Tax for online companies can be extremely complex and confusing. With often multi-jurisdictional transactions and the potential of anonymity of parties, there is no surprise how so many e-commerce companies find them selves in a tax melt-down at the end of the tax year.
UK online companies that operate and sell to the UK are often very much in line with a Bricks and Mortar UK company in regards to tax liabilities and obligations.
However, the beauty of WWW companies is their ‘world-wide’ nature. This means that thousands and thousands of UK online companies find success in cross-border selling every year.
Overseas selling as an online company comes with its own set of tax complexities.
In the UK, taxes are imposed on:
· Worldwide income of any person tax resident in the UK; or
· Income arising in the UK of any person not tax resident in the UK.
Online companies incorporated in the UK are UK tax residents. However, the online company may be treated as being the tax resident of another jurisdiction under the terms of a relevant tie-breaker provision in a double taxation treaty with such jurisdiction.
This works visa-versa for companies incorporated outside of the UK whom has UK profit.
Double taxation treaties
The UK has a wide network of double taxation treaties with countries all over the world. These treaties are formed with the intention to prevent taxpayers from being taxes in more than one jurisdiction upon the same profits or gains.
Complications of double taxation and online businesses
Double taxation treaties follow the Model Convention as drown up by the ODEC. This has the starting point principle that states trading income should be taxed in the jurisdiction where the taxpayer has ‘permanent establishment’ (PE).
The HMRC do not recognise the website of itself as a PE. Nor will a sever of itself be sufficient to amount to a PE of a business conducting trade through a website on that server
Current tax avoidance issues by multinationals mean that there are likely to be substantial tax changes in this area.
Withholding tax on E-commerce Payments
Taxation on Digitalised goods
For online businesses that supply digitalised goods there are a number of issues concerning the characterisation of the income generated- i.e. are these business profits or royalties?
Under traditional rules, the provision of digitalised goods such as music (which can be downloaded) would generally be the provision of a right to use a product, and in most jurisdictions give rise to royalties. However, if the same goods were provided in a non-digitalised form (i.e. music supplied on a CD-ROM) there would be a supply of goods giving rise to profits.
Withholding tax on royalties
Royalties are subject in the UK to a different tax regime from that applicable to other business profits.
Royalty payments may be subject to withholding tax. Where withholding tax applies, the taxpayer is obliged to deduct or withhold an amount equivalent to the tax liability of the payee in respect of the payment. The payee receives the payment net of tax and will be given a tax credit in respect of the amount withheld or deducted.