New Zealand: E-Tax Uncertainty Reigns In Cyberspace?

Last Updated: 31 January 2001
Article by Rob G Macnab

This article summarizes the recent issue by the OECD of final rules regarding article 5 ("permanent establishment") of the OECD Model Tax Treaty and how it applies with respect to electronic commerce. Another report is due out from the OECD soon that will address whether the PE definition should be modified or abandoned in light of the challenges posed by Internet technologies and global e-business. The writer concludes that it is too soon to rely on the findings of the OECD regarding e-commerce and PE’s.

Cyberspace - the final tax frontier? Can international tax advisers continue to seek out new tax structures and opportunities and to boldly go where no one has gone before? Can international tax systems keep up with the challenges presented by Internet technologies and global e-business? Will international revenue authorities also boldly go where no one has gone before? Can traditional tax treaty concepts such as the "permanent establishment", created in the "industrial age", survive into the "digital age"?

The "permanent establishment" concept ("PE" to tax geeks) was originally designed in the later half of the 19th century to prevent double taxation of trade between Prussian municipalities. In 1899, the concept was included in the first international tax treaty between Austria-Hungary and Prussia. Obviously, this tax concept (based on fixed place of business) was created eons before electronic commerce (based on-line trade) was ever thought of.

The PE concept settles whether a tax treaty country has the right to tax profits of a business operating in that country. Such a country can only tax that business if it has a PE in its country and derives profits from sources from within that country. Now that it is no longer necessary to have a physical presence in countries in order to trade internationally, it is questionable whether the PE concept should continue to apply, in light of the pace of change and innovation associated with Internet technologies and on-line trade.

The OECD has recently issued final e-commerce tax guidelines based on the current definition of a PE in its Model Tax Treaty. It should be noted that the guidelines do not amend the PE definition, but rather seek to fit the proverbial "square peg" (viz. e-commerce) into the proverbial "round hole" (viz. the PE definition). The guidelines merely determine whether an entity conducts its business through a PE in a particular OECD member country based on the current PE definition. Another OECD technical advisory group report will hopefully be issued before the end of this year determining whether this existing PE definition should be modified or abandoned because of the challenges brought about by electronic trade.

Under the current PE definition a non-resident entity has a PE in a treaty country if it has both a physical presence and carries out essential business activities in the treaty country from which PE profits are sourced. Fortunately, for those involved in electronic trading, the guidelines conclude that a web site of itself will never constitute a PE. This is because a web site is merely intangible software and data, and cannot be classed as a place of business as there are no "premises or, … machinery or equipment". Also, a web site hosting arrangement will usually not create a PE. Lastly, an ISP will usually not be a dependent agent of a non-resident entity, which would create a PE in the relevant country. The OECD concludes that a web server may sometimes be a PE in a country (e.g. when it is owned or leased by the non-resident and carries out essential business activities). But where the server does no more than carry information that will be processed elsewhere, it cannot be considered to be a PE.

It is questionable why there should be such a distinction between owning or leasing computer equipment and ISP web site hosting arrangements. The only reason that there is a distinction is because of the unique nature of Internet on-line trading that makes this possible. Traditional businesses cannot avoid taxable presence as premises, machinery, or equipment must either be owned or leased, and cannot be "hosted" like web sites can. A German court decision, known as the "pipeline decision" [the 1996 Bundesfinanzhof decision], arguably supports the principle that automated equipment can constitute a PE. The German Supreme Court held that an underground oil pipeline, located in Germany and controlled by computer from the Netherlands constituted a PE in Germany for German tax purposes. This was because the pipeline was essential to the taxpayer's business and there was a significant degree of permanence to it.

Even if you fall foul of the OECD PE rules, income tax can be minimised between OECD countries in a number of ways, by such strategies as: changing ownership or leasing arrangements of computer equipment; ensuring the equipment is portable; restricting activities taking place on the equipment to being solely of a "preparatory" or "auxiliary" nature (e.g. for market research, advertising, warehousing, procurement, etc, as opposed to concluding of contracts); relocation of the computer equipment to a nearby tax haven; using "mirror", parallel or linked web servers; minimising the amount of profits that will be attributed to the PE … (an OECD report is to be released on how to calculate e-commerce PE profits)

Note that there is still a lack of consensus among the OECD taxing authorities concerning what constitutes a PE. Some have argued that the mere maintenance of a web site on a server located in a taxing jurisdiction satisfies the requirements for a PE. Others argue that a web server alone can never be a PE regardless whether it is owned or leased by a non-resident.

The final guidelines issued by the OECD on the current Model Tax Treaty definition of a PE in light of e-commerce seeks to fit the e-commerce concepts into the existing historical physical presence / essential business requirements for a PE. The guidelines do not address whether the traditional definition of a PE is adequate to address the challenges presented by Internet technologies and global e-business, or whether the PE concept should be abandoned altogether in preference to a better international tax concept for the Digital Age.

The current guidelines provide some clarity in determining when computer equipment may create a PE under the current definition. However the expected report, on whether the PE definition should be amended or abandoned, may override the current guidelines. It is arguable that it may have been more prudent for the OECD to report all its findings on the PE and e-commerce issue at the same time.

So the final word is not yet out and income tax uncertainty continues to reign in cyberspace, providing risks of double taxation, but also opportunities for those who dare to plan ahead.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions