Companies engaged in electronic commerce over the Internet have been lulled into a false sense of security over taxation, and need to take action to avoid losses according to accountancy firm Coopers & Lybrand.
The company's corporate tax principal Susan Mainwearing said the US government is trying to work out methods of taxing Internet commerce and it was only a matter of time before the UK government tried something similar. "The sheer volume of business now conducted over the Internet means governments cannot afford to ignore these issues if they want to protect their share of international tax revenues," she said.
Mainwearing went on to explain there are basic taxing concepts in most developed countries, which were applied in conjunction with a system of tax treaties. These concepts relate to the place where contracts are made and profits earned, and determine which territories can levy tax. Internet trading does not fall into the categories that had been set by these criteria.
According to Mainwearing, some US states are already looking at taxing Internet service providers: "In the absence of an international convention on electronic commerce taxation, it would be possible to be taxed several times for the same transaction, so if there is no agreement between territories the manufacturer may end up paying a higher rate of tax than expected.
So if a car was made in the UK but sold in Germany over the Internet, the manufacturer may have to pay German rates which are much higher than here in the UK."
Mainwearing urged UK companies interested in electronic commerce to become involved with the taxation debate to ensure a fair and reasonable set of international rules was agreed.
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