Can a Website alone constitute a permanent establishment for tax purposes?
Benjamin M Musau, Lawyer, Nairobi, Kenya
This article presupposes the hypothesis of a nonresident alien, residing in country X operates a business selling certain goods in country X. The business entity, or foreign corporation, begins a marketing campaign of his product in the United States carried out via a web site. The software for the web site is located on a computer server of an internet service provider (ISP) whose primary business is the renting of space on its servers for the purpose of operating web sites. The foreign business entity enters into a contract with the internet service provider for the use of space on the server and begins advertising goods through a complete catalogue of products. The business has no personnel located within the Unites States.
The article also assumes that the foreign business begins to execute sales contracts via the web site and ships the product to the buyer. To complete the sale agreements online, the business employs the use of ‘intelligent software’ capable of accepting the order, processing the sale with a credit card and sending confirmation to country X where the seller is located. The seller then sends a confirmation of the sale to the buyer.
In this article Benjamin Musau discusses the following issues based on the fact pattern given in the hypothetical scenario.
- Whether a web site alone may constitute a permanent establishment?
- Whether a business entity can be found to have a permanent establishment even in the absence of any personnel within that country?
- Whether an agreement between a nonresident business entity and an ISP located in the United States gives rise to a permanent establishment by virtue of the agency relationship?
In the recent past, many people tend to make use of the internet to facilitate trade in disregard of the geographic distribution. The use of internet to facilitate trade, has led to electronic commerce. Electronic commerce, have given rise to a lot of controversies concerning the permanent establishment to the extent that trade treaties have been signed so as to acertain if any online trade by use of website or automated system, can be deemed to have a permanent establishment. It is in this regard, that this paper is aimed at solving matters which touches on websites in regard to permanent establishments and factors touching on electronic commerce and the permanent establishments.
- Whether a web site alone may constitute a permanent establishment?
By virtue of a web site not being an intangible property, it cannot constitute a permanent establishment; any automated equipment, which does not require the presence of any human on site for it to operate will create permanent establishment.
In the eyes of the law, a website generally may constitute a permanent establishment, which is mainly done for the benefit of the tax system of any given country. [1] The reason behind this is that any country might want to consider if any profits are accrued in doing electronic business in their country.
In case a multinational business entity has a permanent establishment in any given country, the deductable tax will be done in that country, therefore it become a necessity even for a website to have a permanent address.[2] To ensure that even websites have permanent establishment the countries are forced to sign tax treaties. Those treaties put in place the lowest level of activity and presence that is needed to create a permanent establishment. Under article 5 of OECD Model Tax Treaty, a permanent establishment is inclusive of physical facilities, like a management place, a branch or sub branch, or even a factory.
On the contrary, a permanent establishment is not inclusive of the general use of facilities just for the sole reason of storing, delivering inventory or a place only for purchasing products or data collection. Nevertheless, an agent having the power to facilitate contracts for the multinational organization can by their presence in any country, create a permanent establishment for the organization or company.[3]
Whether a business entity can be found to have a permanent establishment even in the absence of any personnel within that country?
It does not need to have any presence of any personnel for a business entity to be said to be having a permanent establishment. The reason behind this is that, the only prove that is needed is that a full transaction has been carried out in that country by the use of electronic trade via the use of website. Therefore, the law mainly generally look at the business that may result either between the resident of any specific country and another person from a different country as well as if any transaction has been made between two trading parties sharing a common residen. To some extent, however the presence of the personnel facilitating the trade makes it easy to show that the business constitutes a permanent establishment.[4]
Whether an agreement between a nonresident business entity and an ISP located in the United States gives rise to a permanent establishment by virtue of the agency relationship?
In General, a web site that is hosted by Internet Service Providers which is a third party; will not constitute a permanent establishment, reason being that the Internet Service Providers are not endowed with the power to validate a contract on behalf of an entity.[5]
An agreement that occurs between business entities, which is a non-resident and an Internet Service Providers found in the United States establishes a permanent establishment; as a result, of the agency relationship.
References
Becker, S. A. (2008). Electronic commerce: concepts, methodologies, tools and applications, Volume 4. New York: Information Science Reference.
Homans, I. S. (1860). A cyclopedia of commerce and commercial navigation. London. PublisherHarper & Brothers.
Lang, M. & Melz P. (2010). Value Added Tax and Direct Taxation: similarities and Differences. London: IBFD.
I am a Kenyan Advocate and the Managing Partner of B M Musau & Co., Advocates, a position I have held since 1999. My work encompasses regulatory reforms, reduction of administrative burdens, the structure of business entities, joint ventures, acquisitions, banking, foreign investment and other general corporate areas
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