Australian-controlled companies setting up Web sites in low-tax countries can now expect careful scrutiny from the Australian Tax Office (ATO).
Judging from the ATO's latest action plan for deciding how and when to tax the Internet, such companies could face an uphill battle in winning tax exemptions for Web site revenues. That's one of the issues detailed in a new ATO report called Tax and the Internet.
The report also mentions the creation of an e-commerce consultative council over the next few months. The council will comprise up to 25 members that will almost certainly include large business taxpayers with a considerable Internet presence, such as IBM Corp. and Microsoft Corp. It will not be a closed shop and community groups and other businesses can nominate themselves for the committee, said Stuart Hamilton, the ATO's acting assistant deputy commissioner for large business and international.
The report also flags tax office policy on the types of records ISPs must keep and how long they must keep them. The tax office will be looking at standards for everything from server transaction logs to the type of corporate identification supplied on Web sites.
The 212-page report spells out the ATO's plans for tracking how fast electronic commerce is growing as a fraction of the total economy. The current level of Internet-based business, however, has little immediate impact on tax revenues, according to Acting Tax Commissioner Bruce Jones.
To monitor changes, the tax office will look at indicators such as the uptake of digital certificates by users, consumer surveys and the rate at which Web sites are migrating to low-tax jurisdictions.
The report foreshadows strategies for dealing with companies which set up Web sites in low-tax countries. Income generated by the Web sites could be treated for tax purposes as "tainted" income, the report suggests. Pure Internet companies may find it more difficult to win exemptions from such treatment than traditional companies operating in preferential foreign tax regimes.
The tax office believes many Web sites that claim to be set up in small tax haven countries are actually located in developed countries where they enjoy bandwidth and infrastructure advantages.
Overall, the ATO is committed to a consultative process as it moves toward Internet taxation, according to Hamilton. "The key thing is we are seeking a light-touch regulatory approach and are not looking to impose an Australian solution on a global system."
The ATO is in broad agreement with OECD (Organisation for Economic Cooperation and Development) countries on the taxation principles which should underpin Internet commerce. They include neutrality and equality (between electronic forms of business and traditional business), efficiency (to reduce compliance costs to business and government administrators) and simplicity (of tax rules).