Select Committee on Trade and Industry Appendices to the Minutes of Evidence

Annex B

Note from H M Treasury on the Progress on Taxation

  1.  The Government welcomes the interest of the Committee in the taxation issues raised by electronic commerce and the progress that has been made in this area. The Committee has specifically asked about the progress made in the international field since the Ottawa conference and this short note aims to update the Committee on this work. Our original text covering the background is annexed to this note for information (paras 4.19-4.27)[2]

  2.  The Organisation for Economic Co-operation and Development (OECD) is the leading forum for the discussion of the taxation issues raised by electronic commerce, as international agreement on the issues is essential for both governments and business. Consensus would bring greater consistency in the treatment of transactions across countries, reducing the risk of double taxation and non-taxation, giving business certainty about how the rules will work and how they can comply with them, and should provide potential to drive down compliance costs. The OECD's two-year work programme on these issues, endorsed by Ministers at the OECD's conference on e-commerce in Ottawa in October 1998, has now run its course. The UK has been playing a leading role in the work at the OECD in many ways, including actively participating in the work programme and chairing some of the working groups.

  3.  Good progress has been made since the Ottawa Ministerial Conference:

    —  In the field of consumption taxes, such as value added tax, a general consensus is emerging that the usual place of residence of the consumer is the appropriate "place of supply/consumption" for consumption taxes. It has been agreed that digital products such as music and software are not goods for consumption tax purposes. The dialogue with the business community, for cross border business to consumer transactions, has focused on possible consumption tax collection mechanism options and on practical means of effecting taxation in the place of consumption. For cross border business to business transactions, a clear consensus now exists that "reverse charge/self assessment" approaches are the most appropriate collection mechanism. This reduces compliance costs significantly by requiring the importing company to account for tax, rather than requiring the exporter to register and account for tax in the customer's country. Business has welcomed the commitment to maintaining this well-established procedure.

    —  On international direct taxation issues a clear consensus is emerging that in most circumstances a web site, by itself, would not constitute a permanent establishment. In regard to web site servers, the general consensus is that only in limited instances would a server, by itself, constitute a permanent establishment. In the area of income characterisation, the consensus is that the mere downloading of digital products will not give rise to royalties;

    —  In the field of tax administration, it is recognised that revenue authorities will need to co-ordinate and co-operate much more than has been necessary in the past.

  Many revenue authority proposals in regard to adequate business web site identifiers and information authentication and retention align with sound business practices already in use by many multinational enterprises. In regard to tax collection, a number of businesses are already experimenting with tax calculation software that calculates consumption and sales taxes across many countries. Revenue authorities are already sharing knowledge and experience of developing electronic services to improve their levels of service to taxpayers and make it easier for taxpayers to comply with their tax obligations. And they are sharing information about risks to tax revenues posed by e-commerce evasion and artificial avoidance—and ways of countering them.

  4.  A lot of the work mentioned above has been carried out through Technical Advisory Groups (TAGs) which comprised representatives from OECD countries, non-OECD member governments and business. The work has greatly benefited from this wide involvement, and the OECD is looking at how it can continue to benefit from this comprehensive input in the future. as part of this, the OECD, working in partnership with a number of regional tax organisations, will co-host a major global conference for revenue authorities on "Tax Administrations in an Electronic World" in June 2001.

  5.  With many of the major e-commerce tax policy questions now close to resolution, the focus of future work will be on progressing the practical tax administration issues: for example adequate taxpayer identification, information authentication and verification approaches, and how to effect the collection of consumption and sales taxes on cross border transactions. It is unlikely that future work of the OECD will take quite the same format as the last two years, especially as some of the TAGs have concluded their work. The Committee of Fiscal Affairs will be reviewing the work of the last two years and setting a future work programme at its next meeting at the end of January 2001.

  6.  In June 2000 the European Commission proposed a new VAT Directive for the treatment of many e-commerce services. The main thrust of the proposal was to remove the existing competitive distortion, which acts against European e-commerce traders. Such traders currently have to account for VAT on sales on these services to customers outside the EU as well as to those inside. At the same time non-EU vendors of these services can sell to EU customers without having to charge VAT. Whilst supporting the general thrust of the proposal, the Government has concerns over the detail, especially the arrangements for collecting tax from non-EU companies on sales to consumers in the EU. Negotiations on the Directive continue with a view to agreement by the end of June 2001.

  7.  In June 1999, the Electronic Commerce Consultation Forum was set up in order for the Inland Revenue and Customs & Excise to consult with business about the taxation issues by e-commerce. This Forum was widely welcomed, and proved successful, especially on the permanent establishment issue, where the members of the Forum successfully lobbied the OECD with their views.

  8.  On 11 April 2000, we announced that the UK takes the view that a web site of itself is not a permanent establishment, and that a server is insufficient of itself to constitute a permanent establishment of a business that is conducting e-commerce through a web site on the server. This was in advance of any decision from the OECD on this issue, as we felt that business needed clarity as to the rules so that they would be able to make investment decisions and calculate their tax liabilities.

  9.  The Inland Revenue and Customs & Excise are working jointly on computer audit training for their staff to raise the awareness of new business models, look at computer audit techniques and develop investigation tools and techniques. They are also trying to ensure that their information powers and anti-avoidance legislation keeps abreast to technological developments, which pose risks to tax revenues.

  10.  The UK has played and will continue to play a leading role in the work in the international arena. Some time in February, we are expecting the OECD to publish a package of papers covering progress over the last two years and setting out future work plans.

2   Not printed. Back

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