WebFarm unfazed at cybertax claim

By PETER GRIFFIN

Taranaki-based web-hosting firm WebFarm has rejected claims from financial experts that similar companies could soon face tax implications based on their internet server activity overseas.

An agreement settled on last week by the OECD's 30-member committee on fiscal affairs included the classification of a website as non-taxable, but deemed income derived from overseas internet servers as taxable if the servers formed an essential part of an online businesses' activities.

Debate that has erupted surrounding the definition of what constitutes essential elements of a businesses' activities or "permanent establishment," is expected to rage until the OECD's technical advisory group completes its own probe into the matter.

Several New Zealand ISPs and web hosting companies utilise servers based in other countries, mainly the US, but WebFarm general manager Richard Shearer believes most of them out-source their server requirements to local firms, therefore avoiding foreign tax laws.

"For the average New Zealand e-commerce business, this ruling won't have any significant effect at this time," he said.

WebFarm, which has internet servers based in Chicago, claims basing its equipment in the US is not "essential" and the company has made provisions for a move to another country if conditions in the US change adversely.

"Most ISPs' operations overseas are pretty small fry on the global scale of things to be affected. A small handful of maybe 12 companies may need to review the eventual OECD ruling to see what liability they face," added Mr Shearer.

While New Zealand has 27 bilateral tax treaties with its main trade and investment partners ensuring that companies are not taxed twice for cross-border transactions, the tax implications companies face on e-commerce transactions has come under increasing scrutiny as Governments try to claw back tax revenue being lost to cyberspace.

Whether an ISP's foreign server activity faces taxation will come down to the size of the ISP's operations, says OECD fiscal expert David Partington.

"Generally a server on its own will not constitute a permanent establishment," he said. "However, if the scale and nature of the operation reaches a certain threshold then the activity will constitute a permanent establishment."

Although an OECD ruling on e-commerce taxation, when it comes, will not require new legislation in member countries to become effective, Law Commissioner Paul Heath, QC, says any decision is not legally binding in New Zealand unless it is incorporated into the country's tax laws.

The Privacy Act 1993 is an example of New Zealand law that is largely based on OECD recommendations.