Law briefs: Cyber-taxman eyes boom in e-business

By JILLIAN LAWRY of CCH

While revenue authorities around the world are pondering how to collect tax in a digital world, e-commerce is developing at break-neck speed. It will not be pausing for revenue authorities to catch up, but this does not mean they will stop trying to keep pace.

Many business activities in New Zealand will have to go global or else face extinction. And one of the important considerations in going global using e-commerce tools such as the internet is the taxation consequences.

These need to be carefully considered at the outset because it is possible, with careful planning, to minimise potential overseas tax liabilities.

A widespread perception exists that doing business over the internet means taxation can be ignored. This may be fuelled by a number of factors, including revenue authorities' limited ability to detect and monitor transactions.

But it is only a matter of time before tax collectors become better equipped to audit e-commerce transactions.

Therefore, a business setting up an overseas activity cannot assume that the New Zealand Inland Revenue will not be able to detect the transactions.

But the way e-commerce tax developments are evolving means it may be relatively easy for an internet business to avoid foreign income tax liability.

For example, a New Zealand taxpayer operating in another country with which New Zealand has a double tax agreement will be liable for tax in that country only if it owns or rents a webserver in a fixed location in that country.

This is based on OECD draft pronouncements and has been widely accepted as quite concessionary.

Indirect tax liabilities may not go away as easily.

Moves are afoot in the United States to require an online seller based in one state to collect sales tax in another state if it has a connection to that other state.

Sales tax is usually imposed only if the buyer and the seller are in the same state.

Future developments may affect New Zealand entities as the debate between online vendors and Main Street retailers hots up.

Likewise, the European Union is proposing changes to the European VAT system that would require non-EU companies to collect VAT on sales of products and services delivered electronically to EU customers who are not VAT registered.

Although the United States has reacted with horror to these proposals, other countries may follow the EU lead if they are implemented.

In Australia, some supplies of overseas services and intangible products are self-assessed under a reverse charge mechanism.

Therefore, it might not be enough for a New Zealand e-commerce business to minimise its income tax liability in other countries.

As revenue authorities worry about diminishing tax bases, indirect tax issues and other tax liabilities may surface.

Avoiding the New Zealand tax net (not just the foreign tax net) on overseas profits, is not straightforward for local tax entities unless they decide to relinquish New Zealand tax residency.

The dawning of the e-commerce age has resurrected some interesting tax havens. Watch the white space.

* Jillian Lawry is author of the CCH publication Guide to Taxing Internet Transactions.

Auckland-based CCH New Zealand is a tax and business law publisher. For further information phone 0800 500 224 or visit www.cch.co.nz.