Glen Sowry, a spokesman for Telecom's internet service provider Xtra, says his company contracts out its server requirements to local partners in other regions, thereby avoiding foreign tax laws.

"The company doesn't purchase its own infrastructure overseas but works with partners who pay tax in their own countries," he said.

While the New Zealand Government has yet to clarify its position on the ruling, the OECD's decision does not need new legislation in member countries to become effective.

PricewaterhouseCoopers is advising its customers to keep the OECD decision in mind when making investment decisions.

It predicts a boost in server farms in overseas locations as businesses look to move their equipment to regions with more favourable tax rates.

Well-established tax havens such as those in the Caribbean and South Pacific are likely to become more attractive for locating servers as taxation issues threaten profitability.

Analysts point out that the OECD decision was reached through a majority vote of the organisation's 30 members and will leave scope for different national interpretations.

The British Government's lenient attitude towards taxing servers could make it an attractive site for online businesses to place their servers.