The Dutch tax system, like that of most other countries, is based on the traditional types of commerce and has not yet been adapted to reflect the special characteristics of e-commerce. This could lead to double taxation or no taxation at all in some situations. With respect to Dutch taxes on profits, there are three main issues in relation to e-commerce. The most important issue is whether an enterprise trading through e-commerce has a taxable presence in the country of the customers. Under the current tax rules, profits realised by an enterprise through its business activities are, as a general rule, taxable only in its country of residence. However, if the enterprise has a permanent establishment ('PE') in another country, profits derived through the PE are taxable in the country where the PE is located.

The main question in relation to e-commerce is whether the presence of only a web site and server in a country is sufficient to constitute a PE. A consensus has not yet been reached on the answer to this question. If an enterprise has a PE in another country, the next issue that needs to be addressed is the attribution of profits to such a PE. Although the issue of attribution of profits to a PE of an 'e-commerce enterprise' requires the application of normal transfer pricing principles, there has been limited experience with transfer pricing in relation to e-commerce.

The third main issue is the characterisation of payments under double tax treaties. Such a treaty allocates the right to tax certain profits between the contracting states. Generally, this right is attributed to the country of residence of the e-commerce enterprise, unless it has a PE in the other country. However, a tax treaty also gives the contracting states the right to tax certain payments at source, such as royalty payments, lease payments and payments for certain services. Payments for e-commerce services and activities are not easily characterised in this connection. For instance, is a payment for the downloading of a document a royalty payment or a payment for the sale of goods or services? The answer to this question will determine which of the contracting states has a right of taxation under a double tax treaty.

The Dutch tax authorities are also wrestling with various issues related to the levying of value added taxes ('VAT') on transactions carried out over the Internet. VAT is a tax on the sale of goods and services that is imposed throughout the European Union by virtue of EC directives. Although e-commerce transactions within the European Union are, in principle, subject to the normal VAT rules, these rules do not always take account of the particular features of such transactions. If the Internet is used to order physical goods, the goods will have to be sent to the customer. The basic rules for VAT can be applied without further complications. In this situation, VAT is in general levied in the country where the customer is situated and the goods are consumed. Since there is a physical exchange of goods that can be monitored by the tax authorities, the levying of VAT in such situations will not give rise to major problems for the tax authorities. Some products can be supplied not only in a physical form, but also by downloading from the Internet in their digital form. This applies to what are known as virtual goods, such as games, magazines, music, films and standard files or programmes. In these situations double taxation or non-taxation may be the result.

In the absence of special EU legislation on this subject, the Dutch State Secretary of Finance decided last year to issue a decree containing guidelines on the levying of Dutch VAT on e-commerce transactions. One of these guidelines is that downloading of virtual goods from the Internet is to be considered a service for VAT purposes. In principle, this service is subject to VAT in the country where the customer is situated. However, if the customer is a private individual, the service will be subject to VAT in the country where the service provider is situated. This means that where the service provider is a US company and the customer is a Dutch private individual, no VAT will be due. However, where the service provider is situated in the Netherlands or France and the customer is a Dutch private individual, the service is subject to Dutch or French VAT, respectively.

This example shows that service providers situated outside the European Union have a competitive advantage over European service providers when supplying virtual goods to private individuals. Apart from downloading virtual goods from the Internet, it is also possible to consult files on the Internet against payment of a fee. It is possible to watch live-shows, participate in multi-player games or take educational courses on the Internet. According to the State Secretary's guidelines, such services will usually qualify as activities of an educational or entertainment nature. From a Dutch point of view, these services will be subject to VAT in the country where the customer is situated. This means that foreign entrepreneurs have to register for VAT purposes in the Netherlands when they provide educational or entertainment activities by means of the Internet to Dutch private individuals.

A major problem for the fiscal authorities is that they cannot easily trace foreign companies that are providing these services to private individuals. The question therefore arises how the fiscal authorities will be able to enforce the application of the VAT system in these cases. These examples show that companies involved in e-commerce must tread carefully.

Auteurs: Trudy Perie en Nico Blom