Taxation of e -commerce

1. By Dr. Ikramul Haq Taxation of e-commerce

2. New taxes or no taxes? The rapid development of e-commerce/m-commerce and the concomitant tax problems has led to the perplexing question: new taxes or no taxes?

3. Global tax approaches • USA, as the home country of the majority of leading companies in e-commerce, would obviously argue for freedom from taxes and at least a moratorium on existing taxation related to e-commerce. • Many countries may argue for short-term solutions in order to preserve or increase their revenue. • Developments are taking place so rapidly that it is difficult to predict who will be the winner or the loser in the long run.

4. Amicable solution • We know that most of the states will not support complete freedom from taxes on e-commerce. • New taxes in the form of bit taxes and taxes on cross-boarder transactions will not be accepted by the business community. Leading governments also do not advocate such taxation. • Neutrality between taxation of e-commerce and brick-and-mortar business is to be re-emphasized.

5. Vital questions • Has e-commerce turned the concept of PE upside down? • Have concepts like “source state” and “residence” become old fashioned? • Have generally accepted principles in international taxes disappeared?

6. Dynamic effects • E-trade transcends physical boundaries and this development relates to both the supply of goods and the provision of services. • Domestic as well as international taxation faces this grim reality and policymakers are still searching for a uniform treatment.

7. New dimensions • Digitized information can be supplied world-wide for personal as well as professional use. • New products and new markets are being opened. M-commerce is gaining momentum. • Governments, instead of worrying about lost bases, must look for opportunities for new revenues.

8. Great potential • E-traders can generate new business avenues increasing the income tax base beyond expectations. The value of their supply of goods or services can be the basis for the taxation of consumption. • If e-commerce/m-commerce is used for cross-border transactions, the tax base will expand in the country where the business takes place as well as in the country of consumption.

9. International tax policy • Impressive growth of software industry in many developing countries has opened completely new markets for them. • A real understanding of ongoing technological advancements and the fact that development does not stop tomorrow must be considered when forming domestic/international tax policy.

10. Simple & transparent laws • A successful tax policy for e-commerce must ensure that businessmen can see the link between their business, its profits or turnover and the corresponding income or consumption taxes. • Tax laws or regulations not understood by the business community or individual taxpayers must be avoided.

11. Taxation framework • In order to secure tax compliance, the parties and contents of e-commerce transactions must be identified. Tax authorities have stressed in numerous papers and conferences that anonymity is the most crucial issue. • A general legal structure for e-commerce may provide invaluable information in this respect e.g. Directive 2000/31/EC on certain legal aspects of information society services, in particular e-commerce, in the Internet Market.

12. M-commerce M-commerce is a healthy reminder that the technological advances and business developments are a never ending and dynamic processes. This aspect must be kept in mind while formulating new laws and regulations. Also, the choice between legislation and self-regulation will always be influenced in favour of the latter, as being more adaptable to changes.

13. Tax compliance difficulties • Consumption and income taxation share the same problem in respect of cross-border e-commerce: the supposed difficulties in securing tax compliance. • Anonymity is a genuine problem in relation to international e-commerce. • Digital supplies directly from a trader in one country to a consumer in another country are not recorded.

14. Tax compliance and collection • If the consumers of e-commerce are not charged consumption taxes, the result would be lost revenue. • It should normally be easy to determine to which jurisdiction belongs the right to tax consumption. • The real problems are related to the securing of tax compliance and tax collection.

15. Consumption Tax Conventions • The first and the foremost important argument for Consumption Tax Conventions is related to securing tax compliance and tax collection. • Increased international cooperation and coordination in respect of consumption tax is required. • Jurisdictional matters also need to be settled.

16. Solutions • A better exchange of information and assistance between tax authorities is the need of the hour. • A regime for multilateral cooperation in tax matters re cross-border e-commerce assistance was established by the joint OECD and Council of Europe. SAARC members are also working for Multilateral Convention on Tax Matters.

17. Solutions (continued) There is growing realisation throughout the world that the tax authorities will have to closely work together in order to coordinate their policies and develop joint approaches. This relates to problems such as double taxation, tax avoidance and evasion, harmful tax competition and e-commerce.

18. Solutions (continued) • No doubt it is complicated and difficult to secure compliance related to the taxation of income and consumption in connection with cross-border e-commerce/m-commerce. • Nevertheless, it is possible to reach some satisfactory solutions through international assistance, coordination and cooperation—see details in Electronic Commerce: Taxation Framework Conditions (OECD 1998), para 11.