Bangalore E-commerce Lecture 2003

BRIEF LOOK AT ABRIEF LOOK AT A
FEW OFFSHOREFEW OFFSHORE
ECOMMERCE ISSUESECOMMERCE ISSUES
Bangalore Chartered AccountantsBangalore Chartered Accountants
December 8, 2003December 8, 2003
Professor William H. Byrnes, IVProfessor William H. Byrnes, IV

Prof. William Byrnes +1 786 271 5202Prof. William Byrnes +1 786 271 5202
Popular Offshore DestinationsPopular Offshore Destinations
 IndiaIndia – skilled labor costs, export incentives– skilled labor costs, export incentives
 IrelandIreland – gov’t directed, low tax, stable, work– gov’t directed, low tax, stable, work
quality, DTAs, EU VAT, Euroquality, DTAs, EU VAT, Euro
 SwitzerlandSwitzerland – govt. directed, low ETR, work– govt. directed, low ETR, work
quality, stable, DTAsquality, stable, DTAs
 SingaporeSingapore – tax incentives, work quality, gov’t– tax incentives, work quality, gov’t
directed, some DTAsdirected, some DTAs
 Hong KongHong Kong – low tax, law, proximity, K mkts– low tax, law, proximity, K mkts

More Recent Offshore (>1998)More Recent Offshore (>1998)
 MauritiusMauritius – low ETR, DTAs, labor cost– low ETR, DTAs, labor cost
 CyprusCyprus – low tax, DTAs, EU (2004)– low tax, DTAs, EU (2004)
 MaltaMalta – low ETR, DTAs, EU (2004)– low ETR, DTAs, EU (2004)
 Isle of ManIsle of Man – low tax, likely no tax, EU VAT– low tax, likely no tax, EU VAT
 BermudaBermuda – no tax– no tax
 GibraltarGibraltar – Spanish life, English work, no tax– Spanish life, English work, no tax
 MalaysiaMalaysia – gov’t directed, labor costs, tax– gov’t directed, labor costs, tax
incentivesincentives

ISSUESISSUES
 Technical infrastructure &Technical infrastructure &
capacitycapacity
 Operational infrastructureOperational infrastructure
 Relative operational costsRelative operational costs
 Regulatory infrastructureRegulatory infrastructure
 Legal issues & ComplianceLegal issues & Compliance
 Tax issuesTax issues

Regulatory & Legal IssuesRegulatory & Legal Issues
Regulatory bodiesRegulatory bodies
E-commerce enablingE-commerce enabling
legislation (e.g. e-contracts)legislation (e.g. e-contracts)
Stable & Robust legal systemStable & Robust legal system
Recognition of judgmentsRecognition of judgments

Operational Capability & CostsOperational Capability & Costs
 Technical laborTechnical labor
– server banks in Singapore / India / Costa Ricaserver banks in Singapore / India / Costa Rica
 Telecommunications & CostsTelecommunications & Costs
– Bermuda v. JamaicaBermuda v. Jamaica
 General offshore business issuesGeneral offshore business issues
– Audit & Compliance?Audit & Compliance?
– Environment?Environment?
– Stability?Stability?

Hong Kong E-commHong Kong E-comm
Government InitiativesGovernment Initiatives
 Electronic service deliveryElectronic service delivery
program (ESD)program (ESD)
Delivery of government services onlineDelivery of government services online
 Digital 21Digital 21
Comprehensive strategy to enhance and promoteComprehensive strategy to enhance and promote
Hong Kong’s information infrastructure andHong Kong’s information infrastructure and
servicesservices

Hong Kong’s E-TransactionHong Kong’s E-Transaction
Ordin. (2000)Ordin. (2000)
 Authorizes the use of electronic and digitalAuthorizes the use of electronic and digital
signaturessignatures
 Confers legal validity to electronic recordsConfers legal validity to electronic records
 Delineates the requirements for theDelineates the requirements for the
formation of electronic contractsformation of electronic contracts
 Establishes regulations for the licensing ofEstablishes regulations for the licensing of
certification authoritiescertification authorities

HK’s E-Transaction Ord. (2000)HK’s E-Transaction Ord. (2000)
Main exception.Main exception.
•• Certain generic items such as wills,Certain generic items such as wills,
trust, statutory declarations, affidavits,trust, statutory declarations, affidavits,
power of attorney, court orders, warrant, billspower of attorney, court orders, warrant, bills
of exchange, documents or instrumentsof exchange, documents or instruments
concerning land or property transactions,concerning land or property transactions,
etc. Are exempt from the operation of theetc. Are exempt from the operation of the
relevant provisions in the proposedrelevant provisions in the proposed
legislation.legislation.

HKMA Internet Banking ProposalHKMA Internet Banking Proposal
 Local online bank - 50 per cent owned by aLocal online bank - 50 per cent owned by a
well-established bank or other supervisedwell-established bank or other supervised
financial institutionfinancial institution
 appropriate experienceappropriate experience
 Foreign online bank – US$16B groupForeign online bank – US$16B group
minimum &minimum &
 Established foreign e-bank regsEstablished foreign e-bank regs

BermudaBermuda
E-business facilities.E-business facilities.
• Systems Resource GroupSystems Resource Group
• Emagine Ltda.Emagine Ltda.
• Secure Hosting LimitedSecure Hosting Limited

BermudaBermuda
Telecommunication infrastructureTelecommunication infrastructure
*Government privatized the*Government privatized the
telecommunication servicetelecommunication service
*Public utility commission (PUC) is the*Public utility commission (PUC) is the
regulatory agencyregulatory agency

BermudaBermuda
• Internet license fees reduced fromInternet license fees reduced from
$10,000 to $2,600$10,000 to $2,600
• Paging licenses fees reducedPaging licenses fees reduced
from $5,000 to $1,300from $5,000 to $1,300

BermudaBermuda
• Internet service cost reduced fromInternet service cost reduced from
US$100 a month to $US20 aUS$100 a month to $US20 a
monthmonth
• Business packages reduced fromBusiness packages reduced from
US$150 a month to US$35 aUS$150 a month to US$35 a
monthmonth

BermudaBermuda
E-COMMERCE LEGAL FRAMEWORKE-COMMERCE LEGAL FRAMEWORK
• The ElectronicThe Electronic
Communication andCommunication and
Transaction BillTransaction Bill
• The Misuse of Computer BillThe Misuse of Computer Bill
• Data Protection BillData Protection Bill

BermudaBermuda
The electronic communicationThe electronic communication
and transaction billand transaction bill
**Recognizes electronic messages,Recognizes electronic messages,
signatures, writings and contracts.signatures, writings and contracts.
**Exemptions: disposition of property,Exemptions: disposition of property,
testamentary dispositions, negotiabletestamentary dispositions, negotiable
instruments, enduring powers ofinstruments, enduring powers of
attorney and court documents.attorney and court documents.

BermudaBermuda
Misuse of computer billMisuse of computer bill
Creates a series of offences arisingCreates a series of offences arising
out of the unlawful interferenceout of the unlawful interference
with computers and computerwith computers and computer
systemssystems based on thebased on the EU CouncilEU Council
and the OECDand the OECD

BermudaBermuda
Data protection billData protection bill
Implements privacy principlesImplements privacy principles
established by the OECD underestablished by the OECD under
its guidelines that protect theits guidelines that protect the
privacy and transferred flows ofprivacy and transferred flows of
personal data.personal data.

BermudaBermuda
BankingBanking
Foreign banks are not permitted to operateForeign banks are not permitted to operate
in Bermuda. The BMA supervises thein Bermuda. The BMA supervises the
three Bermudian banks, which operate athree Bermudian banks, which operate a
joint clearing system. The threejoint clearing system. The three
Bermudian banks have subsidiaries in theBermudian banks have subsidiaries in the
major financial centers.major financial centers.

BermudaBermuda
Payment processing facilitiesPayment processing facilities
*Two local banks have entered partnership*Two local banks have entered partnership
to set up international payment processingto set up international payment processing
solutionssolutions
*Local hosting services utilizing software*Local hosting services utilizing software
and systems provide internet paymentand systems provide internet payment
services as wellservices as well

Isle Of ManIsle Of Man
 E-commerce legal frameworkE-commerce legal framework
 E-transactions regulations of 2000E-transactions regulations of 2000
 Computer security act of 1992Computer security act of 1992
 Data protection act of 1986Data protection act of 1986
 Online gambling regulation actOnline gambling regulation act
 Fair trading amendment billFair trading amendment bill

The e-transaction act , 2000 excludesThe e-transaction act , 2000 excludes
 MarriagesMarriages
 A testamentary dispositionA testamentary disposition
 Power of attorneyPower of attorney
 A conveyance or creation of an interest inA conveyance or creation of an interest in
landland
 A mortgageA mortgage
 Transfer or mortgage of ship interestTransfer or mortgage of ship interest

(Online) Fair trading bill(Online) Fair trading bill
consumer protection act: unfair contractconsumer protection act: unfair contract
terms in consumer contracts, and rulesterms in consumer contracts, and rules
regarding distance sales, includingregarding distance sales, including
information to be given to consumer, rightinformation to be given to consumer, right
to cancel, return of goods, andto cancel, return of goods, and
performance of contracts.performance of contracts.

 Internet service providers.Internet service providers.
 Domicilium Ltda.Domicilium Ltda.
 Mannet.Mannet.
 Manx telecom.Manx telecom.
 XKO (IOM) limited.XKO (IOM) limited.

CYPRUSCYPRUS
 Cyprus Telecom Authority (CYTA)Cyprus Telecom Authority (CYTA)
 virtually all-digital local networkvirtually all-digital local network
 satellite telecom networksatellite telecom network
 fiber optic submarine cable systemfiber optic submarine cable system

CYPRUSCYPRUS
CYTA provides variety of advancedCYTA provides variety of advanced
telecommunications services, covering thetelecommunications services, covering the
whole spectrum of customer needs forwhole spectrum of customer needs for
both voice and data communications, bothboth voice and data communications, both
fixed and mobile.fixed and mobile.

CYPRUSCYPRUS
Telecommunication infrastructure.Telecommunication infrastructure.
A new telecommunication regulator hasA new telecommunication regulator has
been appointed by liberalizationbeen appointed by liberalization
legislation but has not been affectivelegislation but has not been affective
yet.yet.

CYPRUSCYPRUS
Telecommunication InfrastructureTelecommunication Infrastructure
Functions of new regulator:Functions of new regulator:
*granting new telecom and postal*granting new telecom and postal
licenseslicenses
**authorizing telecommunicationsauthorizing telecommunications
networks & servicesnetworks & services

CYPRUSCYPRUS
ISP and hosting services.ISP and hosting services.
*Sofocleous and co.*Sofocleous and co.
* Armata.* Armata.
*CTC Infocom.*CTC Infocom.
* Cyprus on line, Cyprus* Cyprus on line, Cyprus
*telecommunications authority*telecommunications authority
*Spidernet.*Spidernet.

CYPRUSCYPRUS
Online banking.Online banking.
Laiki eBankLaiki eBank, launched by Laiki bank in September, launched by Laiki bank in September
2000, was the first electronic bank in Cyprus to2000, was the first electronic bank in Cyprus to
allow banking and stock market transactions viaallow banking and stock market transactions via
the internet. Laiki eBank customers are able tothe internet. Laiki eBank customers are able to
trade securities on the CSE, track developmentstrade securities on the CSE, track developments
on the CSE and have a live update of theiron the CSE and have a live update of their
portfolio.portfolio.

CYPRUSCYPRUS
Online banking.Online banking.
Spidernet has developed SpidertradeSpidernet has developed Spidertrade
(http://www.spidertrade.Com.Cy), an interactive(http://www.spidertrade.Com.Cy), an interactive
online service providing the latest financial news,online service providing the latest financial news,
real-time quotes from the Cyprus stockreal-time quotes from the Cyprus stock
exchange (CSE) and on-line trading services. Atexchange (CSE) and on-line trading services. At
the same time SpiderNet offers free to itsthe same time SpiderNet offers free to its
subscribers the SpiderWAP service.subscribers the SpiderWAP service.

Major Tax Issues:Major Tax Issues:
 Home jurisdiction tax ratesHome jurisdiction tax rates
– Tax credits for tax paid to source stateTax credits for tax paid to source state
– DTA protection from source withholding / PEDTA protection from source withholding / PE
– Characterize incomeCharacterize income
 Business / Service / License / Capital GainBusiness / Service / License / Capital Gain
 Source stateSource state
– Characterize incomeCharacterize income
– CT on ECI, trade within, PECT on ECI, trade within, PE
– WHT on license, services, branch profitsWHT on license, services, branch profits

Jurisdiction to Tax CompanyJurisdiction to Tax Company
 domiciliary:domiciliary: incorporation and / or effectiveincorporation and / or effective
management and / or real seatmanagement and / or real seat
 sourcesource: items of income or capital that arise in: items of income or capital that arise in
the statethe state
– for business or professional services income:for business or professional services income:
permanent establishment or fixed base ofpermanent establishment or fixed base of
businessbusiness
– for capital income: dividend, interests,for capital income: dividend, interests,
royaltiesroyalties
 anti-deferral legislation (i.e. C.F.C.)anti-deferral legislation (i.e. C.F.C.)

Mauritius TaxMauritius Tax
 Previously companies chose own rate of
tax (0%) but as of 10.07.98 companies
taxed @ 15%.
 Credit of 90% of tax paid (13.5%)
available so effective rate of 1.5%.
 As of 01.07.01 only 80% credit allowed so
effective rate is 3%.
 Several DTAs (India, China, Indonesia)

MaltaMalta
 EU member (2004)
 headline rate of 35% tax
 Complex tax credit system to relieve
double taxation =
– Int’l Trading Company (ITC) – ERT 4%
– Int’l Holding Company (IHC) – ERT 6%

Role of the OECD ModelRole of the OECD Model
ConventionConvention
 Tax Treaties entered into bilaterally by StatesTax Treaties entered into bilaterally by States
are mostly based upon OECD Model, some UNare mostly based upon OECD Model, some UN
Model.Model.
 US ModelUS Model
 Also OECD Reports on E-commAlso OECD Reports on E-comm
 See www.oecd.orgSee www.oecd.org

Source and CharacterizationSource and Characterization
 Blurring of geographical categories:Blurring of geographical categories:
Where income arises?Where income arises?
e.g. if a non resident company generates income through a sale arisinge.g. if a non resident company generates income through a sale arising
out of a web page that is accessed in another country, what is theout of a web page that is accessed in another country, what is the
source of the sale income?source of the sale income?
 Blurring of income categories:Blurring of income categories:
What kind of income is it?What kind of income is it?
e.g. a download of digitalised product from a foreign web site:e.g. a download of digitalised product from a foreign web site:
states may consider such payments as per:states may consider such payments as per:
Royalty, Business Profit, Services or Intangible assetRoyalty, Business Profit, Services or Intangible asset

place of effective managementplace of effective management
Limitations in a modern, technologically advancedLimitations in a modern, technologically advanced
environment:environment:
Problems presented:Problems presented:
a net centric company (i.e. a company that does not have any office, wherea net centric company (i.e. a company that does not have any office, where
managers and employee are located across several states and it ismanagers and employee are located across several states and it is
organised on intranet in leasing): what state has residence based taxorganised on intranet in leasing): what state has residence based tax
authority over the income that net company generates?authority over the income that net company generates?
Use of modern networks, videoconferencing or otherUse of modern networks, videoconferencing or other
electronic discussion group applications can transform aelectronic discussion group applications can transform a
company into a net centric company, where directors orcompany into a net centric company, where directors or
key managers do not need to be fiscally located in anykey managers do not need to be fiscally located in any
place to make decisions and mobile decisions may beplace to make decisions and mobile decisions may be
the rule.the rule.

Article 5: PermanentArticle 5: Permanent
EstablishmentEstablishment
According to article 5 OECD MC a PEAccording to article 5 OECD MC a PE
means a “fixed place of businessmeans a “fixed place of business
through which the business of anthrough which the business of an
enterprise is wholly or partly carriedenterprise is wholly or partly carried
on”on”
How does it apply in the context ofHow does it apply in the context of
electronic commerce?electronic commerce?

Source jurisdiction in e-Source jurisdiction in e-
commerce: Permanentcommerce: Permanent
There are two types of P.E. that are relevantThere are two types of P.E. that are relevant
in the e-commerce context:in the e-commerce context:
 a physical permanent establishmenta physical permanent establishment
 an agency permanent establishmentan agency permanent establishment

Source jurisdiction in e-Source jurisdiction in e-
commerce: Permanentcommerce: Permanent
 where the activity is carried onwhere the activity is carried on
The business carried on through the PE needs to be ‘The business carried on through the PE needs to be ‘
core business activity’ and not meant as havingcore business activity’ and not meant as having
preparatory or auxiliary character.preparatory or auxiliary character.
The activity need not necessarily be performed by aThe activity need not necessarily be performed by a
human being.human being.

Application of physical P.E.Application of physical P.E.
concept to a serverconcept to a server
Consider a R Corp. established in State R having its ownConsider a R Corp. established in State R having its own
server in country S.server in country S.
The serverThe server maymay constitute a P.E. for R Corp in S,constitute a P.E. for R Corp in S,
especially if its own employee operates and maintainespecially if its own employee operates and maintain
the server for its own account, even if they operatethe server for its own account, even if they operate
remotely and are not physically present on S territory.remotely and are not physically present on S territory.
However if the server functioned solely for the purpose ofHowever if the server functioned solely for the purpose of
display, storage or delivery of goods or services,display, storage or delivery of goods or services, itit
may notmay not qualify as PE since its activities would onlyqualify as PE since its activities would only
be of having auxiliary character.be of having auxiliary character.

Permanent EstablishmentPermanent Establishment
AT OECD level consensusAT OECD level consensus
 A web site cannot, in itself, constitute aA web site cannot, in itself, constitute a
permanent establishment since there ispermanent establishment since there is
any ‘place of business’ there.any ‘place of business’ there.
 An ISP does not constitute a dependentAn ISP does not constitute a dependent
agent of another enterprise and thereforeagent of another enterprise and therefore
does not represent a PE for that otherdoes not represent a PE for that other
enterpriseenterprise

Server as a PE?Server as a PE?
The issue of whether a computer equipment at a givenThe issue of whether a computer equipment at a given
location constitutes a Permanent Establishment willlocation constitutes a Permanent Establishment will
depend on:depend on:
 whether the functions performed through thatwhether the functions performed through that
equipment exceed the preparatory or auxiliaryequipment exceed the preparatory or auxiliary
threshold, analysis of case by case;threshold, analysis of case by case;
 The server will need to be located at a certain place forThe server will need to be located at a certain place for
a sufficient period of time so as to become ‘fixed’ withina sufficient period of time so as to become ‘fixed’ within
the meaning of article 5 paragraph 1;the meaning of article 5 paragraph 1;
 Also on a case by case needs to be evaluated whetherAlso on a case by case needs to be evaluated whether
an enterprise has a computer equipment at its disposalan enterprise has a computer equipment at its disposal
and where business functions of the enterprise areand where business functions of the enterprise are
performed;performed;

Server NOT PEServer NOT PE
At OECD consensus following activities as beingAt OECD consensus following activities as being
preparatory or auxiliary to the activity of the enterprisespreparatory or auxiliary to the activity of the enterprises
and not giving rise to a PE:and not giving rise to a PE:
 Providing a communication link between suppliers andProviding a communication link between suppliers and
customerscustomers
 Advertising of goods and servicesAdvertising of goods and services
 Relaying information through a mirror server for securityRelaying information through a mirror server for security
and efficiency purposes;and efficiency purposes;
 Gathering market data for the enterprise;Gathering market data for the enterprise;
 Supplying information.Supplying information.
Unless of course the above activities constitute coreUnless of course the above activities constitute core
functions of the enterprise.functions of the enterprise.

Server = PEServer = PE
If the server offers more than auxiliary activities:If the server offers more than auxiliary activities:
 sales help,sales help,
 contracting,contracting,
 payment processing,payment processing,
 delivery arrangements,delivery arrangements,
 database information retrieval (about the company) etc.database information retrieval (about the company) etc.
R Corp. leases space on a third party’s server in country S,R Corp. leases space on a third party’s server in country S,
since it qualifies as being nevertheless ‘at disposal ‘ ofsince it qualifies as being nevertheless ‘at disposal ‘ of
the enterprise R Corp in state Sthe enterprise R Corp in state S
This last situation, for example may even give rise to theThis last situation, for example may even give rise to the
fact that R Corp may end having a P.E. in S withoutfact that R Corp may end having a P.E. in S without
even knowing iteven knowing it ..

If Server = PEIf Server = PE
 When a server is deemed to constitute aWhen a server is deemed to constitute a
P.E. of R Corp. in state S, all the incomeP.E. of R Corp. in state S, all the income
that is attributable to it shall be subject tothat is attributable to it shall be subject to
tax in State S.tax in State S.
 Business Profits in particular, may beBusiness Profits in particular, may be
subject to tax in the source state only andsubject to tax in the source state only and
to the extent there is a PE in that state.to the extent there is a PE in that state.

Characterization 1Characterization 1
 Electronic order processing ofElectronic order processing of
tangible productstangible products
Definition:Definition:
The customer selects an item from an onlineThe customer selects an item from an online
catalogue of tangible goods and orders the itemcatalogue of tangible goods and orders the item
electronically.electronically.
The products are physically delivered to theThe products are physically delivered to the
customer by a common carriercustomer by a common carrier
AnalysisAnalysis : clearly falls within art.7 Business Profits: clearly falls within art.7 Business Profits

Case 2Case 2
 Electronic ordering andElectronic ordering and
downloading of digital productsdownloading of digital products
Definition:Definition: The digital product is downloaded ontoThe digital product is downloaded onto
the customer’s hard disk or other non-temporarythe customer’s hard disk or other non-temporary
mediamedia
Analysis:Analysis: majority of OECD countries = Bus Profitsmajority of OECD countries = Bus Profits
Some countries that may qualify this payment asSome countries that may qualify this payment as
Royalty (art.12) thus WHT because downloadingRoyalty (art.12) thus WHT because downloading
= use of copyright.= use of copyright.

Case 3Case 3
 Up-dates and add-onsUp-dates and add-ons
The provider of a software or other digital productThe provider of a software or other digital product
agrees to provide the customer with updates andagrees to provide the customer with updates and
add-ons to the product.add-ons to the product.
AnalysisAnalysis
Payments arising from this kind of transactionsPayments arising from this kind of transactions
qualify in the majority of cases as Businessqualify in the majority of cases as Business
Profits (Art. 7)Profits (Art. 7)

Case 4Case 4
 Single use software or other digitalSingle use software or other digital
productproduct
The customer acquires the right to use the digitalThe customer acquires the right to use the digital
product only one time and it may be eitherproduct only one time and it may be either
downloaded or used remotely (e-book).downloaded or used remotely (e-book).
AnalysisAnalysis
Payments of this kind may qualify as: Royalties,Payments of this kind may qualify as: Royalties,
Bus Profits or even Services (art. 14)Bus Profits or even Services (art. 14)

Case 5Case 5
 Application Hosting -Application Hosting -
A user has a perpetual licence to use a softwareA user has a perpetual licence to use a software
product by entering into a contract with a hostproduct by entering into a contract with a host
entity. The user can access, execute operateentity. The user can access, execute operate
the software applications remotely. E.G.the software applications remotely. E.G.
Financial management, H.R.M. etc.Financial management, H.R.M. etc.
AnalysisAnalysis
qualify as Bus Profits (art. 7)qualify as Bus Profits (art. 7)

Case 6Case 6
 Technical informationTechnical information
The customer is provide with undivulged technicalThe customer is provide with undivulged technical
information concerning a product or process.information concerning a product or process.
AnalysisAnalysis
qualify as Royalties as they are made for thequalify as Royalties as they are made for the
supply of know howsupply of know how

US characterizationUS characterization
reg 1.861(18)reg 1.861(18)
transactions ‘in’ a copyright versustransactions ‘in’ a copyright versus
‘‘subject’ of a copyright (copyrighted article)subject’ of a copyright (copyrighted article)
5 rights of copyright5 rights of copyright
 to reproduceto reproduce
 to prepare derivative works that may be copyrightedto prepare derivative works that may be copyrighted
 to transfer to public for sale, or licenseto transfer to public for sale, or license
 to publicly performto publicly perform
 to publicly displayto publicly display
characterize substance, not formcharacterize substance, not form

US characterUS character
Adobe web page allows download ofAdobe web page allows download of
Acrobat editorAcrobat editor
 Credit card fee for downloadCredit card fee for download
 License agreement not to reproduceLicense agreement not to reproduce
except one copy for backupexcept one copy for backup
= sale of goods= sale of goods

License is a test license for portion of feeLicense is a test license for portion of fee
 after one month, must destroy copyafter one month, must destroy copy
 = no ownership of article= no ownership of article
= lease= lease
E-book : fee for a one week check out thenE-book : fee for a one week check out then
encrypts itself, must return to web page forencrypts itself, must return to web page for
additional fee for renewaladditional fee for renewal
= lease= lease

Firm acquires one CDROM copy, pays a one-timeFirm acquires one CDROM copy, pays a one-time
user fee (site-license) for users only in the firm,user fee (site-license) for users only in the firm,
perpetual use, no sales to 3rd partyperpetual use, no sales to 3rd party
 Load on work stationLoad on work station
 Work stations access CDROM from LANWork stations access CDROM from LAN
= sale of goods= sale of goods
same but a monthly fee required for continued usesame but a monthly fee required for continued use
and updates, if cancelled, then must deleteand updates, if cancelled, then must delete
entire programentire program
= lease of good= lease of good

US CharacterUS Character
Audit firm pays CO to develop programAudit firm pays CO to develop program
 Pays monthly fee during development processPays monthly fee during development process
 Audit firm keeps all code if cancel contractAudit firm keeps all code if cancel contract
 Completed program transferred to Audit firmCompleted program transferred to Audit firm
== service feeservice fee
CO sends programmer to audit firm to teach auditCO sends programmer to audit firm to teach audit
firms code writers to save time in manipulatingfirms code writers to save time in manipulating
programs, contract called information ‘tradeprograms, contract called information ‘trade
secret’secret’
== provision of know howprovision of know how

India - USIndia - US
credit card info accesscredit card info access
 US Bank has India SUB for credit cardsUS Bank has India SUB for credit cards
 software and data server in USsoftware and data server in US
 software: collection, analysis, creditsoftware: collection, analysis, credit
 SUB accesses US through InternetSUB accesses US through Internet
 pays fee for accesspays fee for access
 service or royalty?service or royalty?
= royalty, see DTA rates= royalty, see DTA rates

IndiaIndia
airline computerized reservation systemairline computerized reservation system
 CO: server, data, software outside IndiaCO: server, data, software outside India
– customer is travel agentscustomer is travel agents
– airlines pay CO per ticket bookedairlines pay CO per ticket booked
 SUB in IndiaSUB in India
– hardware: routershardware: routers
 local software to travel agent firmlocal software to travel agent firm
Is CO liable on $ paid by non-IndianIs CO liable on $ paid by non-Indian
airlines for India bookings?airlines for India bookings?
= CO “deemed” virtual presence PE in= CO “deemed” virtual presence PE in
India thus bus income attributedIndia thus bus income attributed

India DTA characterIndia DTA character
 India/UKIndia/UK – look to res. of payee– look to res. of payee
BUT if Tech Ser is for own use, notBUT if Tech Ser is for own use, not
liableliable
so if non-res pays non-res for techso if non-res pays non-res for tech
serv utilized in India, not liableserv utilized in India, not liable
 India/USIndia/US – res. of payee and where– res. of payee and where
utilizationutilization

US states CT & Sales/UseUS states CT & Sales/Use
 Constitutional limitation = “min contacts” &Constitutional limitation = “min contacts” &
“substantial presence”“substantial presence”
No State CT when min contactNo State CT when min contact
 limit to representative solicits for sale oflimit to representative solicits for sale of
tangiblestangibles
 orders sent out of Stateorders sent out of State
 goods delivered from out of State by commongoods delivered from out of State by common
carriercarrier

State Sales / UseState Sales / Use
BUT Consumption tax (sales, use)BUT Consumption tax (sales, use)
 tickets where origination of travel was in-Statetickets where origination of travel was in-State
 calls originating/destination in-State if payingcalls originating/destination in-State if paying
addressee in Stateaddressee in State
 sales if “systematic sales support” in-State visitssales if “systematic sales support” in-State visits
 market maintenance through problem solvingmarket maintenance through problem solving
employee visitemployee visit
 software installation and trouble shootingsoftware installation and trouble shooting
requiring employee visitrequiring employee visit

State Use taxState Use tax
Vendor selling through InternetVendor selling through Internet
state A – home server / websitestate A – home server / website
Customer state B logs onto server in stateCustomer state B logs onto server in state
A, pays CC through InternetA, pays CC through Internet
Product shipped by UPS from State A DCProduct shipped by UPS from State A DC
 No mnm contacts = no sales tax in BNo mnm contacts = no sales tax in B
 But state B’s use tax to customerBut state B’s use tax to customer

Bangalore E-commerce Lecture 2003

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Bangalore E-commerce Lecture 2003