Tax legislation amid rapid tech growth
The rapid development of technology is outstripping the ability of tax legislation to keep pace, with the result that current tax provisions do not cover scenarios, such as just what is a permanent establishment for a business, that are now becoming common in the IT arena, says Deloitte.
The advent of cloud computing, which enables companies to operate without the support of ‘in-house’ resources, is an example says Louise Vosloo, head of international tax at Deloitte, who points out that this technology enables all IT resources, hardware and software to be managed by third parties in the cloud.
“Companies can make use of all these services, or just those they need, as and when they require them. Depending on the type of service/s client would need to consider whether a permanent establishment (PE) which is defined as a ‘fixed place of business, through which the business of an enterprise is wholly or partly carried on’ is created.”
Although the requirements of this definition may seem easy to meet, or just as easy to avoid, says Vosloo, the reality of determining whether a permanent establishment has been created for tax purposes is in fact murkier than it appears. “The reality is that each case has to be individually examined. Applying the requirements of a permanent establishment to the e-commerce business arena is no easy task.
Those looking to implement cloud computing strategies therefore need to be aware of the legislation regarding the definition of a permanent establishment and consider several risks that could be associated with the technology.
“Many tax professionals would maintain that no taxable presence can be deemed to have been created if all services are being rendered ‘up in the clouds’. One of the major considerations, however, rests on whether the server used to deliver the services could be said to be creating a permanent establishment in the country in which it is located. It is the server through which applications are stored and accessed by various users that therefore legitimately raises the concern of a permanent establishment,” Vosloo said.
“When examining and complying with the requirements for a ‘place of business’ it therefore becomes important that one distinguishes between operating a web site and the situation where the particular server the web site is hosted on is at one’s disposal.
“In the latter case, this is indicative of having a permanent establishment. The counter argument that the server in question is not owned, but leased is irrelevant. The primary question arising is whether the server is at the person’s disposal or not.”
The interpretation of ‘fixed’ place of business does not mean that the place needs to be ‘fixed to the ground’. All that is required is that it be at a specific location for a sufficient period of time says Vosloo, whilst ‘carrying on the business wholly or partly through the fixed place of business’ requires the company to determine whether it has the relevant facilities and, or, premises at its disposal where its business activities are carried out.
“Careful consideration therefore has to be given to these concerns when considering cloud computing solutions so that it can be determined whether they could potentially result in a permanent establishment for the business in the country in which the server is based,” Vosloo said.
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