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On Thursday, November 15th, the U.S. Senate finally acted to extend the moratorium safeguarding against
discretionary taxation of the Internet and Internet access for two years.
The Senate had failed
to act in October, allowing the moratorium to expire. This was not as a result of the very serious anthrax
scare, but as a result of 18-month long foot-dragging of three Senators: Majority Leader Tom Daschle,
Senator Byron Dorgan and Senator Ron Wyden.
These Senators chose to ignore Americans, whom according
to a recent Zogby poll, oppose Congressional consideration of a law which would force Internet merchants to
begin collecting sales tax by 66%.
After much pressure, they finally listened and voted to extend the
measure. President Bush signed the bill on November 28, 2001.
On November 15th, the US Senate
finally moved to extend the Internet moratorium for a period of two years, after their previous inaction
allowed for its expiration.
On October 16th, the U.S. House of Representatives voted to approve
HR 1552, which will extend the current moratorium against Internet taxation for two years. President Bush
signed the moratorium into law on November 28, 2001.
For anti-Internet tax advocates, this is a hollow
victory as the House should have made the moratorium permanent, as you and I and even President Bush have
advocated.
While it is certainly not the outcome that we desired, it nonetheless prevents the 7,600
taxing bodies across America from imposing taxes on the Internet for a period of two years.
You can
rest assured that like the previous three years, the next two will be full of debate.
By: David Hardesty, December 16, 2001
The European Council of Economics and Finance Ministers
(ECOFIN) took an important step toward final approval of new laws that would require non-European
companies to collect value added tax (VAT) on sales of digital products to EU consumers. ECOFIN agreed last
week on the broad outlines of a plan to impose VAT on e-commerce; and scheduled a vote on detailed rules for
next February. Under the plan approved by the Council, non-EU sellers would register in one of the 15 member
states of the European Union, but collect tax based on the actual locations of customers.
ECOFIN gave
its okay to draft detailed plans at a December 13 meeting in Brussels. The Council agreed to accept the
e-commerce VAT proposal, as it was submitted in June 2000, but with important changes. (To review the
provisions of the June 2000 proposal, see Europe Proposes New Taxes on Non-EU Sellers ).
Under the
agreed-to plan, non-EU sellers of digital products (software, video, music, books, and entertainment) would
be required to collect VAT on sales to European customers, once their sales reach a certain threshold. However,
they would be required to collect VAT only on sales to non-business customers.
The original proposal
would have allowed non-EU sellers to register in only one EU member state, and collect VAT at that country’s
rate. Under the plan approved on December 13, sellers would still register in only one state, but would collect
tax based on the rates for the countries in which its customers reside. The VAT revenue would be re-allocated
from the country of registration to the country of the customer.
In addition, the plan calls for the
removal of the current requirement that European sellers collect VAT on exports of digital products. Right now,
these sellers must collect VAT if they sell from a European business location, even if their customers are
located outside the EU.
The e-tax plan is by no means final, and there is no certainty it will ever be
put into place. Many technical details must be worked out by those drafting the new legislation, and the ministers
of all 15 EU-member states must approve the legislation before it is effective. Some states may not like what
they see when it comes to a final vote. The United Kingdom, for instance, has been reluctant to go along with
plans to tax e-commerce.
In addition, the Europeans must deal with a U.S. Congress that has been hostile
to plans to collect VAT on e-commerce. (U.S. sellers of digital products are the primary targets of the proposed
rules.) Obviously, the Europeans can adopt and attempt to enforce any laws they feel are appropriate; but, the
ministers will certainly want to avoid overburdening U.S. vendors, and sparking U.S. retaliation.
Elaine X. Grant, NewsFactor.com
February 15, 2002
European companies could charge a flat tax rate
for all purchases made by European customers, while non-EU companies would have to determine each buyer’s
location first.
An agreement over value-added tax (VAT) reached this week by the European Union (EU)
could cause trouble for U.S. Internet companies and international trade, according to a report by Gartner.
The proposal could be “a significant problem” for U.S. e-tailers, Gartner analyst French Caldwell told the
E-Commerce Times.
It also could cause international conflict. Gartner previously has predicted that
differences between EU and U.S. tax laws will become a major source of friction in international trade by 2003.
In a report released Thursday, the research firm said, “The EU’s decision to move forward with its proposals
raises the probability.”
Digital Disadvantage
The plan calls for all non-EU companies to start
charging European residents sales tax on digital products like music and software downloads. Similar products
sold by EU-based companies are already taxed, as are goods like books and CDs.
The problem, as the United
States sees it, is that while EU companies charge tax based on where their headquarters is located, U.S. companies
would be required to charge tax based on where the buyer lives.
That means European companies could charge
a flat tax rate for all purchases made by European customers, while U.S. and other non-EU companies would have
to determine where each buyer resides before calculating tax. Such a process would place a significant administrative
and technological burden on U.S. e-tailers.
U.S. Concerns
U.S.-based Web retailers worry that they
may have to charge more tax than a European e-tailer, even to the same customer.
“Customers in like
situations should be taxed alike,” Margaret Dawson, international spokesperson for Amazon.com (Nasdaq: AMZN),
told the E-Commerce Times. “There shouldn’t be a variance in how customers are treated.”
If the directive
is approved, Dawson said, Amazon hopes that resulting regulations will be “very clear, easy to comply with and
easy to program with current technology.”
U.S. Deputy Treasury Secretary Kenneth Dam called for “further
efforts to achieve a more global consensus that reflects a consideration of all the issues raised.” He pointed to
current discussions on e-commerce tax issues being held at the Organization for Economic Cooperation and Development
(OECD).
“The OECD process is moving along at a decent pace. It seems like the EU has decided to drop out of
that process and take action unilaterally, which is not really helpful,” Caldwell said.
Road Blocks
The proposal has a long way to go before it becomes law, however. First, it must be approved by all EU countries.
That process will take at least 18 months, and at least one country -- the United Kingdom -- has serious objections.
“I’d be surprised if this proposal makes it through,” Caldwell said.
Even if the policy is approved, Caldwell
said, it will be unenforceable, because it will be impossible to determine whether an EU consumer has downloaded
digital goods from a server based outside the EU. “And how are you going to charge VAT on Web services? That’s the
next thing,” Caldwell added.
There may even be legal trouble. The U.S. Supreme Court has ruled that companies
cannot be forced to collect taxes on interstate sales when they do not have a physical presence in the consumer’s
state.
According to the Gartner report, if that ruling is extends to international sales, U.S. companies could
be legally barred from collecting value-added tax on behalf of EU countries.
In the end, the EU’s proposed
policy may come back to haunt it.
“The bigger problem is not for the U.S. companies, it’s a problem for EU
companies potentially locked out of the U.S. market if the U.S. decides to retaliate,” Caldwell said.
David Hardesty, January 13, 2002
2001 was a big year for international taxation of electronic commerce.
The Organization of Economic Cooperation and Development (OECD) continued to build consensus on new rules for
taxation of electronic commerce; the OECD and United States increased pressure on tax havens to ease bank secrecy,
making the havens less attractive for offshore e-commerce; the United States started looking at alternatives to the
Subpart F rules; and all fifteen members of the European Union agreed to require non-EU companies to collect VAT on
sales of digital products and services.
Web Server as a Permanent Establishment
The beginning of 2001
saw the release of final rules for determining when a Web server in a country constitutes a permanent establishment
(PE) under tax treaties based on the OECD model tax convention. Under the Convention (which is similar in most respects
to the U.S. model tax convention) business profits of a foreign company are subject to tax in a country only if those
profits are attributable to a PE in a country.
EXAMPLE: USWebCo.com is a U.S. corporation engaged in selling
computer parts through its various Web servers. Sales to customers in Country X, a country with which the United States
has a tax treaty, are subject to tax in Country X only to the extent they are attributable to a PE in Country X.
A PE is ordinarily defined as a fixed location through which a trade or business is carried on. For several years tax
experts argued about whether a Web server in a country is a PE. The OECD settled the issue by issuing final revisions
to the Commentaries for the OECD model tax convention. The Commentaries are used to interpret the Convention, and
treaties based on the Convention. The Commentaries have also been used to interpret U.S. tax treaties.
The
new rules were released in January 2001.[1] The most important points are as follows:
A website alone is not a
PE. For this purpose a website is “a combination of software and electronic data,” and does not include the computer
on which the software and data are housed.
The server on which the website is stored can be a PE, but only if
the server is “at the disposal” of the company that owns the website. A server is usually “at the disposal” only if it
is either owned or leased by the company.
The server must remain in one place for a sufficient time for its
location to be fixed.
The core business activities of the company must be carried on through the server. Activities
that are merely preparatory or auxiliary to the organization’s core business activities are not activities that create a
PE.
A PE can be established by a Web server even if the company has no employees at the location of the server.
Attribution of Profits to a Web Server
For taxpayers subject to the U.S. model tax convention, or the OECD
model tax convention, a foreign company’s business profits are subject to tax in a country only if they are attributable to
a PE in the country. When a company earns profits through a Web server located in a country two questions arise. The first
is whether the Web server is a PE. This question is discussed immediately above. Once a Web server is established as a PE,
the question is how much profit to attribute to the server. This question is currently under discussion within the OECD.
In early 2001, a working group of the OECD released a report meant to be a discussion of the issues related to
attribution of profits to a Web server.[2] The report emphasized that it was meant only to initiate discussions.
The theory set forth for allocation of profit to a Web server is based on the idea that a PE should be treated as
a separate profit center, with its own assets, activities, and risks; and that profit should be allocated based
on the PE’s exploitation of its own assets, and on the risks it bears. A PE should be treated as a separate
entity, even if it is not a separate legal entity. Assets should be allocated to the PE based on “economic”
ownership, rather than legal ownership. Risks should be assigned based on an in-depth analysis of the risks associated
with the functions carried on through the PE.
The concepts discussed in the report can be illustrated by a
discussion of the following fact situation:
EXAMPLE: USWebCo.com is a U.S. corporation, engaged in sales of
online entertainment services. All of the entertainment assets are developed in the United States, and all and
marketing activities are performed by U.S.-based personnel. Access to the entertainment assets is accomplished through
a Web server, owned by USWEbCo.com, and located in European Country X (in this example, assume the Web server is a PE
in Country X).
According to the theory adopted in the report, the economic ownership of the entertainment assets,
in this example, resides in the United States, where the assets were created. The risks associated with the business,
which are primarily marketing risks, are also located in the United States, where marketing activities take place.
Based on this analysis, profits associated with the exploitation of the entertainment assets and the assumption of
risk would not be attributed to the Web server.
Should any amount of profit be allocated to the server? According
to the report, the server should be allocated profits commensurate with the services it provides. Because these services
are primarily administrative, the profits should be equal to what an unrelated company (e.g., a hosting service) would
charge for similar services. The report offers no guidance on the dollar value of such services. However, the implication
is that the value is relatively small.
Therefore, a Web server in a country, with the sole function of allowing
access to a website, would not attract very much profit; where, at the location of the site, there is no economic ownership
of assets and little assumption of risk.
Contrast this with an example in the report, where intangible assets are
developed at the site of a Web server, and are exploited through the server. In this case, the economic ownership of the
assets resides at the server’s location, and profit commensurate with the exploitation of the assets should be attributed
to the PE represented by the server.
It should be emphasized that the theories set out in the report are in the
preliminary stages of development.
Character of Digital Transactions
In 2001, the OECD finalized recommendations
regarding the character of digital products and services delivered online. A report detailing the recommended treatment
under the OECD model tax convention, of 28 kinds of transactions, was issued in February 2001. The report focuses on
differentiating between transactions that result in business profits, as opposed to those that result in royalties. This
distinction is important because royalties are ordinarily taxable in a country if they have a source in the country, while
business profits are ordinarily taxable in a treaty country only if they are attributable to a PE in the country.
The OECD’s conclusions on each of the 28 transactions analyzed are discussed in the article, Character of E-Commerce
Transactions.[3] In summary, however, only one category of transaction resulted in royalties. This was: ordering and
downloading of copyrighted digital products, for purposes of commercial exploitation of the copyright. However, other issues
that arose in the report include defining transactions as either rentals or services, and as transactions involving technical
services or know-how. These later transactions have importance in some tax treaties.
Harmful Tax Competition and
Money Laundering
In mid-2000, the OECD launched an initiative to combat harmful tax competition through tax havens.
A related effort also aimed to gain the cooperation of countries around the world, many of which are tax havens, in
combating tax evasion and money laundering. These efforts continued in early 2001, but with only the reluctant support of
the United States. However, the September 11 attack made a believer of the United States, at least as regards efforts to curb
SEATTLE POST-INTELLIGENCER
http://seattlepi.nwsource.com/local/61908_tax12.shtml
Taxes at root of tech issue
Lawmakers,
lobbyists contest city’s treatment of software development
Tuesday, March 12, 2002
By ANGELA GALLOWAY
SEATTLE
POST-INTELLIGENCER CAPITOL BUREAU
OLYMPIA -- Stepping into a broad and contentious debate over the taxation of
intellectual property, some state lawmakers are trying to block Seattle’s recent changes in how it taxes the development
of software, including software that is actually manufactured outside the city.
The outcome could have broad
ramifications on the taxation of high-tech industry, some say.
The question boils down to whether Seattle
should apply the business tax to the development of software -- essentially a thinking process -- as it does to
the manufacturing of off-the-shelf software products, software lobbyists say.
Some software companies research
and develop their software in Seattle, and then send it to towns without business taxes to be printed onto disks.
Seattle wants to tax those companies once they produce the software -- even if it’s produced elsewhere.
Software lobbyists, representing 1,300 businesses from the smallest software companies to Microsoft Corp.,
are pushing for an amendment to a municipal tax-reform bill to block the taxation of such intellectual property.
The amendment was defeated once in a Senate budget committee, but lawmakers plan to revive it in Senate floor
debate this week.
“More and more taxes on the businesses we’ve got here isn’t going to keep them around,” said
Sen. Bill Finkbeiner, R-Redmond, who said he met with a Microsoft lobbyist concerned about the new tax yesterday.
“If people are printing them (disks) out of town, well, there’s a reason why they’re doing it,” Finkbeiner added.
Taxing the intellectual property of software companies makes about as much sense as taxing the thought process
of a university professor, said Rep. Jeff Morris, D-Anacortes.
Morris said he’s particularly concerned about
what the tax rules could lead to for biotech. And he dismisses the city’s argument that the question is one of local
authority.
“Cities and counties only exist as agents of the state,” Morris said.
After a long-standing
dispute over Seattle’s business taxes, city officials met with software industry representatives over the summer to
strike a compromise, said Dwight Dively, finance director for the city.
Based on those discussions, the city
in December adopted a new definition of manufacturing to include research and development, Dively said.
The city
believes it’s had the authority to levy the tax for three decades. In fact, some companies have been paying it for some
time, he said. The new definition was meant to clear up issues raised in court, he said.
“That agreement was that
we would continue to tax software development as manufacturing, but that we would grant a research and development tax
credit,” Dively said.
“The industry people told us that they thought, that for a typical firm, it would reduce
their (overall Seattle business) taxes by about 50 percent.”
The city’s business and occupation tax is 0.215 percent
of gross receipts, minus credit for money spent on research and development, he said.
The goal is to get the companies
that have not paid the taxes to pay up, while giving all companies a break on R & D, he said.
“We feel they should pay
something. Clearly, not everyone agreed with that,” Dively added. “There are those in the software industry who basically feel
that they shouldn’t pay taxes at all -- and hence this amendment.”
In coming months, the city hopes to strike a similar
deal with the biotech industry, he said.
But Lewis McMurran, of the Washington Software Alliance, said other industries
don’t support the idea any more than his does.
“It’s a big concern for everyone,” he said. “It’s one thing to be taxing
revenues, and it’s another to be taxing activities that are the creation of intellectual property. It doesn’t make sense.”
Further, it was one thing to try out the system with Seattle. But now, McMurran said, Seattle officials are encouraging
other cities to adopt similar rules on software development.
“The city said it was an ’agreement’ (with the industry.) I
call it an ’acceptance’ because it was the best of a bad situation,” McMurran added.
“The city was very aggressive
over this theory of taxation that they had.”
© 1998-2002 Seattle Post-Intelligencer
On February 12th, the European Council of Economics and Finance Ministers (ECOFIN) took steps towards
new laws that would require non-European companies to collect value added tax (VAT) on sales of digital
products to EU consumers (non-EU companies already collect/remit VAT on tangible goods).
The EU’s original proposal would have allowed non-EU sellers to register in only one EU member state,
and collect VAT at that country’s rate. That has recently changed, much to the U.S. dismay. (U.S. sellers
of digital products are the primary targets of the proposed rules.)
Under the plan approved by the
Council, non-EU sellers would register in one of the 15 member states of the European Union, but would collect
tax based on the actual locations of customers. Sellers of digital products would be included in the new rules
(software, video, music, books, and entertainment), collecting VAT on sales to European non-business customers,
once their sales reach a certain threshold.
The problem, as the United States sees it, is that while
EU companies charge tax based on where their headquarters is located, U.S. companies would be required to
charge tax based on where the buyer lives.
That means European companies could charge a flat tax rate
for all purchases made by European customers, while U.S. and other non-EU companies would have to determine
where each buyer resides before calculating tax. Such a process would place a significant administrative and
technological burden on U.S. e-tailers.
Further, despite a directive last year from the EU to encourage
the global growth of e-Commerce, the new rules are in conflict as they specifically target US-based
companies. This risks US participation in the marketplace, ultimately further regionalizing e-Commerce,
rather than expanding upon it. (The directive can be found
at: http://www.cordis.lu/esprit/src/ecomcomx.htm)
The matter is up for vote this month, and the United Kingdom in the past has been reluctant to go
along with plans to tax e-commerce. That position is now unclear.
You can rest assured that we will be watching this carefully.
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