31 August 1998 Ministerial Letter 9816468 - COMPUTER SERVER AND PERMANENT ESTABLISHMENT

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

XXXXXXXXXX 981646

Dear XXXXXXXXXX,

I have been asked by the Honourable Herb Dhaliwal to reply to your letter of May 29, 1998, wherein you inquire as to the tax implications for a non-resident company of storing proprietary information on a Canadian-based server. More specifically, you ask whether information stored by a U.S. company on a Canadian server constitutes a business presence for the company in Canada and, if so, what the tax implications would be for the company.

The advent of electronic commerce has created a host of opportunities and challenges for governments around the world. One such challenge is the application of existing domestic and international tax principles to transactions conducted electronically. Some of the more fundamental tax issues raised by electronic commerce (and implicit in your query) are:

• What degree of electronic activity constitutes the carrying on of a business in a country ?
• Is a file server or other computer a permanent establishment for tax treaty purposes?
• Is the concept of permanent establishment valid in the electronic commerce environment and, if not, should it be replaced by an alternative concept ?
• What is the nature and source of income arising from electronic transactions ?
• Does a transaction manager or Internet service provider constitute a dependent agent of a non-resident enterprise conducting business over the Internet ?

To address these questions and other novel issues raised by the growth of electronic commerce, the Advisory Committee on Electronic Commerce was established in April 1997. The Committee was mandated to review domestic and international trends in electronic commerce; identify the potential growth and use of electronic commerce; examine the approaches to the taxation of electronic commerce being taken by other countries; identify the implications and associated risks of domestic and international trends in electronic commerce and their effect on compliance; and report back to the Minister of National Revenue with advice and recommendations concerning the above.

The Advisory Committee issued its report in April 1998. The Committee made thirty-six recommendations with respect to income tax matters alone. Each of these recommendations is currently being examined by the Department to determine whether it should be implemented and, if so, how this could be accomplished.

However, as I am sure you can appreciate, the taxation of electronic commerce is not a matter which can be tackled by Canada alone. The global nature of electronic commerce requires a global solution to the taxation issues generated by electronic commerce. Failure to co-ordinate tax policies between the various countries could result in the double taxation of electronic transactions and cripple the growth of electronic commerce. Therefore, it is vital that a consensus be achieved at the international level with respect to the application of existing tax concepts to electronic commerce and the need for alternative concepts. As stated by Mr. Dhaliwal at the Electronic Commerce Summit held in Ottawa this April, “....Revenue Canada will promote consistency in electronic commerce policies among all levels of government in Canada, and among national governments around the world.” To this end, Revenue Canada is participating in the various working groups of the Organization for Economic Cooperation and Development studying electronic commerce issues.

Furthermore, in October of this year, Canada will host a major conference on electronic commerce in Ottawa. This conference will be called “A Borderless World--Realizing the Potential of Global Electronic Commerce”. It is expected that there will be some consensus on the principles to be adopted and action required to implement those principles.

I am confident that the work being done by Revenue Canada, both domestically and internationally, will accelerate the resolution of some of the difficult international taxation issues surrounding electronic commerce, thus permitting us to provide you with more guidance with respect to the issues implicit in your query.

Thank you for your letter.

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..../cont’d

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