5 th International Conference Cyberspace, Brno, 30/11-1/12/2007 E-commerce and Transfer Pricing: Some Selected Issues Cyberspace 07 – 01/12/07

Relevance and object of the presentation; Scenarios analysed; The applicability of the arm’s length principle; Permanent Establishment: servers and websites; Arm’s lengths methods in e-commerce scenarios. Agenda Cyberspace 07 – 01/12/07

Relevance and object of the presentation Transfer Pricing and E-commerce: MNEs play in the global market of goods and services through a controlled entity (branch or subsidiary), exploiting technological means (Internet and Intranets) Allocation of taxable incomes in lower- tax jurisdictions. Cyberspace 07 – 01/12/07

Scenarios analyzed Intra-company transfer pricing Intra-company transfer pricing: an enterprise provides goods or services through a branch situated in a different country, using an electronic communications network (Internet or Intranet): e-commerce, e-tailing; Inter-companies transfer pricing Inter-companies transfer pricing: two companies that are part of the same group (holding-subsidiary, subsidiary-subsidiary) and that are located in different jurisdictions enter into an e-commerce transaction directed to trade goods or services. Cyberspace 07 – 01/12/07

The applicability of the arm’s length principle Basic principle Basic principle: permanent establishment at arm’s length the prices set in transactions between associated enterprises and between an enterprise and its branch (permanent establishment) in a different country must be at arm’s length. Cyberspace 07 – 01/12/07

The applicability of the arm’s length principle (continue) Article 9 OECD Model tax Convention Article 9 OECD Model tax Convention: where “conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.” Cyberspace 07 – 01/12/07

The applicability of the arm’s length principle (continue) controlled transaction prices independent parties The ‘behavior’ of the parties involved in the controlled transaction and the prices set in their mutual business operations must correspond to the practice between two independent parties Avoid the illicit transfer of taxable income to a low-tax country or to a tax heaven. Cyberspace 07 – 01/12/07

Permanent Establishment: servers and websites Relevance of the topic Relevance of the topic: the income of a branch of an enterprise situated in another country can be taxed there only if such a branch is recognized to be a permanent establishment (P.E.) of the enterprise. Therefore, the basic requirement for the applicability of transfer pricing regime is met. Cyberspace 07 – 01/12/07

Permanent Establishment: servers and websites (continue) The perspective of the OECD The perspective of the OECD: application of the traditional notion of P.E. to e-commerce scenarios distinction between servers and websites; application of the traditional notion of P.E. to e-commerce scenarios. Only a physical device or premise can be a P.E. of the enterprise. Only a server can be deemed to be a P.E. Cyberspace 07 – 01/12/07

Permanent Establishment: servers and websites (continue) Requisites for a server being a P.E.: fixed It must be fixed: analysis on a case-by- case basis; personnel The presence of personnel is not necessary (but it can be a further indicator of the activities performed); activities of preparatory or auxiliary character It must not carry on activities of preparatory or auxiliary character (e.g.: communication link, advertisement, mirror server, supply information, gather market data). Cyberspace 07 – 01/12/07

Permanent Establishment: servers and websites (continue) is A server is a P.E. if: contract the conclusion of the contract with the customer payment the processing of the payment delivery the delivery of the products are performed automatically through the server. ISP An independent ISP is not, usually, agent of the enterprise and therefore it can’t be deemed to be its P.E. Cyberspace 07 – 01/12/07

Arm’s length methods in e-commerce scenarios Preference traditional transaction methods Preference must be given to the traditional transaction methods (comparable uncontrolled price; resale price; cost plus). For highly integrated transactions, it can be better the profit split method (analysis on a case-by-case basis). very small Usually the portion of profits attributed to the P.E. is very small: the operations carried on are automatic and do not require a complex structure. Cyberspace 07 – 01/12/07

Davide M. Parrilli Interdisciplinary Centre for Law & ICT - ICRI K.U.Leuven Sint-Michielsstraat Leuven - Belgium Thank you! Cyberspace 07 – 01/12/07