The Organisation for Economic Co-operation and Development represents the leading industrial nations of the world.
Under existing tax laws, a company’s profits are liable to taxation in any country where the company has a “permanent establishment.” The new guidelines agreed by the OECD will be used to determine whether a company conducts its business through a permanent establishment in a particular country – which therefore determines whether that country is entitled to tax the company.
Under the guidelines, a web site of itself will not constitute a permanent establishment for tax purposes and a web site hosting arrangement typically will not result in a permanent establishment for the company that carries on business through that web site.
The guidelines also provide that an ISP will not, except in very unusual circumstances, constitute a dependent agent of another company so as to constitute a permanent establishment of that company.
In addition, while the location of a server may in certain circumstances constitute a permanent establishment, this requires that the functions performed at that place be significant as well as an essential or core part of the business activity of the company.
It is therefore expected that if a server takes orders from web site customers or processes credit card details, it will be conducting an essential or core part of the business activity, and the server’s location will give rise to a tax liability in that country.
However, where the server has no other function than to act as a conduit for information that will be processed elsewhere, it will not be considered a permanent establishment.