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    Tax and internet based business [Article]

    Tax and internet based business [Article]

    Upon mentioning tax and internet based business, the concept of ‘permanent establishment,’ simply must come to mind immediately.
    The idea of permanent establishment,[1] developed gradually in the nineteenth century, in Germany under its domestic law, to prevent the undesirable situation of double taxation by Prussia.[2] The basic premise was that a business needed to have a fixed geographic location as well as the intention to conduct business within this fixed geographic location.[3] The nuts and bolts of PE stemmed from the German Double Taxation Act of 1909, which laid down three requirements, namely: the existence of the place of business; the actual location of the business and continuous business activity.[4] From a historic perspective, there are two key reasons for a PE, namely: the existence of a PE was proof that a foreign company generated a huge amount of business within a source country and the PE allowed source countries to get an amount of tax from the profit generated by business opportunities put forward by their markets.

    The problem and challenge for the proper implementation of PE arises when business is conducted electronically via a website.[5] This is so as when trade is conducted electronically via a website, physical locations are not always necessary in a foreign country for goods and money to change hands.[6]

    Before tax can be charged by any country, such as South Africa, on any entity, there has to be a link between the country and the actual income.[7] Taxation systems are centred on two links, namely the residence or source links.[8] With the resident link, residents are taxed on revenue generated world-wide, whereas with the source link, the tax is collected in and from the physical geographical place where the income was generated and therefore earned.[9] The problem arises in the following: where a business is not classified as a resident of the particular jurisdiction, where it is physically located, this jurisdiction may not charge income tax, unless the profits of the business can be linked to a PE which is situated in that particular jurisdiction.[10] A PE grants legitimacy to tax income, by a country, wherein the business is located.[11]A tax presence in another country in the form of a PE is important.[12] To establish whether this tax presence exists, it is necessary to differentiate between ‘trading with’ another country and ‘trading in’ another country.[13]In the case of trading with a foreign country there is an assumption that there is no tax presence in that country, whereas, in the case of trading in a foreign country, there is an assumption that there is a tax presence in such country.[14] E-commerce and it’s resulting international trade and globalisation has developed to such an extent that trading with a foreign country is a much bigger issue than trading in a foreign country.[15]
    PE is defined in terms of article 5 of the OECD Model Convention.[16] It’s necessary to read section 108(1) of the Income Tax Act 58 of 1962[17] with section 231(2) of the Constitution[18] of the Republic of South Africa, 1996.[19] Upon doing so, it is found that double tax treaties approved by parliament, are valid, as if this has been directly placed into the Income Tax Act.[20] Three elements are derived from Article 5(1), namely: a place of business; the place of business must be fixed and the business of the company must be conducted through its fixed place of business.[21] In order for a business to be classified as fixed, it must meet two requirements namely: The business must be in a precise geographical spot and must display a certain level of permanence at this geographic spot.[22] It is submitted that the place of conducting business needn’t be physically joined to the ground.[23] The business activities of the company, needs to be conducted completely or partially through the fixed business place.[24] An agency presence is acceptable.[25]

    Trading electronically, also known as e-commerce entails the use of networks for the exchange of information; this exchange of information includes trade in the form of a buyer and seller.[26]E-commerce transcends the borders of a country.[27]Trading electronically poses difficulties in both the identification as well as the physical location of the trader who should be a tax payer.[28]
    Online traders use a website, which showcase all their products for sale, the consumer simply needs to select the product that they are looking for, and pay by credit card.[29] The OECD has developed guidelines to meet the challenges that e-commerce presents to PE.[30] A website, seen as intangible, doesn’t constitute a PE.[31] Servers are automated infrastructure, on which a website is stored and the means by which the website is accessed; since a server is seen as equipment with a geographical location, this location may be classified as a fixed place of business.[32]
    There are specific challenges: Since servers can change their locations, they are difficult to trace; a rise in mala fide tax evasion schemes and SARS will face administrative challenges such as taxing income that comes from the software functions of these servers.

    Writers have expressed several opinions on the taxation of income that comes from electronic trading in source countries.[33] With the ‘virtual PE approach,’ there’s a tax connection in the source country regardless of no fixed place location.[34] With the ‘market proxy,’ approach, it is argued that PE history proves that PE is not only based on the geographic location of where production stems.[35] Other views such as the ‘base erosion approach,’ postulate a low withholding tax on electronic trade in source countries.[36]
    It is submitted that a withholding tax is the accepted wisdom.[37]

    Conclusion
    With money exchanging hands at great ease and speed with sites such as PayPal.com, and consumers obtaining goods of varying degrees, virtually in cyber space, from sites such as Gap.Gom, the importance of PE is shown.

    Bibliography

    Journals

    Oguttu and Tladi 2009 Stell LR 74-96.

    Oguttu A and Tladi “E-commerce: A critique on the determination of a “Permanent
    Establishment for income tax purposes from a South African perspective” (2009) 20 (1) Stell
    LR 74 -96.
    Legislation

    Constitution of the Republic of South Africa, 1996
    Income Tax Act 58 of 1962



    [1] Permanent Establishment (Hereinafter referred to as PE)

    [2] Oguttu and Tladi Stel LR 75.

    [3] Oguttu and Tladi Stel LR 75.

    [4] Oguttu and Tladi Stel LR 75.

    [5] Oguttu and Tladi Stel LR 79.

    [6] Oguttu and Tladi Stel LR 79.

    [7] Oguttu and Tladi Stel LR 74.

    [8] Oguttu and Tladi Stel LR 74.

    [9] Oguttu and Tladi Stel LR 74.

    [10] Oguttu and Tladi Stel LR 74.

    [11] Oguttu and Tladi Stel LR 74.

    [12] Oguttu and Tladi Stel LR 74.

    [13] Oguttu and Tladi Stel LR 74.

    [14] Oguttu and Tladi Stel LR 75.

    [15] Oguttu and Tladi Stel LR 75.

    [16] Oguttu and Tladi Stel LR 76.

    [17] Income Tax Act 58 of 1962

    [18] Constitution of the Republic of South Africa, 1996 (Hereinafter Constitution)

    [19] Oguttu and Tladi Stel LR 76.

    [20] Oguttu and Tladi Stel LR 76.

    [21] Oguttu and Tladi Stel LR 77.

    [22] Oguttu and Tladi Stel LR 77.

    [23] Oguttu and Tladi Stel LR 77.

    [24] Oguttu and Tladi Stel LR 77.

    [25] Oguttu and Tladi Stel LR 77.

    [26] Oguttu and Tladi Stel LR 77.

    [27] Oguttu and Tladi Stel LR 80.

    [28] Oguttu and Tladi Stel LR 80.

    [29] Oguttu and Tladi Stel LR 81.

    [30] Oguttu and Tladi Stel LR 81.

    [31] Oguttu and Tladi Stel LR 81.

    [32] Oguttu and Tladi Stel LR 83.

    [33] Oguttu and Tladi Stel LR 92.

    [34] Oguttu and Tladi Stel LR 92.

    [35] Oguttu and Tladi Stel LR 92.

    [36] Oguttu and Tladi Stel LR 92.

    [37] Oguttu and Tladi Stel LR 93.
    Last edited by Vanash Naick; 28-Jun-15 at 04:31 PM. Reason: spelling
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