In essence affiliate marketing involves a Product/Service Seller paying a commission to other online entities, known as affiliates, for referring new business to the Seller’s website. Affiliate marketing is performance-based, which means affiliates only get paid when their promotional work actually results in a sale.
Affiliates can be any kind of site, but usually they tend to be bloggers or other content sites related to the merchant’s industry. Affiliates work to introduce their visitors to the Seller’s brand. They might write/blog a post about a new product or promotion on the Seller’s site, feature banner ads on their site that drive people to the Seller’s site, or offer visitors a special coupon code. If buyers come from that affiliate’s site and make a purchase, the affiliate gets paid.
Traditionally many affiliate programs were comprised of coupon and loyalty sites. As the industry has matured, content bloggers have come to play a more prominent role in many programs. Innovative programs are stretching the definition of an affiliate even more, partnering with schools, nonprofits, and individual professionals.
An Affiliate Marketing Business is but one example of an Online Business.
Online Businesses are difficult to tax.
Why?
Often an order is placed with one business, product is manufactured by a 2nd business and fulfillment (ie product delivery/dispatch) is provided by a 3rd business. This is completely different to a traditional point of sale (ie retail) business where typically the business is managed/controlled from and, the product is handed over/payment made in, a defined physical location. Clearly in the retail situation offer and acceptance are concluded (and consideration is tendered) in the one place leading to a taxable event in that locale.
Generally speaking as a matter of contract law when you have offer and acceptance (& assuming you have legal capacity to contract + intention to create legal relations + consideration) a contract is formed.
Under general tax law principles a taxable sale is made where the contract is concluded. It follows therefore if the seller concludes the contract (ie accepts the buyer’s offer) and is based in a zero tax country and the product or service is supplied digitally (ie on or via the Internet) no tax will be applicable (either in the buyer’s or the seller’s jurisdiction) to/re profit made on the sale .
An online businesses requires no physical presence: the Seller becomes entitled to a payment once certain events conclude electronically. The sale is effectively concluded in cyberpace. This affords the Seller an opportunity to determine as a matter of contract where the sale is concluded. Hence expertly drafted terms and conditions can provide that no contract is formed until the seller Company communicates acceptance of the buyer’s offer, meaning that the contract is concluded where the Seller Company/Business is domiciled and/or managed from.
More specifically, in the case of an Affiliate Marketing business an Agreement is entered into between the Seller and the Affiliate whereby the Affiliate becomes entitled to payment once certain events occur in Cyperspace. The source of the income is in effect the contract. Thus if the contract is effectively concluded, and the Affiliate Marketing Business is domiciled in, (and seen to be managed and controlled from) a nil tax jurisdiction (and provided the Company is structured/administered a certain way) it is possible to bank profits made from such ventures free from tax.
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