Electronic Commerce Tax Jurisdiction and Principles of Permanent Establishment

The principle of "permanent establishment" is very important for avoidance the conflict of law of matter connected imposition of taxation. In the absence of a permanent establishment, a country where goods or services are sold has no jurisdiction to tax the resulting profits. A permanent establishment means a "fixed place of business through which the business of an enterprise is wholly or partly carried on. " The notion "fixed" means attachment of physical property to a geographic location where the territorial jurisdiction of a state can be exercised. The concept of e-business permanent establishment means attachment of various components of computer or other devices having attached to earth. The concept of permanent provide the foundation for imposition of taxation and limits the ability of a state jurisdictions to tax profits derived from sales or service performed by electronic commerce means through a Web site or their electronic devices. But the establishment of servers and other computer technologies do not meet the physical requirement, but only to the extent that they are established in the jurisdiction in question. The application of this principle of permanent establishment has been clarified by the OECD in its Commentary on Article 5 of the OECD Model Convention, which provides that a web site in itself does not constitute a permanent establishment and a server where the web site has been uploaded can only regarded as permanent establishment.

To the extent that a foreign person is not engaged in a Pakistani trade or business, then the absence of a permanent establishment is irrelevant since the Pakistan will not tax that person's active business income. However, some persons entitled to benefits under a Pakistani income tax treaty will not be subject to Pak Tax due to the lack of a permanent establishment, notwithstanding the fact that they may be engaged in a Pakistani trade or business. A Pakistani permanent establishment generally requires a fixed place of business in the Pakistan although a permanent establishment can also arise by imputation from the activities of an agent.

The state North Dakota of United States of America confronts enormous administrative problems in seeking to enforce taxes on electronic commerce. As the Court delivered the judgment and construed the provisions of laws in Quill Corp. v. North Dakota , states will often be unable to require the vendor to collect of taxes on goods or services sold in electronic commerce, and, insofar as they seek to do so, they are likely to engender lengthy and inconclusive litigation. What a state needs to see for purpose of imposition of taxation is the presence of intermediaries as source of taxation but an eventuality of facts are that role of intermediaries are so important and dynamic causing its own set of legal issues . The concept of permanent establishment is so important that I am going to discuss it in detail.

o The presence of a web site itself is not a permanent establishment

Does a web site or home page have a physical presence of some permanence? The best answer is that website can have its permanent establishment if the operator of site is located in jurisdiction of a state. Either home page or linked pages if the operator of pages residing in a state and performing service not delivery goods the where web site has been hosted can be regarded as permanent establishment e-business for purpose exercising jurisdiction of taxation. A web page is consisted of binary or digital code, and is housed on a magnetic surface in computer disk or hard where which is physical in nature. The binary code is viewable using a computer and a communications device. However, even though we can establish a physical presence, albeit a brand new form, the "establishment " exists on the host computer. Therefore, a web page will likely constitute a permanent establishment only in the country where the host computer resides.

The viewer of a web site feel as web site has no actual physical presence and it is existed in cyberspace and, viewer can only feel the presence of the website on his computer and its contents. Presence of employees in country is not essential condition maintenance of the site. The order function of web site or electronic media is same as comparison with ordering done through catalog or a television advertisement, "infomercial" or home shopping channel. It can not be established under present statute that mere extension of interpretation of tax provisions does not create a permanent establishment under existing principles, and it should not when effectuated through electronic commerce. The way the contents are displayed for mailing or online ordering, the ultimate purpose of these are providing facilitation to customers so that view stock or data are made viewable to them. The web site is analogous to a location being maintained solely for the purposes of displaying the contents of goods and services offered for sale or performance. Moreover, contention of fact for evolving the principal of jurisdiction for purposes of imposition of taxation and proposed construction of status can not accepted as basic principles of electronic commerce jurisdiction on a server only temporarily should not be a permanent establishment.

o The presence of a server should not Regarded as a permanent establishment

I recommend further clarification that, under above mentioned principles, the presence of a web site alone in a country, without more, is not in itself a sufficiently "fixed place of business" to constitute a permanent establishment for purposes of defining the tax jurisdiction. Moreover, the principles of permanent establishment the existing tax laws conducted by modern states consistently look to the locations of purchaser, employees or dependent agents who are engaged in business transaction in a country as source of imposition of taxation mere presence of server at some location can be regarded ground sufficient for doing that. The negation of fact that presence of personal or employee at some location can not be regarded principle for imposition of taxation. Thus, even if the presence of a piece of equipment such as a server were sufficient to constitute a fixed place of business, the determination of permanent establishment must look beyond the mere presence of the server to the presence of personnel, the functions they perform using the server, and the nature of the activities for which it is used, and other indicated that the business of an enterprise is being conducted through a permanent establishment in the country. Where such activities or functions of computer server are of a discretionary in nature, the server should not constitute a permanent establishment. For example, the database hosted at remote server also should not be deemed a permanent establishment because the act is discretionary which provide enough opportunity for tax payer to avoid the higher tax jurisdiction. I believe that, in most instances, the presence of a server alone is analogous to the presence of a warehouse used solely for the purpose of display or to facilitate delivery of goods and for cost management purposes. Moreover, No existing tax provision has provided any clarification on this point in cases in which capacity on the server is leased to others. But the parallel circumstance are available which provide clarification that the existing provisions regarding the leasing of storage and display facilities and the leasing of buildings, facilities, equipment, or intangible property apply. Under existing tax provision that principle of storage place can not be constituted as permanent established and reason for imposition of taxation. The presence of equipment in a country that is leased to other enterprises for use in their business does not create a permanent establishment absent a fixed place of business, other than the leased equipment itself, from which personnel carry on the leasing activity. In particular, tax laws we should distinguish the concept of "automatic equipment", exemplified by "gaming and vending machines". Such machines clearly represent a stand-alone business activity conducted wholly within the country of establishment in contrast to a server conducting business possibly in every country of the world and not necessarily in the country of establishment - the entire business cycle is conducted in one machine, including solicitation, order-taking, sale, fulfillment, and collection of payment. And again, the application such equipment focuses not on the machine's functions but on the place of the personnel. The controlling fact should be whether the enterprise personnel carry on significant business activity that results in the actual realization of profits, other than setting up, operating and maintaining the machines. Finally, a finding of permanent establishment requires a certain element of permanence, given the ability of businesses to structure their electronic commerce operations to move servers, databases, software, and server operations at will, to use mirror servers or server arrays, and to build redundancy into their hardware platforms. Businesses engaged in electronic commerce are relatively indifferent to the location of particular hardware. The consumers are equally indifferent with the functioning of the business and jurisdiction of taxing authorities and are not concern with server location, and an in-country location does not convey any business or economic advantage. Moreover, the use of a server is no more integral to the enterprise's business presence on particular location because of the use of telephone and fax and other electronic connect are sufficient to establish the permanent establishment. The jurisdiction based on the presence of a server alone is thus rather illusory and ambiguous and to treat the mere presence of a server as a permanent establishment would in effect result in new taxation of electronic commerce in violation of the international principles of neutrality and avoidance of double taxation relief mechanism business placed in a certain jurisdiction may be restricted to host the web site and its database within the jurisdiction of taxing state. I believe that a clarification based on existing principles that a server does not in itself constitute a permanent establishment will contribute to greater enforcement of tax provisions and will also cause enforcement of principles of certainty, simplicity, and neutrality and further more it will eliminate conflict of laws.

o Internet service providers should not be regarded as legal agents for purposes of enforcement of tax provisions

Any arrangement or availing the facility of hosting server or computer network for purpose of hosting of website or data base does not constitute the permanent establishment. For example, when the enterprise's web site is hosted by an Internet service provider (ISPs) on the ISP's equipment in the taxing authorities can not exercise tax jurisdiction, although where the enterprise hosting server at particular jurisdiction can be placed under tax net because of services rendered within the jurisdiction of a state.

I make recommendations on this point that hosting of enterprises business can not constituted permanent while the business of ISPs constitute permanent establishment because of installment of computer and networking hardware for purpose of delivery of hosting server and to tax authorities need to clarify that the relationship between a business enterprise and an Internet service provider, acting in the ordinary course of business for facilitating the internet services, will not result in a permanent establishment.

As a legal matter, the relationship of an enterprise with its Internet service provider is simply a business contract for services to be provided to the enterprise rather than to act on behalf of the enterprise as a legal agent and in number of cases the agent are taxed for server rendered to their business concern. In number of case the hosting server come in binding contract with enterprises for acting as agent and entire business activating by these agent. In such manner the putting these servers at tax net will not violate the international tax principles; but in number of cases it certainly would be extremely unusual for an Internet service provider to have any authority to enter into binding contracts on behalf of a business customer. Certainly, these enterprises can not dispose their businesses to server to act as agent which are no more different from a dependent agent than a telephone service provider, a mail courier, or a common carrier. If in fact there is a legal agency relationship at all, then the Internet service provider currently acting as an independent agency if its function as accepted as legal facilitating the electronic commerce between business and purchase then there must be unlimited binding contract between three parties but in actual world of Internet is legally and physically impossible to do acting in the ordinary course of business and if it is legally and economically independent of the enterprise. I do believe that the legal tax environment the service rendered by these electronic servers and resulting factors would result in a dependent agency is rare. The current tax provisions are not adequately addressing this legal position of server provider. Tax authorities should have to clarify that the existing rules of agency apply to service provider in facilitating the electronic commerce that an Internet service provider which is economically and legally independent of the enterprise, and is acting in the ordinary course of business, is not a dependent agent and will not constitute a permanent establishment of the enterprise. This analysis also should apply to telecommunications cell services and electronic stock trading and their online facility provide by financial institute for delivery of online services.

The writer is an advocate of High Court and practicing immigration and corporate laws in Pakistan since September 2001. He is a self employed and pioneer in research on electronic commerce taxation in Pakistan. His articles were published widely in the critical areas of cyber crimes, electronic commerce, e-taxation and various other topics. He wrote LL.M thesis on titled "Legislation of electronic commerce taxation in Pakistan" in which he provided comprehensive legal proposals for statutory reconstruction of tax laws for purpose of imposition of taxation on e-business in Pakistan. Currently he is conducting is research on topic 'Electronic commerce taxation: emerging legal issues of digital evidence'.Author can be contacted by adil.waseem@lawyer.com.