IRD hails e-commerce move

By Brian Fallow

WELLINGTON - The Inland Revenue supports new international rules on electronic commerce, accepting that this is one area where the tax base is inevitably being eroded.

A working group of the rich nations' club, the Organisation for Economic Cooperation and Development (OECD), has been grappling with the implications of e-commerce through the internet on international tax treaties which determine who taxes whom for what.

Craig Elliffe, a tax partner with accounting firm KPMG, said one of the most important questions was whether the use of a web server in a foreign country would cause a firm to be liable for income tax in that country. Did it constitute a "permanent establishment" and therefore a taxable presence in that country?

"Where an enterprise effectively rents the foreign server equipment, the conclusion is that it will not constitute a permanent establishment. Since the firm has no tangible assets in the country it is thought there is no physical presence," Mr Elliffe said.

"The OECD's conclusion is that ISPs [internet service providers] will not normally constitutes permanent establishments of the taxpayers whose web pages they host, as they will not have authority to conclude contracts in the taxpayers' names and furthermore they are acting as independent agents in the ordinary course of their business, as evidenced by the fact that they host many enterprises' web sites."

Given the rapid growth of e-commerce and the fact that a majority of the firms on the vendor side of these transactions are likely to be based offshore, the potential tax revenue loss is substantial, running into hundreds of millions of dollars a year, Mr Elliffe estimates.

But the IRD's general manager, policy, Robin Oliver said the tax authorities just had to accept that as a result of e-commerce some kinds of economic activity would no longer take place in New Zealand. For example, where imported books had traditionally been stored in warehouses and sold through a chain of bookstores, adding taxable value on the process, the consumer might now order them via the internet.

"So there's a loss to the tax base, but the economic activity is no longer happening in New Zealand and we have to recognise that," Mr Oliver said.

But that would be offset by other aspects of e-commerce, which would increase firms' efficiency.

The OECD's guidelines clarify how the existing provisions in bilateral double tax agreements should be interpreted, much as Hansard can be cited in legal arguments over statutory interpretation.

"I don't think it opens up avoidance opportunities. We're 100 per cent behind it," Mr Oliver said.

Mr Elliffe said local companies needed to ensure they paid their tax in New Zealand rather than other jurisdictions so that they could pass on imputation credits to their shareholders.