Technology – Websites spark tax chaos.

Governments are having little success in setting the ground rules for taxing the profits of e-commerce, according to a leading expert.

Douglas McWilliams, chief executive of the centre for Economics and Business Research, said some enterprises were avoiding tax entirely and enforcers were struggling to pin them down as government systems are based on a model for businesses with a ‘permanent establishment’.

His comments come at a time when the European Commission is desperately trying to solve the problem of recovering VAT on electronic goods, such as music, supplied to customers inside the union from third party countries.

‘Governments are trying to fight back but the basis of taxation relates to business activities carried out through a permanent establishment – websites do not fit this model,’ said McWilliams at the tax computer systems conference at the ICAEW.

He said e-businesses would continue to be hard to control by governments because their structures would make it extremely difficult to formulate international agreements between countries.

He said the recent OECD agreement made it clear that problems would persist.

‘The agreement asserts that a website is not a permanent establishment, that a website hosting arrangement typically does not result in a permanent establishment for the enterprise carrying on business through the website,’ he said.

He added: ‘These companies can be described as footloose and governments will continue to have difficulty in formulating internationally-acceptable rules for taxation.’

So far the European Commission has struggled to deal with VAT on electronic goods with member countries unable to agree a solution. At present the commission wants non-EU traders to register in one member state but levy VAT at the rate of the country in which each customer lives.

This has proved a highly unpopular idea with much criticism of the proposal, especially from the UK which claims it is impossibly bureaucratic.

In contrast, the UK proposes suspending VAT for all e-traders until a workable solution can be found. One solution is the creation of an EU portal through which all outside e-businesses would trade. It would automatically note how much is payable on each transaction.

Currently, many traders sell electronic goods into the EU without paying VAT. The UK’s proposal would level the playing field for domestic traders.

UK pushes EU to suspend online VAT:

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