Bangalore E-commerce Lecture 2003

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Bangalore E-commerce Lecture 2003

  1. 1. BRIEF LOOK AT ABRIEF LOOK AT A FEW OFFSHOREFEW OFFSHORE ECOMMERCE ISSUESECOMMERCE ISSUES Bangalore Chartered AccountantsBangalore Chartered Accountants December 8, 2003December 8, 2003 Professor William H. Byrnes, IVProfessor William H. Byrnes, IV
  2. 2. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 Popular Offshore DestinationsPopular Offshore Destinations  IndiaIndia – skilled labor costs, export incentives– skilled labor costs, export incentives  IrelandIreland – gov’t directed, low tax, stable, work– gov’t directed, low tax, stable, work quality, DTAs, EU VAT, Euroquality, DTAs, EU VAT, Euro  SwitzerlandSwitzerland – govt. directed, low ETR, work– govt. directed, low ETR, work quality, stable, DTAsquality, stable, DTAs  SingaporeSingapore – tax incentives, work quality, gov’t– tax incentives, work quality, gov’t directed, some DTAsdirected, some DTAs  Hong KongHong Kong – low tax, law, proximity, K mkts– low tax, law, proximity, K mkts
  3. 3. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 More Recent Offshore (>1998)More Recent Offshore (>1998)  MauritiusMauritius – low ETR, DTAs, labor cost– low ETR, DTAs, labor cost  CyprusCyprus – low tax, DTAs, EU (2004)– low tax, DTAs, EU (2004)  MaltaMalta – low ETR, DTAs, EU (2004)– low ETR, DTAs, EU (2004)  Isle of ManIsle of Man – low tax, likely no tax, EU VAT– low tax, likely no tax, EU VAT  BermudaBermuda – no tax– no tax  GibraltarGibraltar – Spanish life, English work, no tax– Spanish life, English work, no tax  MalaysiaMalaysia – gov’t directed, labor costs, tax– gov’t directed, labor costs, tax incentivesincentives
  4. 4. ISSUESISSUES  Technical infrastructure &Technical infrastructure & capacitycapacity  Operational infrastructureOperational infrastructure  Relative operational costsRelative operational costs  Regulatory infrastructureRegulatory infrastructure  Legal issues & ComplianceLegal issues & Compliance  Tax issuesTax issues
  5. 5. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 Regulatory & Legal IssuesRegulatory & Legal Issues Regulatory bodiesRegulatory bodies E-commerce enablingE-commerce enabling legislation (e.g. e-contracts)legislation (e.g. e-contracts) Stable & Robust legal systemStable & Robust legal system Recognition of judgmentsRecognition of judgments
  6. 6. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 Operational Capability & CostsOperational Capability & Costs  Technical laborTechnical labor – server banks in Singapore / India / Costa Ricaserver banks in Singapore / India / Costa Rica  Telecommunications & CostsTelecommunications & Costs – Bermuda v. JamaicaBermuda v. Jamaica  General offshore business issuesGeneral offshore business issues – Audit & Compliance?Audit & Compliance? – Environment?Environment? – Stability?Stability?
  7. 7. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 Hong Kong E-commHong Kong E-comm Government InitiativesGovernment Initiatives  Electronic service deliveryElectronic service delivery program (ESD)program (ESD) Delivery of government services onlineDelivery of government services online  Digital 21Digital 21 Comprehensive strategy to enhance and promoteComprehensive strategy to enhance and promote Hong Kong’s information infrastructure andHong Kong’s information infrastructure and servicesservices
  8. 8. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 Hong Kong’s E-TransactionHong Kong’s E-Transaction Ordin. (2000)Ordin. (2000)  Authorizes the use of electronic and digitalAuthorizes the use of electronic and digital signaturessignatures  Confers legal validity to electronic recordsConfers legal validity to electronic records  Delineates the requirements for theDelineates the requirements for the formation of electronic contractsformation of electronic contracts  Establishes regulations for the licensing ofEstablishes regulations for the licensing of certification authoritiescertification authorities
  9. 9. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 HK’s E-Transaction Ord. (2000)HK’s E-Transaction Ord. (2000) Main exception.Main exception. ••                 Certain generic items such as wills,Certain generic items such as wills, trust, statutory declarations, affidavits,trust, statutory declarations, affidavits, power of attorney, court orders, warrant, billspower of attorney, court orders, warrant, bills of exchange, documents or instrumentsof exchange, documents or instruments concerning land or property transactions,concerning land or property transactions, etc. Are exempt from the operation of theetc. Are exempt from the operation of the relevant provisions in the proposedrelevant provisions in the proposed legislation.legislation.
  10. 10. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 HKMA Internet Banking ProposalHKMA Internet Banking Proposal  Local online bank - 50 per cent owned by aLocal online bank - 50 per cent owned by a well-established bank or other supervisedwell-established bank or other supervised financial institutionfinancial institution  appropriate experienceappropriate experience  Foreign online bank – US$16B groupForeign online bank – US$16B group minimum &minimum &  Established foreign e-bank regsEstablished foreign e-bank regs
  11. 11. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 BermudaBermuda E-business facilities.E-business facilities. • Systems Resource GroupSystems Resource Group • Emagine Ltda.Emagine Ltda. • Secure Hosting LimitedSecure Hosting Limited
  12. 12. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 BermudaBermuda Telecommunication infrastructureTelecommunication infrastructure *Government privatized the*Government privatized the telecommunication servicetelecommunication service *Public utility commission (PUC) is the*Public utility commission (PUC) is the regulatory agencyregulatory agency
  13. 13. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 BermudaBermuda Telecommunication infrastructureTelecommunication infrastructure • Internet license fees reduced fromInternet license fees reduced from $10,000 to $2,600$10,000 to $2,600 • Paging licenses fees reducedPaging licenses fees reduced from $5,000 to $1,300from $5,000 to $1,300
  14. 14. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 BermudaBermuda Telecommunication infrastructureTelecommunication infrastructure • Internet service cost reduced fromInternet service cost reduced from US$100 a month to $US20 aUS$100 a month to $US20 a monthmonth • Business packages reduced fromBusiness packages reduced from US$150 a month to US$35 aUS$150 a month to US$35 a monthmonth
  15. 15. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 BermudaBermuda E-COMMERCE LEGAL FRAMEWORKE-COMMERCE LEGAL FRAMEWORK • The ElectronicThe Electronic Communication andCommunication and Transaction BillTransaction Bill • The Misuse of Computer BillThe Misuse of Computer Bill • Data Protection BillData Protection Bill
  16. 16. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 BermudaBermuda The electronic communicationThe electronic communication and transaction billand transaction bill **Recognizes electronic messages,Recognizes electronic messages, signatures, writings and contracts.signatures, writings and contracts. **Exemptions: disposition of property,Exemptions: disposition of property, testamentary dispositions, negotiabletestamentary dispositions, negotiable instruments, enduring powers ofinstruments, enduring powers of attorney and court documents.attorney and court documents.
  17. 17. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 BermudaBermuda Misuse of computer billMisuse of computer bill Creates a series of offences arisingCreates a series of offences arising out of the unlawful interferenceout of the unlawful interference with computers and computerwith computers and computer systemssystems based on thebased on the EU CouncilEU Council and the OECDand the OECD
  18. 18. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 BermudaBermuda Data protection billData protection bill Implements privacy principlesImplements privacy principles established by the OECD underestablished by the OECD under its guidelines that protect theits guidelines that protect the privacy and transferred flows ofprivacy and transferred flows of personal data.personal data.
  19. 19. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 BermudaBermuda BankingBanking Foreign banks are not permitted to operateForeign banks are not permitted to operate in Bermuda. The BMA supervises thein Bermuda. The BMA supervises the three Bermudian banks, which operate athree Bermudian banks, which operate a joint clearing system. The threejoint clearing system. The three Bermudian banks have subsidiaries in theBermudian banks have subsidiaries in the major financial centers.major financial centers.
  20. 20. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 BermudaBermuda Payment processing facilitiesPayment processing facilities *Two local banks have entered partnership*Two local banks have entered partnership to set up international payment processingto set up international payment processing solutionssolutions *Local hosting services utilizing software*Local hosting services utilizing software and systems provide internet paymentand systems provide internet payment services as wellservices as well
  21. 21. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 Isle Of ManIsle Of Man  E-commerce legal frameworkE-commerce legal framework  E-transactions regulations of 2000E-transactions regulations of 2000  Computer security act of 1992Computer security act of 1992  Data protection act of 1986Data protection act of 1986  Online gambling regulation actOnline gambling regulation act  Fair trading amendment billFair trading amendment bill
  22. 22. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 Isle Of ManIsle Of Man The e-transaction act , 2000 excludesThe e-transaction act , 2000 excludes  MarriagesMarriages  A testamentary dispositionA testamentary disposition  Power of attorneyPower of attorney  A conveyance or creation of an interest inA conveyance or creation of an interest in landland  A mortgageA mortgage  Transfer or mortgage of ship interestTransfer or mortgage of ship interest
  23. 23. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 Isle Of ManIsle Of Man (Online) Fair trading bill(Online) Fair trading bill consumer protection act: unfair contractconsumer protection act: unfair contract terms in consumer contracts, and rulesterms in consumer contracts, and rules regarding distance sales, includingregarding distance sales, including information to be given to consumer, rightinformation to be given to consumer, right to cancel, return of goods, andto cancel, return of goods, and performance of contracts.performance of contracts.
  24. 24. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 Isle Of ManIsle Of Man  Internet service providers.Internet service providers.  Domicilium Ltda.Domicilium Ltda.  Mannet.Mannet.  Manx telecom.Manx telecom.  XKO (IOM) limited.XKO (IOM) limited.
  25. 25. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 CYPRUSCYPRUS Telecommunication infrastructureTelecommunication infrastructure  Cyprus Telecom Authority (CYTA)Cyprus Telecom Authority (CYTA)  virtually all-digital local networkvirtually all-digital local network  satellite telecom networksatellite telecom network  fiber optic submarine cable systemfiber optic submarine cable system
  26. 26. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 CYPRUSCYPRUS Telecommunication infrastructureTelecommunication infrastructure CYTA provides variety of advancedCYTA provides variety of advanced telecommunications services, covering thetelecommunications services, covering the whole spectrum of customer needs forwhole spectrum of customer needs for both voice and data communications, bothboth voice and data communications, both fixed and mobile.fixed and mobile.
  27. 27. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 CYPRUSCYPRUS Telecommunication infrastructure.Telecommunication infrastructure. A new telecommunication regulator hasA new telecommunication regulator has been appointed by liberalizationbeen appointed by liberalization legislation but has not been affectivelegislation but has not been affective yet.yet.
  28. 28. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 CYPRUSCYPRUS Telecommunication InfrastructureTelecommunication Infrastructure Functions of new regulator:Functions of new regulator: *granting new telecom and postal*granting new telecom and postal licenseslicenses **authorizing telecommunicationsauthorizing telecommunications networks & servicesnetworks & services
  29. 29. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 CYPRUSCYPRUS ISP and hosting services.ISP and hosting services. *Sofocleous and co.*Sofocleous and co. * Armata.* Armata. *CTC Infocom.*CTC Infocom. * Cyprus on line, Cyprus* Cyprus on line, Cyprus *telecommunications authority*telecommunications authority *Spidernet.*Spidernet.
  30. 30. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 CYPRUSCYPRUS Online banking.Online banking. Laiki eBankLaiki eBank, launched by Laiki bank in September, launched by Laiki bank in September 2000, was the first electronic bank in Cyprus to2000, was the first electronic bank in Cyprus to allow banking and stock market transactions viaallow banking and stock market transactions via the internet. Laiki eBank customers are able tothe internet. Laiki eBank customers are able to trade securities on the CSE, track developmentstrade securities on the CSE, track developments on the CSE and have a live update of theiron the CSE and have a live update of their portfolio.portfolio.
  31. 31. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 CYPRUSCYPRUS Online banking.Online banking. Spidernet has developed SpidertradeSpidernet has developed Spidertrade (http://www.spidertrade.Com.Cy), an interactive(http://www.spidertrade.Com.Cy), an interactive online service providing the latest financial news,online service providing the latest financial news, real-time quotes from the Cyprus stockreal-time quotes from the Cyprus stock exchange (CSE) and on-line trading services. Atexchange (CSE) and on-line trading services. At the same time SpiderNet offers free to itsthe same time SpiderNet offers free to its subscribers the SpiderWAP service.subscribers the SpiderWAP service.
  32. 32. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 Major Tax Issues:Major Tax Issues:  Home jurisdiction tax ratesHome jurisdiction tax rates – Tax credits for tax paid to source stateTax credits for tax paid to source state – DTA protection from source withholding / PEDTA protection from source withholding / PE – Characterize incomeCharacterize income  Business / Service / License / Capital GainBusiness / Service / License / Capital Gain  Source stateSource state – Characterize incomeCharacterize income – CT on ECI, trade within, PECT on ECI, trade within, PE – WHT on license, services, branch profitsWHT on license, services, branch profits
  33. 33. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 Jurisdiction to Tax CompanyJurisdiction to Tax Company  domiciliary:domiciliary: incorporation and / or effectiveincorporation and / or effective management and / or real seatmanagement and / or real seat  sourcesource: items of income or capital that arise in: items of income or capital that arise in the statethe state – for business or professional services income:for business or professional services income: permanent establishment or fixed base ofpermanent establishment or fixed base of businessbusiness – for capital income: dividend, interests,for capital income: dividend, interests, royaltiesroyalties  anti-deferral legislation (i.e. C.F.C.)anti-deferral legislation (i.e. C.F.C.)
  34. 34. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 Mauritius TaxMauritius Tax  Previously companies chose own rate of tax (0%) but as of 10.07.98 companies taxed @ 15%.  Credit of 90% of tax paid (13.5%) available so effective rate of 1.5%.  As of 01.07.01 only 80% credit allowed so effective rate is 3%.  Several DTAs (India, China, Indonesia)
  35. 35. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 MaltaMalta  EU member (2004)  headline rate of 35% tax  Complex tax credit system to relieve double taxation = – Int’l Trading Company (ITC) – ERT 4% – Int’l Holding Company (IHC) – ERT 6%
  36. 36. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 Role of the OECD ModelRole of the OECD Model ConventionConvention  Tax Treaties entered into bilaterally by StatesTax Treaties entered into bilaterally by States are mostly based upon OECD Model, some UNare mostly based upon OECD Model, some UN Model.Model.  US ModelUS Model  Also OECD Reports on E-commAlso OECD Reports on E-comm  See www.oecd.orgSee www.oecd.org
  37. 37. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 Source and CharacterizationSource and Characterization  Blurring of geographical categories:Blurring of geographical categories: Where income arises?Where income arises? e.g. if a non resident company generates income through a sale arisinge.g. if a non resident company generates income through a sale arising out of a web page that is accessed in another country, what is theout of a web page that is accessed in another country, what is the source of the sale income?source of the sale income?  Blurring of income categories:Blurring of income categories: What kind of income is it?What kind of income is it? e.g. a download of digitalised product from a foreign web site:e.g. a download of digitalised product from a foreign web site: states may consider such payments as per:states may consider such payments as per: Royalty, Business Profit, Services or Intangible assetRoyalty, Business Profit, Services or Intangible asset
  38. 38. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 place of effective managementplace of effective management Limitations in a modern, technologically advancedLimitations in a modern, technologically advanced environment:environment: Problems presented:Problems presented: a net centric company (i.e. a company that does not have any office, wherea net centric company (i.e. a company that does not have any office, where managers and employee are located across several states and it ismanagers and employee are located across several states and it is organised on intranet in leasing): what state has residence based taxorganised on intranet in leasing): what state has residence based tax authority over the income that net company generates?authority over the income that net company generates? Use of modern networks, videoconferencing or otherUse of modern networks, videoconferencing or other electronic discussion group applications can transform aelectronic discussion group applications can transform a company into a net centric company, where directors orcompany into a net centric company, where directors or key managers do not need to be fiscally located in anykey managers do not need to be fiscally located in any place to make decisions and mobile decisions may beplace to make decisions and mobile decisions may be the rule.the rule.
  39. 39. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 Article 5: PermanentArticle 5: Permanent EstablishmentEstablishment According to article 5 OECD MC a PEAccording to article 5 OECD MC a PE means a “fixed place of businessmeans a “fixed place of business through which the business of anthrough which the business of an enterprise is wholly or partly carriedenterprise is wholly or partly carried on”on” How does it apply in the context ofHow does it apply in the context of electronic commerce?electronic commerce?
  40. 40. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 Source jurisdiction in e-Source jurisdiction in e- commerce: Permanentcommerce: Permanent EstablishmentEstablishment There are two types of P.E. that are relevantThere are two types of P.E. that are relevant in the e-commerce context:in the e-commerce context:  a physical permanent establishmenta physical permanent establishment  an agency permanent establishmentan agency permanent establishment
  41. 41. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 Source jurisdiction in e-Source jurisdiction in e- commerce: Permanentcommerce: Permanent EstablishmentEstablishment  where the activity is carried onwhere the activity is carried on The business carried on through the PE needs to be ‘The business carried on through the PE needs to be ‘ core business activity’ and not meant as havingcore business activity’ and not meant as having preparatory or auxiliary character.preparatory or auxiliary character. The activity need not necessarily be performed by aThe activity need not necessarily be performed by a human being.human being.
  42. 42. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 Application of physical P.E.Application of physical P.E. concept to a serverconcept to a server Consider a R Corp. established in State R having its ownConsider a R Corp. established in State R having its own server in country S.server in country S. The serverThe server maymay constitute a P.E. for R Corp in S,constitute a P.E. for R Corp in S, especially if its own employee operates and maintainespecially if its own employee operates and maintain the server for its own account, even if they operatethe server for its own account, even if they operate remotely and are not physically present on S territory.remotely and are not physically present on S territory. However if the server functioned solely for the purpose ofHowever if the server functioned solely for the purpose of display, storage or delivery of goods or services,display, storage or delivery of goods or services, itit may notmay not qualify as PE since its activities would onlyqualify as PE since its activities would only be of having auxiliary character.be of having auxiliary character.
  43. 43. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 Permanent EstablishmentPermanent Establishment AT OECD level consensusAT OECD level consensus  A web site cannot, in itself, constitute aA web site cannot, in itself, constitute a permanent establishment since there ispermanent establishment since there is any ‘place of business’ there.any ‘place of business’ there.  An ISP does not constitute a dependentAn ISP does not constitute a dependent agent of another enterprise and thereforeagent of another enterprise and therefore does not represent a PE for that otherdoes not represent a PE for that other enterpriseenterprise
  44. 44. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 Server as a PE?Server as a PE? The issue of whether a computer equipment at a givenThe issue of whether a computer equipment at a given location constitutes a Permanent Establishment willlocation constitutes a Permanent Establishment will depend on:depend on:  whether the functions performed through thatwhether the functions performed through that equipment exceed the preparatory or auxiliaryequipment exceed the preparatory or auxiliary threshold, analysis of case by case;threshold, analysis of case by case;  The server will need to be located at a certain place forThe server will need to be located at a certain place for a sufficient period of time so as to become ‘fixed’ withina sufficient period of time so as to become ‘fixed’ within the meaning of article 5 paragraph 1;the meaning of article 5 paragraph 1;  Also on a case by case needs to be evaluated whetherAlso on a case by case needs to be evaluated whether an enterprise has a computer equipment at its disposalan enterprise has a computer equipment at its disposal and where business functions of the enterprise areand where business functions of the enterprise are performed;performed;
  45. 45. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 Server NOT PEServer NOT PE At OECD consensus following activities as beingAt OECD consensus following activities as being preparatory or auxiliary to the activity of the enterprisespreparatory or auxiliary to the activity of the enterprises and not giving rise to a PE:and not giving rise to a PE:  Providing a communication link between suppliers andProviding a communication link between suppliers and customerscustomers  Advertising of goods and servicesAdvertising of goods and services  Relaying information through a mirror server for securityRelaying information through a mirror server for security and efficiency purposes;and efficiency purposes;  Gathering market data for the enterprise;Gathering market data for the enterprise;  Supplying information.Supplying information. Unless of course the above activities constitute coreUnless of course the above activities constitute core functions of the enterprise.functions of the enterprise.
  46. 46. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 Server = PEServer = PE If the server offers more than auxiliary activities:If the server offers more than auxiliary activities:  sales help,sales help,  contracting,contracting,  payment processing,payment processing,  delivery arrangements,delivery arrangements,  database information retrieval (about the company) etc.database information retrieval (about the company) etc. R Corp. leases space on a third party’s server in country S,R Corp. leases space on a third party’s server in country S, since it qualifies as being nevertheless ‘at disposal ‘ ofsince it qualifies as being nevertheless ‘at disposal ‘ of the enterprise R Corp in state Sthe enterprise R Corp in state S This last situation, for example may even give rise to theThis last situation, for example may even give rise to the fact that R Corp may end having a P.E. in S withoutfact that R Corp may end having a P.E. in S without even knowing iteven knowing it ..
  47. 47. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 If Server = PEIf Server = PE  When a server is deemed to constitute aWhen a server is deemed to constitute a P.E. of R Corp. in state S, all the incomeP.E. of R Corp. in state S, all the income that is attributable to it shall be subject tothat is attributable to it shall be subject to tax in State S.tax in State S.  Business Profits in particular, may beBusiness Profits in particular, may be subject to tax in the source state only andsubject to tax in the source state only and to the extent there is a PE in that state.to the extent there is a PE in that state.
  48. 48. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 Characterization 1Characterization 1  Electronic order processing ofElectronic order processing of tangible productstangible products Definition:Definition: The customer selects an item from an onlineThe customer selects an item from an online catalogue of tangible goods and orders the itemcatalogue of tangible goods and orders the item electronically.electronically. The products are physically delivered to theThe products are physically delivered to the customer by a common carriercustomer by a common carrier AnalysisAnalysis : clearly falls within art.7 Business Profits: clearly falls within art.7 Business Profits
  49. 49. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 Case 2Case 2  Electronic ordering andElectronic ordering and downloading of digital productsdownloading of digital products Definition:Definition: The digital product is downloaded ontoThe digital product is downloaded onto the customer’s hard disk or other non-temporarythe customer’s hard disk or other non-temporary mediamedia Analysis:Analysis: majority of OECD countries = Bus Profitsmajority of OECD countries = Bus Profits Some countries that may qualify this payment asSome countries that may qualify this payment as Royalty (art.12) thus WHT because downloadingRoyalty (art.12) thus WHT because downloading = use of copyright.= use of copyright.
  50. 50. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 Case 3Case 3  Up-dates and add-onsUp-dates and add-ons Definition:Definition: The provider of a software or other digital productThe provider of a software or other digital product agrees to provide the customer with updates andagrees to provide the customer with updates and add-ons to the product.add-ons to the product. AnalysisAnalysis Payments arising from this kind of transactionsPayments arising from this kind of transactions qualify in the majority of cases as Businessqualify in the majority of cases as Business Profits (Art. 7)Profits (Art. 7)
  51. 51. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 Case 4Case 4  Single use software or other digitalSingle use software or other digital productproduct Definition:Definition: The customer acquires the right to use the digitalThe customer acquires the right to use the digital product only one time and it may be eitherproduct only one time and it may be either downloaded or used remotely (e-book).downloaded or used remotely (e-book). AnalysisAnalysis Payments of this kind may qualify as: Royalties,Payments of this kind may qualify as: Royalties, Bus Profits or even Services (art. 14)Bus Profits or even Services (art. 14)
  52. 52. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 Case 5Case 5  Application Hosting -Application Hosting - Definition:Definition: A user has a perpetual licence to use a softwareA user has a perpetual licence to use a software product by entering into a contract with a hostproduct by entering into a contract with a host entity. The user can access, execute operateentity. The user can access, execute operate the software applications remotely. E.G.the software applications remotely. E.G. Financial management, H.R.M. etc.Financial management, H.R.M. etc. AnalysisAnalysis Payments arising from this kind of transactionsPayments arising from this kind of transactions qualify as Bus Profits (art. 7)qualify as Bus Profits (art. 7)
  53. 53. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 Case 6Case 6  Technical informationTechnical information Definition:Definition: The customer is provide with undivulged technicalThe customer is provide with undivulged technical information concerning a product or process.information concerning a product or process. AnalysisAnalysis Payments arising from this kind of transactionsPayments arising from this kind of transactions qualify as Royalties as they are made for thequalify as Royalties as they are made for the supply of know howsupply of know how
  54. 54. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 US characterizationUS characterization reg 1.861(18)reg 1.861(18) transactions ‘in’ a copyright versustransactions ‘in’ a copyright versus ‘‘subject’ of a copyright (copyrighted article)subject’ of a copyright (copyrighted article) 5 rights of copyright5 rights of copyright  to reproduceto reproduce  to prepare derivative works that may be copyrightedto prepare derivative works that may be copyrighted  to transfer to public for sale, or licenseto transfer to public for sale, or license  to publicly performto publicly perform  to publicly displayto publicly display characterize substance, not formcharacterize substance, not form
  55. 55. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 US characterUS character Adobe web page allows download ofAdobe web page allows download of Acrobat editorAcrobat editor  Credit card fee for downloadCredit card fee for download  License agreement not to reproduceLicense agreement not to reproduce except one copy for backupexcept one copy for backup = sale of goods= sale of goods
  56. 56. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 US characterUS character License is a test license for portion of feeLicense is a test license for portion of fee  after one month, must destroy copyafter one month, must destroy copy  = no ownership of article= no ownership of article = lease= lease E-book : fee for a one week check out thenE-book : fee for a one week check out then encrypts itself, must return to web page forencrypts itself, must return to web page for additional fee for renewaladditional fee for renewal = lease= lease
  57. 57. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 US characterUS character Firm acquires one CDROM copy, pays a one-timeFirm acquires one CDROM copy, pays a one-time user fee (site-license) for users only in the firm,user fee (site-license) for users only in the firm, perpetual use, no sales to 3rd partyperpetual use, no sales to 3rd party  Load on work stationLoad on work station  Work stations access CDROM from LANWork stations access CDROM from LAN = sale of goods= sale of goods same but a monthly fee required for continued usesame but a monthly fee required for continued use and updates, if cancelled, then must deleteand updates, if cancelled, then must delete entire programentire program = lease of good= lease of good
  58. 58. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 US CharacterUS Character Audit firm pays CO to develop programAudit firm pays CO to develop program  Pays monthly fee during development processPays monthly fee during development process  Audit firm keeps all code if cancel contractAudit firm keeps all code if cancel contract  Completed program transferred to Audit firmCompleted program transferred to Audit firm == service feeservice fee CO sends programmer to audit firm to teach auditCO sends programmer to audit firm to teach audit firms code writers to save time in manipulatingfirms code writers to save time in manipulating programs, contract called information ‘tradeprograms, contract called information ‘trade secret’secret’ == provision of know howprovision of know how
  59. 59. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 India - USIndia - US credit card info accesscredit card info access  US Bank has India SUB for credit cardsUS Bank has India SUB for credit cards  software and data server in USsoftware and data server in US  software: collection, analysis, creditsoftware: collection, analysis, credit  SUB accesses US through InternetSUB accesses US through Internet  pays fee for accesspays fee for access  service or royalty?service or royalty? = royalty, see DTA rates= royalty, see DTA rates
  60. 60. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 IndiaIndia airline computerized reservation systemairline computerized reservation system  CO: server, data, software outside IndiaCO: server, data, software outside India – customer is travel agentscustomer is travel agents – airlines pay CO per ticket bookedairlines pay CO per ticket booked  SUB in IndiaSUB in India – hardware: routershardware: routers  local software to travel agent firmlocal software to travel agent firm Is CO liable on $ paid by non-IndianIs CO liable on $ paid by non-Indian airlines for India bookings?airlines for India bookings? = CO “deemed” virtual presence PE in= CO “deemed” virtual presence PE in India thus bus income attributedIndia thus bus income attributed
  61. 61. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 India DTA characterIndia DTA character  India/UKIndia/UK – look to res. of payee– look to res. of payee BUT if Tech Ser is for own use, notBUT if Tech Ser is for own use, not liableliable so if non-res pays non-res for techso if non-res pays non-res for tech serv utilized in India, not liableserv utilized in India, not liable  India/USIndia/US – res. of payee and where– res. of payee and where utilizationutilization
  62. 62. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 US states CT & Sales/UseUS states CT & Sales/Use  Constitutional limitation = “min contacts” &Constitutional limitation = “min contacts” & “substantial presence”“substantial presence” No State CT when min contactNo State CT when min contact  limit to representative solicits for sale oflimit to representative solicits for sale of tangiblestangibles  orders sent out of Stateorders sent out of State  goods delivered from out of State by commongoods delivered from out of State by common carriercarrier
  63. 63. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 State Sales / UseState Sales / Use BUT Consumption tax (sales, use)BUT Consumption tax (sales, use)  tickets where origination of travel was in-Statetickets where origination of travel was in-State  calls originating/destination in-State if payingcalls originating/destination in-State if paying addressee in Stateaddressee in State  sales if “systematic sales support” in-State visitssales if “systematic sales support” in-State visits  market maintenance through problem solvingmarket maintenance through problem solving employee visitemployee visit  software installation and trouble shootingsoftware installation and trouble shooting requiring employee visitrequiring employee visit
  64. 64. Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202 State Use taxState Use tax Vendor selling through InternetVendor selling through Internet state A – home server / websitestate A – home server / website Customer state B logs onto server in stateCustomer state B logs onto server in state A, pays CC through InternetA, pays CC through Internet Product shipped by UPS from State A DCProduct shipped by UPS from State A DC  No mnm contacts = no sales tax in BNo mnm contacts = no sales tax in B  But state B’s use tax to customerBut state B’s use tax to customer

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