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ASIA-PACIFIC TAX BULLETIN
From E-Commerce to E-Business Taxation
Collin Lau and Andrew Halkyard
Although many e-merchants in recent times have experienced great, and often terminal, economic difficulties, there is an underlying momentum to e-transformation that will continue evolving in a myriad of innovative and revolutionary ways of conducting business. In these circumstances, it seems an imperative for revenue authorities to examine their approach and policy towards taxation of ecommerce more comprehensively than they have to date. This examination should not be confined to, or dominated by, the now more comfortable topics of whether an e-merchant has a permanent establishment, how income from online transactions should be characterized and where consumption of goods and services delivered electronically takes place. Important as these issues are, they should be considered in the context of a broader study evaluating the total impact of e-transformation on business productivity, supply chain, economic cycles and sector differences. Put another way, revenue authorities should not simply focus upon taxation of e-commerce per se (such as the B2C sale and purchase of goods typified by Amazon.com or the downloading of a Norton anti-virus program), where attention is typically focused upon the location and function of servers, characterization of income and place of consumption. Instead, the analysis should extend more broadly to ensure a deeper understanding of the nature of e-business as it is today, and as it will develop tomorrow. In this regard, it is tempting to argue that business functions will simply and suddenly disappear into cyberspace and to suggest that virtual companies will be able to operate with little presence anywhere except a site hosted by an Internet service provider in a tax-free jurisdiction. But will this happen? This article will contend that whilst communications efficiencies certainly allow some (perhaps many) activities to be coordinated from a distance, all enterprises still need to have real, and not virtual, people, assets and business operations. It will be contended that a balanced approach should be taken in assessing the impact of e-business on taxation systems worldwide and that it is not necessarily harmful for developing and technology importing countries. Outsourcing to lower-cost environments now occurs in many economic sectors. There is no reason to suggest that this should not continue in an ebusiness context. The theme of this article is that only when the “richness” of e-business is appreciated, can the traditional taxation questions of residence, attribution of profits, characteriza1. The authors wish to thank Gary Sprague, Baker & McKenzie, Palo Alto for his useful comments and, in particular, for his challenging queries on an earlier draft of this article. We would also like to acknowledge the helpful suggestions provided by the anonymous referee. The usual disclaimer applies. © 2003 International Bureau of Fiscal Documentation
Collin Lau is the Chief Financial Officer at Baring Private Equity Partners, Hong Kong. Andrew Halkyard is a Professor at the Faculty of Law, University of Hong Kong.
This article has undergone an additional refereeing process.1 1. INTRODUCTION Even after the current downturn and market corrections resounding throughout stock markets worldwide, e-commerce is still one of the most intriguing taxation topics of the new millennium. Leading investment advisers and financial institutions have published very optimistic forecasts. Goldman Sachs, in a report issued in June 2000 entitled “B2B E-Commerce/Internet”, predicted that business-to-business (B2B) e-commerce alone should reach USD 4.5 trillion in 2005 (see Figure 1). The report assumes that B2B transactions will constitute approximately 60% of total e-commerce whilst the remaining 40% (approximately USD 3.2 trillion) will be contributed by business-to-consumer commerce (B2C).
FIGURE 1 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 1999 2000 (USD billion) US Non-Japan Asia Rest of world EU Japan 2001 2002 2003 2004 2005
Source: GS Research estimates.
are Butler et al. See Owens. and Ball. the OECD focused upon the implications of the Internet. that taxation of e-commerce is a major concern for international agencies and tax authorities worldwide. Baxi and Shah.” © 2003 International Bureau of Fiscal Documentation . Id. International Tax Review (November 2001). of this article commences with an overview of the current views and future work programme of the OECD towards taxation of e-commerce and. “An Updated Overview of the European VAT Rules Concerning Electronic Commerce”.in/fdrev (click on “Central Board of Direct Taxes”). As did Krever.. 1999). they will surely survive the Internet”. Tax Notes International (23 October 2000). “Tax Issues”. at 200. 28 Tax Management International Journal (11 June 1999).. OECD has summarized the conclusions reached in the report as follows:9 1. International Tax Review (February 2002). See Gnaedinger.JANUARY 2003 ASIA-PACIFIC TAX BULLETIN 3 tion and source of income. “International E-Commerce Bibliography”. This sentiment has been taken up. footnote 3 . articles and papers produced on this topic however.7 This report paved the way for a statement of broad taxation principles that should apply to e-commerce. the work of the Organization for Economic Co-operation and Development (OECD) stands out as the most significant. at 357. given its commitment to consulting broadly with governments worldwide as well as with the business community to develop an integrated and comprehensive approach to taxation of e-commerce. Business decisions should be motivated by economic. at 1917. Tax Notes International (21 June 1999). e-Finance (September 2000). “Electronic Commerce Taxation Evolves in India”. “India Takes a Bold Approach to E-Commerce”. at 26. at 575. a paper prepared by the OECD’s Committee on Fiscal Affairs (CFA) for an informal round table discussion between business and government held in Turku.5 In its initial consultations. Electronic Commerce and International Taxation (Kluwer Law International. be considered in a proper context. Torregrossa and Babington. private intranet networks and emerging payment technologies for tax policy and tax administration. “Impact of E-Commerce on Allocation of Tax Revenue Between Developed and Developing Countries”. however.nic. at Paras. rather than by tax. 3. Section 4. A provocative and interesting conclusion is submitted by Krever. Finland on 18 November 1997. Section 2.” (See further. show a critical scepticism in accepting the arguments put forward by developed countries in either maintaining the status quo or extending the existing rules into the digital era. “Demystifying Taxation of Global Electronic Commerce: Let’s Get On With the Business of [e-Business]” (paper submitted to the OECD for its 1997 round table discussion on 18 November 1997: see footnote 6 ). It should be noted that the Committee’s report has not yet been adopted by India as an official government statement. at 412.. Of particular interest will be its measure of success in reaching an accommodation with the European Union regarding consumption tax issues. AsiaPacific Tax Bulletin (June 2000). as well as tax compliance and administration. prepared by the CFA for the OECD Ministerial Conference held in Ottawa. The same principles that governments apply to taxation of conventional commerce should apply equally to ecommerce. Section 3. In Europe. by the Indian High Powered Committee on Electronic Commerce and Taxation which. 1998). e. Canada on 8 October 1998. 10. 8. 5. in its report dated 6 September 2001. provides a conclusion. but true. Tax Notes International (11 February 2002). OECD DEVELOPMENTS AND PROPOSALS FOR TAXING E-COMMERCE It is trite.10 thus avoiding double taxation or unintentional non-taxation. In addition to the wellknown and well-established taxation journals. North America. relevant for the period until the release of the various OECD reports (described below). and Boyle. analyses those challenges and examines in practical terms what this means for tax administration and enforcement. Tax Notes International (23 October 2000) at 1923-1933). See further. discusses the implications of enlarging the scope of our study from e-commerce to ebusiness. “Electronic Commerce and Taxation – A Summary of the Emerging Issues”. “Australia – Taxation of Internet Trade”. 2. “Electronic Commerce: Taxation Framework Conditions” (OECD. various commentators within the Asian region have indicated that the main challenge to taxation authorities posed by e-commerce lies in their ability to fairly apply and collect consumption tax: see. 6-9. In Professor Lee’s view. at 65.” Other commentators. Neutrality – taxation should seek to be neutral and equitable between different forms of e-commerce and between conventional and electronic commerce.4 and whether in this context it is possible to implement a fully electronic or technological solution to the problems of levying and paying consumption taxes on online sales and services.” See also Mattson. put it this way: “notwithstanding the desire to expand the growth of e-commerce. provides examples of e-business models and introduces the challenges facing revenue authorities today. Warren. It is the case. at 1251. namely: a. See further. who conclude: “As tax systems survived the telegraph. at 151. notes converging and diverging approaches taken in various jurisdictions. Patel. Section 5. “A Taxing Question”. where relevant. Paris. and Doern- berg and Hinnekens.EN-home-22-nodirec torate-no-no–22. a global cocoordinated approach is required to tax a truly global phenomenon. that e-commerce will place enormous strains on some aspects of consumption tax bases and will test the boundaries of some important international income tax concepts such as the source of income and the definition of a ‘permanent establishment’. EC Tax Review (2002/2). Section 6. a specialist journal devoted to the taxation of e-commerce entitled Tax Planning International e-Commerce is published monthly. 1997). Rae.6 The theme throughout this initial report (which is still reflected in the OECD’s work today) is that if governments are to successfully meet the challenges posed by e-commerce for taxation systems. have expressed grave concerns over the implications of e-commerce for taxation systems worldwide. E-Commerce VAT”. “ECONFIN Addresses Savings Tax. Asia-Pacific Tax Bulletin (November 1998). All the reports published over the past two years by the OECD can be accessed electronically at www.3 Among the plethora of books. most notably Chang Hee Lee. 29(1) INTERTAX 10-11. “Digitized Services and the Unresolved Question of Taxation”.html (accessed 27 November 2002).org/EN/home/0. Asia-Pacific Tax Bulletin (July 2000). Many other commentators however. concluded that “applying the existing principles and rules to e-commerce does not ensure certainty of tax burden and maintenance of the existing equilibrium in sharing of tax revenues between countries of residence and source. echoes a common theme in stating: “The unprecedented level of international cooperation over such a short period of time on the Internet challenge to established commerce highlights the seriousness with which governments and tax authorities view the rapid recent growth in the Internet.00.” The Committee indicated that possible equilibrium could be achieved by subjecting to withholding tax all (and not just ecommerce) tax-deductible payments made to a foreign enterprise: see http://finmin. 9. reports. the digital age should not be exempted from the normal remit of taxation. Your Guide to e-Commerce Law in Singapore (Singapore. Sample. at 20-23. consid2. Two useful general resources. 7. “The Taxation of Global E-Commerce”. 4. at 2569. 2000). Head of Fiscal Affairs. “developing countries have not much choice but to suffer. at 42 and Shah and Shroff. Schottenstein and Sprague. Peterson. “The Emerging International Tax Environment for Electronic Commerce”. 6.8 Jeffrey Owens.g. Drew and Napier. in no small measure. “Electronic Commerce: The Challenges to Tax Authorities and Taxpayers” (Paris. who states: “A more sober study will reveal that in many respects much of the hyperbole about e-commerce and tax is just that and in the overall scheme of things the impact of e-commerce on tax systems may be limited. For example. Tax Notes International (24 December 2001). See Hinnekens. “Taxation and E-Commerce: Progress Report” (2000). and Australia and in many Asian countries (particularly Singapore and India) substantial research2 has been conducted on the impact of e-commerce on taxation.. “India – Government Solicits Comments on Taxation of E-Commerce”.oecd.
promoting and assisting taxpayer compliance. at 17. The technologies underlying e-commerce offer significant opportunities for improved taxpayer services. In December 2000. The Consumption Tax TAG released its Report on E-Commerce and Consumption Taxes in December 2000. Sinyor and Chew. See further.oecd.16 (3) Tax administration issues – A detailed examination is being made of the opportunities e-commerce technology offers for improving taxpayer service. both generally. 13. See footnote 8 . residence. See Owens. 5 of the OECD Model Tax Convention. 17. non-business taxpayer groups. and transfer pricing in the context of e-commerce has attracted a great deal of publicity and comment. the Technology TAG issued a report on the tax administration aspects of e-commerce. Hersey. 16. footnote 9. inter alia. The process of implementing these principles should involve an intensive dialogue with business. These principles can be applied through existing tax rules. specifically relating to permanent establishments involved in e-commerce transactions. Permanent establishments. at 2091. 2. See further.4 ASIA-PACIFIC TAX BULLETIN JANUARY 2003 erations. Certainty and simplicity – tax rules should be clear and simple to understand so that taxpayers know where they stand. The Consumption Tax TAG’s report proposes guidelines defining the place of taxation for cross-border services and intangible property by reference to the recipient’s business establishment (for B2B transactions) and by reference to the recipient’s usual jurisdiction of residence (for B2C transactions). the principle of taxation at the place of consumption and the collection mechanisms that best serve to ensure the effective operation of this principle. The common theme of these various reports focuses upon how to ensure effective tax compliance in an e-commerce environment and considers the measures needed to secure international cooperation between revenue authorities. it is hardly surprising that the OECD’s work on permanent establishments. This work mainly involves questions of characterizing income (as either royalties. Tax Notes International (23 April 2001). c. Effectiveness and fairness – taxation should produce the right amount of tax at the right time. it is useful to provide an overview of the more contentious issues. changes have been made to the Commentary on Art. Changes to the Commentary were adopted by the CFA on 22 December 2000. Also in December 2000. released on 8 February 2001. and non-OECD member economies. In February 2001. the Forum on Strategic Management issued a further report to the CFA on the challenges and opportunities facing tax administration generally in an e-commerce context. Efficiency – compliance costs for business and administration costs for governments should be minimized as far as possible. 12. The work carried out by these TAGs has focused upon three major areas:12 (1) Consumption tax issues – A Consumption Tax TAG has been examining. the Professional Data Assessment TAG released a report examining. and 11. which governments should actively pursue. known as the Treaty Characterization TAG. An excellent historical. and the references contained therein. in the context of crossborder transactions. Tax Notes International (23 April 2001). has focused upon the definition of royalties in the OECD Model Tax Convention in the context of a wide range of payments made in ecommerce transactions. the CFA also released a discussion paper of the Business Profits TAG entitled “The Impact of the Communications Revolution on the Application of ‘Place of Effective Management’ as a Tiebreaker Rule” to determine a corporation’s place of residence. and focusing upon the challenges e-commerce presents to established methods of tax audit and collection. The © 2003 International Bureau of Fiscal Documentation . clarifying the application of the permanent establishment definition to e-commerce15 and reports have been issued concerning profit attribution to a permanent establishment. The Business Profits TAG released a discussion paper in February 2001 entitled “Attribution of Profit to a Permanent Establishment Involved in Electronic Transactions”. See particularly Lambooij. The revised Commentary to Art. 18. Common ground was covered in a further OECD report entitled “Consumption Tax Aspects of Electronic Commerce – A Report from Working Party No 9 on Consumption Taxes to The Committee on Fiscal Affairs” (February 2001) [the Work Plan of Working Party No. These reports address allocation of profits to permanent establishments. 9 20012003 can be accessed electronically at www. “Recent OECD Initiatives With ECommerce Taxation”. e. yet still current and comprehensive commentary on the work of the OECD on taxation of e-commerce can be found in Lambooij. 5 of the OECD Model Tax Convention19 clearly states that a non-resident enterprise with an Internet web site The OECD Ministerial conference held in Ottawa in October 199811 endorsed the principles summarized above.17 Given the undeniable US-centric focus on matters of direct taxation (which is bound to change). emerging standards or statements of best practice relevant for accessing electronic data and assessing its reliability. See report released on 1 February 2001 of the TAG to Working Party No. Tax Planning International e-commerce (2002/02). characterization of income. 14. d.13 (2) International direct tax issues – The work of another TAG. Sinyor and Chew. at 2091.14 In two independent exercises. 4. the CFA’s “Discussion Draft on the Attribution of Profits to Permanent Establishment”. “International Reaction to OECD E-commerce Proposals”. b.18 To provide important background to the main theme of this article. 3. Adopted by the CFA on 22 December 2000 and published by the OECD Directorate for Financial. and any new or revised administrative measures in the framework of those rules should be directed towards the application of existing taxation principles. “Recent OECD Initiatives With E-Commerce Taxation”. 19. Flexibility – taxation systems should be flexible and dynamic to ensure they keep pace with technological and commercial developments. The Technology TAG also published a report in December 2000 on the technological implications of various models considered for collecting consumption taxes on cross-border ecommerce transactions. 1 of the CFA on Treaty Characterization Issues Arising from E-Commerce. There should be no discriminatory tax treatment on ecommerce. These comprise government officials from OECD as well as non-OECD states. service fees or proceeds from the sale of goods) arising from different types of ecommerce transactions.org]. and the potential for evasion and avoidance should be minimized. Fiscal and Enterprise Affairs on 9 January 2001. Subsequently. and discuss transfer pricing issues in the context of a working hypothesis involving a permanent establishment being treated as a distinct and functionally separate enterprise. 15. In February 2001. the CFA of the OECD proceeded to implement these taxation framework conditions by establishing five Technical Assistance Groups (TAGs). and representatives of the international business community. albeit mainly in the context of examining collection problems in levying consumption taxes on cross-border e-commerce transactions.
an Internet service provider (ISP) normally will not constitute a dependent agent of another enterprise so as to constitute a permanent establishment of that enterprise. whether the existing definition of permanent establishment in double tax agreements such as the OECD Model Tax Convention can achieve a fair allocation of tax revenue between the countries involved in international e-commerce.20 Although the contrary view that a server can never amount to a permanent establishment has been described as “extreme”. cache and edge storage devices) and software. In many common law jurisdictions. organizational designs are highly versatile and there are generally a variety of ways to achieve the same business objectives. Similarly. and the use of services provided by ISPs. As indicated above. 23. It is not at all clear how the OECD view takes account of the ease. – excluded activities. this matter is currently being considered by the Business Profits TAG in its study on Monitoring the Application of the Existing Treaty Norms for the Taxation of Business Profits in the Context of Electronic Commerce. (Singapore. including the United Kingdom. bandwidth as well as other commercial and political considerations. OECD Take Different Views of Unstaffed Servers as Permanent Establishments”. 8/2001 dated 12 February 2001. This issue concerns the classification of various types of e-commerce income as either royalties or income from the sale of goods or income from the provision of services. The topology is usually distributed.” It will be very interesting to see how the TAG deals with the report of the Indian High Powered Committee on Electronic Commerce and Taxation. [the rule] will provide the right result”. and – the core activities or essential functions of the web site and servers. cost.hk and .23 In a net-centric society. 24. and consists of operating systems. given the alternatives that exist for extensive automation.oecd. a branch. 5(2) provides that it may mean “a place of management. and thus carries on business. 76. an office. whether an agent habitually exercises powers on behalf of its principal. – whether a permanent establishment requires personnel to maintain and/or to operate. – independent contractual arrangements with information technology service providers (ISPs) to manage the facilities. firewall boxes. middleware. namely. They can be co-located in a multitude of locations. Web infrastructure is highly mobile. employees and business partners can be connected remotely and seamlessly. the place where a company is resident. if so. Unless they can be attributed to a permanent establishment in the place of payment or use. 21. and activities of an auxiliary and preparatory nature. 23 February 2001). 22. at best. other hardware devices (such as routers. A leading authority for this proposition is the House of Lords decision in McMillan v. As indicated above. described at footnote 3 . Tax Notes International (3 June 2002). can be established by determining where the business of the company was managed and controlled by its Board of Directors.com. The strains placed upon this rule by the impact of modern communications are recognized in a Discussion Paper from the Business Profits TAG on Monitoring the Application of Existing Treaty Norms for the Taxation of Business Profits. the revised Commentary considers: – what are the predominant factors in ascertaining the principal place of business and what level of presence is required to constitute a taxable presence in a place. The future work of this TAG will include “identification of alternatives to the current treaty rules for determining the taxing rights of source and residence countries and to the current treaty rules for allocation of profits between taxing jurisdictions. The contrasting approaches of the OECD and countries such as the United Kingdom and Singapore. The permanent establishment concept is of course crucial to the assessment of business profits under Art. and exists in layers. As noted above. CFA is currently awaiting a report from the Business Profits TAG on the topic of “Monitoring the Application of Existing Treaty Norms for the Taxation of Business Profits in the Context of Electronic Commerce”. See footnote 15. to equate a permanent establishment with the location of a server seems highly vulnerable to manipulation and arguably overly simplistic. “Income Tax Guide on E-Commerce”.24 One could also consider other common multinational ebusiness practices concerning the ownership and leasing of hardware devices. This report will examine the issue of whether changes should be made to the OECD Model Tax Convention in order to properly allocate taxing jurisdiction to e-commerce activity (the proposed future work programme of the Business Profits TAG. Several countries. 7 of the OECD Model Tax Convention. See Owens.21 there is merit in moving away from a servercentric concept.22 In short. The revised Commentary explores various challenges posed by e-commerce to the current wording of the permanent establishment concept detailed in Art. the revised Commentary clarifies that a web site cannot of itself be considered a permanent establishment. Income characterization. set out in its preliminary report dated December 2000. Guest  AC 561. – the length of time required to establish permanency. servers. subject to availability. footnote 9. even though the conclusion is reached that “in the majority of cases. a server within a country could amount to a permanent establishment if the server is at the disposal (owned or leased) of the enterprise carrying on business through a web site. databases. By way of contrast. a factory and a workshop”. which envisages the possibility that even a web site allowing market accessibility can constitute a permanent establishment. Among other things. consider that in no circumstances can a server constitute a permanent establishment: see HM Customs and Excise Press Release No. On the other hand. outdated. the “place of effective management” is used as a tie-breaker rule to determine corporate residence. at Para.JANUARY 2003 ASIA-PACIFIC TAX BULLETIN 5 alone would not be regarded as having a permanent establishment in the country in which the web site is located. whether certain of those arrangements could amount to an agency and.com. Singapore takes the same view: see IRAS. directors. the enterprise carries on business functions through it for a sufficient period of time and those functions must be significant as well as an essential or core part of the enterprise’s business activities. of a business setting up sub-URLs. switches. It would be redundant to elaborate that the modern e-commerce environment renders the common law tests for residence.org). as well as France (whose stance is apparently at a midpoint between the OECD and the UK positions: see MwbaMboma. or difficulty.cn. highlight a key problem. The totality of these matters makes the determination of whether a permanent establishment exists without human intervention in an e-commerce environment increasingly problematic. 5(1) defines a permanent establishment as “a fixed place of business through which the business of an enterprise is wholly or partly carried on” and Art. at 1107). “France. Such as . can be viewed electronically at www. a similar epithet could be ascribed to the Spanish position. In the OECD Model Tax Convention. © 2003 International Bureau of Fiscal Documentation . Art. 20. 5.
different tax treatment (including the imposition of consumption taxes) may apply if the income can be classified as income resulting from the sale of goods or the provision of services. follow from this example that all value creation simply falls through the cracks. with many employees and assets. substance prevailed over form. It does not. local companies such as The Utopian Book Center probably never imagined that it could escape liability to Utopian income tax on its book retailing operations. Taxation authorities worldwide appreciate that obtaining information from taxpayers and related parties and ensuring tax compliance in an e-commerce world will be a burgeoning problem. Li Jinyan. See further. it will be difficult in terms of determining appropriate transfer pricing to decide which business functions should carry greater weight. then the function truly disappeared because shoppers no longer need a building to go to touch what they may purchase. In the now typical example of buying “virtual” books. It is a fine balancing act to legislate on the basis of an intellectual and equitable framework on the one hand and to take proper consideration of enforcement barriers and administrative practicalities on the other. This is already a highly simplified example. If the function disappeared altogether. As e-commerce fosters the proliferation of cross-border activities. How should transaction records be kept and where? What is the appropriate record keeping standard and how detailed should 25. to establish and maintain the web site) that the traditional bookstore did not need to employ? A broader study should also consider what the same communications efficiencies that led to closing the bookstore are doing elsewhere in the Utopian economy. an egroup would generally still wish to set up a transfer pricing policy to reward operations performed by different group entities. as in many cases. in turn. Whatever business model is adopted. and numerous other commercial reasons (including satisfying taxation authorities). perhaps Utopia now also exports domestically produced products via web sales and no longer needs to employ distributors in cities in the source countries with which it trades. and its supply chain is intrinsically connected. by downloading the content and the right to read without the right to reproduce. “Slicing the Digital Pie With a Traditional Knife – Effectiveness of the Arm’s Length Principle in the Age of E-Commerce”. Transfer pricing. Profit-making operations may also depend on the load balancing of different servers at the time the transaction takes place. In the old economy. or find other ways to manage the relevant profit-earning operations. and finally receives payments through its New York bank account. at 775. It is interesting. When taking a snapshot “before and after” comparison of a business function that is “replaced” by e-commerce. An example is an e-merchant based in Singapore who receives and processes orders through servers in ten different locations. © 2003 International Bureau of Fiscal Documentation . The group postulated above will doubtless be a fairly big one. See documents referred to at footnote 16 . because physical distance and time zones do not matter to anything like the same extent as previously. The Treaty Characterization TAG formulated its conclusions by insisting on neutrality of taxation between traditional commerce and e-commerce. The OECD recognizes that transfer pricing issues will be increasingly important in the e-commerce age. 26. international tax planning will become increasingly important and increasingly complex. In the new economy. for financial control. Returning to the example above. Numerous questions arise in this regard. to speculate upon which countries stand to benefit from this approach. Id. one should also ask whether the function moved to a different jurisdiction (in which case there has indeed been a transfer of value adding activity from one jurisdiction to another) or whether the function simply has now been automated out of existence (as in the case of the hand loom weavers in industrializing Britain). But this analysis is incomplete. however. Inaction on the part of taxation authorities in today’s e-business environment is simply not an option. particularly given that e-commerce has changed the way of intermediation and distribution of business flows to a significant extent. or possibly it could be virtually established and have no physical presence in any of the countries in which its products are sold. If people are happy shopping online. because in each interface there are opportunities to outsource. that taxpayers and tax collectors alike are struggling to determine which business functions are significant and agree a suitable allocation of profits thereto. most companies today (rightly) think that they need a local marketing presence if they are going to penetrate a market to any significant extent. The characterization of income as royalties or sale proceeds or service fees will decide the extent to which tax jurisdiction will benefit and this. Although the example assumes that the group has no physical presence in the countries where its sells its products. sends the finished products to four regional hubs for storage. may depend upon whether the home and source jurisdictions are net exporters or importers of technology. where these are established. delivers to 50 countries where title passes. Have additional personnel been retained elsewhere (for example. internal management. It facilitates connectivity both intra-group and inter-group. For instance. Conversely. Examining the totality of facts. Tax Notes International (19 November 2001).25 E-commerce is more collaborative and dispersed than traditional forms of commerce. The group might have the choice of setting up either branches or subsidiaries. the same Book Center may well have disappeared. then it seems inappropriate to argue that this is a loss to importing countries that needs to be compensated in some way in the international tax system. why did the Utopian Book Center disappear? If it disappeared because modern logistics allow centralized warehouses.26 Tax administration and collection. it seems logical that taxation treatment should be no different from that applying to buying a paperback. the function has moved from one place to another. however.6 ASIA-PACIFIC TAX BULLETIN JANUARY 2003 royalties are invariably subject to withholding tax on a gross basis. Today’s technology allows changes to the processing server for an individual customer. manufac- tures its goods in Thailand. It is no small wonder therefore. In this context.
This proposition is best highlighted by representatives of business themselves who (correctly) point out: The Internet has fundamentally changed how business is conducted in local. and many such businesses are the result of gigantic mergers. the following TAG arrangements will operate. It offers products and services in both a physical and a virtual context. – On tax administration issues. – A Consumption Tax TAG. remains central to building that international consensus and so providing the certainty and confidence that governments and business both seek. – Because a “clicks and mortar” business operates in a hybrid context. and as it will develop tomorrow. but also approved proposals for a continuation and refinement of the TAG process. the variety of services and products offered. This “clicks and mortar” operation is not confined to pure B2C business. In line with its working methods since Ottawa . © 2003 International Bureau of Fiscal Documentation . Transfer pricing issues need to be resolved and there may be free riders on income gen27. a copy of which is on file with the author. As a result. and multinational environments. The following is a recent summary of the OECD’s objectives and work programme in the area of e-commerce and taxation (source: OECD web site. The complexities lie first in the even greater multiplicity of companies within the group structure. Future work programme. and the means of delivery. Business functions such as product innovation. Consider AOL’s merger with Time Warner. non-member economies and the European Commission. such as local cable services and an international stock news service transmitted from an offshore hub. the CFA not only endorsed the elements of a work programme for 2001-03. The CFA has narrowed the focus of the main fields of further work to a number of key issues. accounting and finance.) with continued input from. national. These three TAGs will be supported by a smaller Technology Panel which will provide technical advice as required/requested. Information. and close working with. various group subsidiaries of a business information/infotainment multinational enterprise may draw upon the same customer relation database (or even use the same local salesman) to offer privileged products to the same customer. which will build upon the work of the previous Professional Data Assessment TAG and examine a broader range of tax administration issues. their analysis should extend more broadly to ensure a deeper understanding of the nature of e-business as it is today. amongst others: – On direct tax issues.JANUARY 2003 ASIA-PACIFIC TAX BULLETIN 7 this be? How should the constraints under various privacy and personal data laws be balanced with the need to ensure tax compliance? Is it feasible or appropriate to require an e-merchant to obtain a business (or consumption tax) registration in every place in which sales are made or services provided? How should parity treatment be ensured between new e-merchants and old-style catalogue houses that export goods from a remote location? These are some of the many questions to be considered. and with economies outside the OECD. the theme of this article is that revenue authorities should not simply focus upon taxation of ecommerce per se. Draft memorandum dated 5 September 2001 to the Members of the Business Profits TAG from the Business Representatives on the TAG. the taxation issues arising are increasingly complicated. These include. the means to address significant compliance challenges and to exploit taxpayer service opportunities. and the levying and collection of consumption taxes obviously must be satisfactorily resolved. Rather. Working in partnership with the international business community. production (including delivery of services). 3. but also allow business the flexibility to obtain resources and to structure operations in the most cost-effective and efficient manner. The CFA will continue to undertake its work on the taxation aspects of electronic commerce in an open and transparent manner with the express aim of continuing to strengthen the emerging international consensus on these issues. – On consumption tax issues. Whilst the potential must not be ignored or underestimated. – A Compliance. the role of technologybased systems in tax collection. FROM E-COMMERCE TO E-BUSINESS As indicated above. allocation of income. It is increasingly evident that enterprises of the old and new economies are merging to create an extended line of viable business platforms. again continued to advise and support the work on consumption tax related questions. etc. … Although much attention is given to the proliferating use of the Internet as a marketing and sales tool. Internet-related technologies not only offer automation of routine administrative and financial functions. For example: – Tax authorities should direct their efforts to where the real money is. There will be three TAGs: – A Business Profits TAG continuing to pursue the mandate of the previous TAG. administration.27 There are many reasons to broaden our scope of investigation from e-commerce to e-business in order to properly assess the taxation implications arising. and customer service have all been made more efficient through the use of the Internet. the CFA intends to take forward this further work through its subsidiary bodies (Working Parties. In January 2001. For example. enterprises are able to locate personnel and other value producing activities in those places which yield the greatest return on investment. Technical Advisory Groups (TAGs) As of 1 April 2001. either directly or by acting as a conduit for advice from experts in the wider business and technology community. it is a truism that customer acquisition costs are huge. and Documentation TAG. less attention is placed on the innovative efforts to streamline other core business functions over the Internet. Only a minority of B2C and B2B companies are making profits today. accessed 27 November 2002): At its meeting in January 2001 the CFA has agreed to progress further the work towards the implementation of the taxation framework conditions and the strengthening of the international dialogue. business.
0 0.0 1.0 1.0 12.0 0. its Taiwanese OEM manufacturers and the semi-conductors foundries are immediately adversely affected.0 15. and the components-makers in Mainland China need to reduce output.0 6.0 3.0 2002 8. and where” is more difficult.5 1.5 4. because of diversity of business.7 6. There is no need for all software programmers to sit in the same place and work out a product.5 0. insurance.3 4.0 3.1 1. Having the liberty to engage in e-business dramatically reduces the barriers of physical distance. real estate food. it accelerates and fuels the momentum of globalization.0 6.0 15. 0. finance. Source-based rules become vulnerable.0 1.0 2.0 10.0 22.0 13. FIGURE 2 US E-Commerce Penetration Rates By Vertical Industry.5 2. tax planning and other commercial considerations. For example.0 12.5 4. The complexity lies in the fact that.0 25.0 7.4 3.0 21.0 19.0 17. and react to. It is interesting also to note the difference in the pace of e-transformation amongst various industries and sectors.0 12.0 20. taxation questions will focus upon what constitutes the fairest way to allocate tax profits between the home and host countries.5 16.0 9.6 6.0 10.5 0.0 2000 4.5 9.1 4.0 7.6 6.0 2004 12.0 12.0 13.0 21. and the whole spectrum of a value chain comprising various industries can be adversely affected within a very short period of time.2 1. it should be emphasized that this example postulates a case of recession.0 9.0 25.0 21.0 2005 14.0 25. The assembly is in the Net. E-business emerges in tandem with the exponential growth of Internet connectivity.9 6.5 0. 1999-2005E (%) 1999 agriculture.5 1.0 5.5 1.0 17.0 8.0 2.0 8. the Indian contribution to the product development could be significant. Naturally.0 8.0 12. the present corporate and tax structure for many multinational groups is already Byzantine.0 2. in more prosperous times the affected entities can benefit substantially.5 0.6 2. – – An increasingly interconnected global economy means that we are seeing an exponential growth of business outsourcing.0 17. tobacco government health service hotels and other lodging places industrial equipment instrument and related products legal services metals (extraction and fabrication) motor vehicles and equipment paper and allied products printing and publishing rubber and miscellaneous plastics transportation utilities (electric/gas/sanitary services) wholesale trade other industries 2. it is not unusual today for e-business enterprises to operate customer contact centres and service support functions in India and also China.0 4.0 5.0 0.2.7 1.0 5.4 10. To be fair. The world economy works increasingly in a dynamic and interactive pattern.0 2.0 12.7 8. Change in the way business is conducted is the norm.0 16.3 1.0 3.0 11.0 2.4 1.5 1.2 3.0 21. Economic boom and bust rise and fall more spontaneously than before.5 14.7 3.0 13.9 2.5 0.2 8.0 4.0 18.4 1. whereby the supply chain is increasing worldwide.9 1.0 25. forestry. how profit attribution between the developed and the developing nations in areas such as this may well shape international tax policy for many years to come.0 9.8 15.0 13.0 30.2 9.0 16.0 6.5 10. and the bulk of its product specifications is finished there.0 10.0 11.1 1.0 0.5 10. These effects reduce GDP growth in several countries. This is illustrated by the data table from Gold- 28. and are fuelled by the real or almost real time availability of information in a networked world.0 8.0 7.0 8. even in the old economy.0 15.0 2.9 12.0 4. if a computer systems provider wants to cut inventory.0 28.0 20.0 19.0 8.1 12. beverage.7 12.0 2001 6.2 0.6 5.0 10.5 1.0 17.0 16.1 9.0 10.0 4.2 16. Identification of “who does what.6 11.2 1.0 2. fishing business services chemicals and allied products communications construction electronic/other electric equipment energy: oil/gas/petroleum mine/mfg.0 6. and the application of residencebased rules for taxation contain various grey areas. Costs and availability of skilled labour make India and China attractive to justify an outsourcing of efforts to these countries.0 19. The world today is more mobile. In the meantime. if an enterprise migrates its programming centre to a tax-free zone in Bangalore.6 0.0 5. with very few comparables available to carry out a traditional transfer pricing study. © 2003 International Bureau of Fiscal Documentation .0 8.0 15. The same circumstances exist in the e-financial services world. these volatile changes in taxable sources.0 1.0 13.8 ASIA-PACIFIC TAX BULLETIN JANUARY 2003 – eration.0 13.0 1.0 7.5 1. Ultimately. An application may be a proprietary product.0 2.0 4.28 Any tax authority and government finance ministry may quickly need to deal with. For instance.5 0.0 17.0 4.0 2.2 3. One typical example is application programming.0 2003 10. Indeed.0 26.1 2.0 6.0 Source: GS Research estimates. Globalization is made easier.5 6.4 8.0 6.0 3.5 12. collaborative and working on distributed efforts than ever before.
The applications are numerous. B2B. application service provider (ASP). consumer to consumer (C2C). certification authority (CA). We are living in a networked world. an end-user needed to buy a shrinkwrap software CD for installation on its own server located at its own office. Formerly. 4. Whilst it is hard to imagine e-agriculture (other than an agricultural B2B marketplace on the web. aggregator. technology in the e-business world is changing rapidly and competitive businesses need to constantly upgrade. Customers can then subscribe to the services. access the programming through Internet broadband. To properly understand how e-businesses are working. Formerly. a whole building was needed to accommodate a telephone exchange serving only a few blocks. However. as shown in Figure 2. technology allows the operator to anchor the exchange in a number of handy boxes and in a remote location. the telecommunications industry is definitely the most affected by Internet connectivity. Today. it is useful to select certain of these business models and examine them in detail. wireless Internet. Internet data centre – (IDC). Under the old business methodology. and how. Internet content provider (ICP). An ASP model aims to develop and host applications centrally. Product obsolescence can take place overnight. Internet service provider (ISP). More complex software such as ERP or CRM solutions had to be installed locally. and brick-and-mortar operations transformed by Internet technologies (into click-and-mortar or dot-corporations) can be found in any conventional industry or sector today. the locality of the profit arising from a product sale was clear. hardware. from FIGURE 3 ASP ASP Server/DB Servers SUPPLIER/ PARTNER ISP ISP INTERNET Core Optical Networking Access ISP REMOTE OFFICE ENTERPRISES ISP ISP WIRELESS OFFICE ISP HOME NETWORKS © 2003 International Bureau of Fiscal Documentation . Voice over Internet Protocol (VoIP) is a reality. they can tax a phone/data operator that does not have a taxable presence locally. Telephone companies have traditionally been large tax contributors to the revenue. outsourcing. and sale and post-sales services were performed on site (Figure 4). networked IT services. 4. Application service provider (ASP) An ASP delivers applications and software services over the Internet. Taxation authorities are naturally asking whether.1. Our world is like the chart below (Figure 3). with or without a local presence. EXAMPLES OF VARIOUS E-BUSINESS MODELS E-business encompasses a broad range of businesses including: – various specific models of Internet businesses such as B2C. call centres and many other diverse business models.JANUARY 2003 ASIA-PACIFIC TAX BULLETIN 9 man Sachs published in June 2000. software. and pay as and when they use. but in a multiplicity of modules. and it needed to be local to avoid expensive distance charges. but we may now see many different competitive local exchange carriers and long distance carriers adopting various business models. this industry is still land-driven).
30. India’s Authority for Advance Ruling has determined that payments received by a US company from an Indian company for the use of computer systems situated abroad are taxable in India as royalty income: see Tax Notes International (5 July 1999). It is not for taxation reasons but for genuine commercial necessity that ASP models are growing rapidly. the larger the transaction. It is.10 ASIA-PACIFIC TAX BULLETIN JANUARY 2003 FIGURE 4 REMOTE OFFICE ISP INTERNET Core Optical Networking Access ISP ISP ASP ASP Server/ DB Servers ISP WIRELESS OFFICE ISP ISP the basics of having web-based personal organizers to fully-fledged manufacturing and production planning tools. only fair to record that many companies operate on the basis that they do need a physical sales presence in the source country. although in a context not totally analogous to an ASP model. however.29 It needs a programming and product development office.30 29. Furthermore. and customer support team can be remote and offshore. but this can easily be anchored in an Asian country that provides appropriate tax incentives. Interestingly. The challenge to tax authorities worldwide is that the location of the ASP. The ASP can also work through a number of portals such as AOL or Yahoo to resell its products. its servers. 39 (Hong Kong. FIGURE 5 China REMOTE NETWORK MANAGEMENT CENTRE ISP ISP INTERNET Core Optical Networking Access ISP Japan ISP ISP ISP Korea Hong Kong India © 2003 International Bureau of Fiscal Documentation . the Inland Revenue Department in Hong Kong has publicly stated in Departmental Interpretation and Practice Notes No. By way of contrast. at 11. That helps eliminate the necessity of having a sales office in each country in which it sells. Its customer support functions are accessed through the Internet. because physical on-site maintenance based on an ASP model is not generally required. July 2001) that a typical ASP model derives service income (and not royalties) and is thus only liable to business profits tax if the ASP carries on business in Hong Kong (which typically it does not). the less comfortable a buyer may be to procure something expensive from the Internet without any local sales or support activity.
these operations must be situated locally to support the local banks and the local merchants. IDD charges or dedicated lease lines are costly and mobility is therefore limited.2. Amazon. it will be political and security concerns that slow down the pace of outsourcing. programme. the customer support may be nearby or in the same city. rather.JANUARY 2003 ASIA-PACIFIC TAX BULLETIN 11 4. in the new economy these matters are all largely resolved. this is a new business model. However. The whole operation may be viewed from the perspective of the countries in which the customers are located as an export of services from China. Under the old economy. a remote centre can help maintain. If broadband continues to improve. and offer cost-conscious clients (for instance. These can all be changed in the remote Internet model. However. the maintenance technician needs to work on-site. To compare the model described above with that existing in the old world (when it is not networked). Remote monitoring is costly.) Payment Processor Visanet (MasterCard/VISA) Card-Issuing Bank order online – – send transaction info. and the security concerns might not be satisfactorily resolved. Again. survey. distribute.3. customers with a regional presence are likely to be primary targets. The network operation centre might be exempted from any direct or indirect taxes. Assume China offers very competitive tax and commercial incentives at certain special economic zones (which it does). request authorization – – – format verification request (number/add. In the old PSTN networks. broadcast. etc. All online credit card transactions within a region can be aggregated by one single payment acquirer/processor who then handles the authentication. and makes available ample bandwidth. 4. Remote network management and IT services A remote network management and IT service provider helps corporations maintain and monitor their own networks. As virtual distance is not proportional to physical distance. banks and other service providers) more economical network management services on a remote control basis. Initially. in the Internet world.) This contrasts with the old economy where a plumber or repair technician must have a physical proximity to the clients. FIGURE 6 Consumer Merchant (e.) conduct fraud screening request authorization request authorization – – send authorization send authorization complete sale evaluate cardmember account authorize transaction © 2003 International Bureau of Fiscal Documentation . eToys. particularly where confidential information is involved. this will depend on bandwidth availability from point to point. the physical location of the service provider can be flexible. verification. monitor. In this event. and perform numerous other functions as if the computer centre is established locally. Taxation authorities will need to review whether and how such entities can be subject to tax in their respective jurisdictions.g. it is not so much a question of technical feasibility that will stop this development. In short. fraud screening. regional infrastructure could be prohibitively expensive. there could be enormous incentives for network service providers to move their operations to those zones. which is becoming increasingly popular in the e-business world. (See Figure 5. as well as other market factors. and authorization request before clearing with a card issuer such as VISA/MasterCard (that serves as an exchange). Aggregators The final example (Figure 6) involves aggregators. store. Banks and merchants can then focus on their core competence without being distracted by considerations of Internet security and networking infrastructure. and the storage sys- tem is local to the clients. These are service providers that provide back-end services to merchants or banks on a regional basis. The customers are scattered in many countries and the service provider may not have any physical presence in those locations.
Many tax officials still cling to the fallacy of living in an “EDP” world. Sample. through the Compliance. notwithstanding both hard work and commitment displayed by many governments and international bodies in moving towards fair solutions in the taxation of e-commerce. A Report to the Minister of National Revenue from the Minister’s Advisory Committee on Electronic Commerce (1 April 1998): both reports support the need for increased multilateral cooperation. chapter 6 and Electronic Commerce and Canada’s Tax Administration.31 The continuing work of the OECD. Australian Taxation Office. these bodies are continuing to monitor and evaluate developments in Internet technology.gov/taxpolicy/internet: “In the area of tax administration and compliance. alludes to this issue. as can been seen from the work of the OECD and many taxation authorities worldwide. footnote 3. Tax and the Internet: Second Report (1999). for tax administration in the e-commerce environment. and will probably necessitate new rules regarding supervision and fraud prevention. Note also that. “Tax & E-Commerce – OECD and EU Developments”. Peterson.36 There is also an increasing need to monitor cross-border business activities on the Internet. “The Emerging International Tax Environment for Electronic Commerce”. reflects appreciation of these challenges. at 1551. flexible and not ad hoc. it is not trite to reiterate that tax policy and law should be certain. See Boyle. See further. and the obvious question is how well equipped are tax authorities today in handling all the new electronic means of data flows? Suggestions have been made to collect data and ultimately taxes from those entities without a presence in the source country by way of withholding taxes. radically. developments in the science of encryption and related technologies may lead to systems that verify the identity of persons online and ensure the veracity of electronic documents. Krever. Compare the conclusion reached by The US Department of the Treasury. the obligation being 31. because use of new technology can improve standards of taxpayer service. who is quoted as saying that “tax administrators must be able to conduct their transactions with e-commerce business with the same ability that the businesses have among themselves. fair. At a very basic level. reliability and verifiability. which examined how external professionals remotely access client/taxpayer data and assess the data for authenticity. Koh Cher Siang. The emphasis here is not restricted simply to efficient tax administration. “Netherlands Publishes Position Paper on Internet Taxation”.33 At the very least. in which IT is none of their business because it “belongs” to the realm of IT specialists. at 161. at 122. Australian Taxation Office. Yet. for instance. In an article published by Red Herring forecasting the top ten trends for technology and business in 2001. verifying taxpayer information and facilitating cost-efficient collection of tax. with a view to adopting or adapting such methods. Schottenstein and Sprague. Selected Tax Policy Implications of Global Electronic Commerce 2 (27 November 1996). 36. with a view to determining whether the technology creates challenges or opportunities for tax administration tasks such as identifying taxpayers. Tax Notes International (11 October 1999). Another significant category of issues involves identifying parties to communications and transactions utilizing these new technologies and verifying records when transactions are conducted electronically. supervision and the duty to preserve files will also be applicable to Internet files. – obtaining access to encrypted data. – developing a response to the advent of electronic money (e-cash). many commentators and businesses have voiced. Many taxation authorities need to modernize their operations. Hopefully this work will build upon the study of the Professional Data Assessment TAG.”Compare also the views of the Netherlands Ministry of Finance on tax administration and collection expressed in its paper to Parliament on 4 May 1998: “Electronic commerce will influence the way taxes are levied. as appropriate. taxation officials will forever be playing catch up.) See further. even in the short term.” The point is made very clearly by the Commissioner of the Inland Revenue Authority of Singapore. albeit in a different (tax audit) context by stating: “A thorough understanding of the business is the first step towards putting together the pieces of the puzzle … to compute taxpayers’ true incomes.” (Reported in Tax Notes International (27 November 2000).32 Meeting these challenges are obviously critical policy objectives – and it is instructive. Information. Farrell and Boutellis. The major compliance issue posed by electronic commerce is the extent to which electronic money is analogous to cash and thus creates the potential for anonymous and untraceable transactions. there is already an urgent need for more intra/inter-government and multi- jurisdictional liaison and agreement to synchronize the taxation treatment and exchange of information applicable to an e-business world. to which tax authorities universally appear to subscribe. Tax Management Memorandum (1999). at 1393.34 The need for clarification and perfection of existing tax rules is well recognized. Specifically. ideas. Tax Notes International (23 October 2000).”35 If this prediction has any validity. at 1842. at 2460. 32. clear. electronic commerce may create new variations on old issues as well as new categories of issues. CHALLENGES FOR TAX AUTHORITIES The general perceived wisdom. including commercially developed Internet standards and protocols. the goal will be to develop international mechanisms for collecting tax. As a result of the increasing international electronic market there will be an increased need for international cooperation and exchange of information. Without knowing the e-business world and how fast it is changing (in relation to all of business methodology. an attitude change is an imperative. – obtaining access to verifiable information and documents. and Documentation TAG. See. and continue to voice. with the support of the Technology Panel. December 2000. 35. Red Herring. “CIAT Examines E-Commerce Challenge to Tax Administration”. concerns about the present confusions and uncertainty in the application of tax regulations in this area. See Guttman. effective. because of the nature of e-commerce transactions “new ways of administering the old rules may be necessary”. However. (2000) 1(2) International Tax Planning Journal. See further. 34. Merrill. completeness. “Policy Making in the E-Business Era”. and business models). 33. that this goal is being pursued in tandem with considering technical issues concerning taxation of e-commerce. Lejeune. the following prediction was made: “The Internet falls under the regulation of international accords. Tax and the Internet: Second Report (1999). in accordance with the OECD’s Taxation Framework Conditions (see footnote 8 ). is that their major challenges regarding e-commerce are: – identifying the taxpayer – especially when an Internet user is involved. Tax Notes International (18 May 1998). and – ensuring an efficient mechanism for collecting tax. © 2003 International Bureau of Fiscal Documentation . available electronically at http://ustreas. especially from non-resident taxpayers.” (Reproduced in de Bruin. – identifying audit risks and developing audit trails to ensure compliance. In short. Edgar. achieving this is a challenge that remains with us.12 ASIA-PACIFIC TAX BULLETIN JANUARY 2003 5. See reports cited at footnote 17 . chapter 6. “The Top 10 Trends in Business and Technology in 2001”. International collaboration will be required … The current rules for inspection.
transfer pricing and consumption taxes are undoubtedly matters that will ultimately be of significant increasing concern. It is in these areas where the interests of developed and developing countries most obviously intersect. between the old and the new economy. income characterization. the sale of a shrink-wrap Microsoft Office is in substance no different from selling via downloading. electronic filing. at 161-162 reaches a similar conclusion. International tax policy is a fine balancing act. 37. “A Proposal for Electronic Tax Collection in the Context of Tax-Driven Reform of Banking Laws” (1999) 10 JBFLP 125 and (1999) 14 Journal of International Banking Law. footnote 3. For instance. He concludes: “While the digitalization of modern commerce and the electronic shift of funds are sometimes seen by tax administrators as hindrances to effective audit techniques. The authors examine the Asian response to taxation of e-business. between the conservative and the liberal. See The International Fiscal Association Report by Doernberg and Hinnekens. the world economy continues to evolve. permanent establishment. Although issues relating to residence. 43. Such clarification is necessary from other tax authorities. Krever. For comparative purposes. 1999). In technologically advanced and rich countries a move could be made to ensure that taxpayers must be online and on the Internet. Many tax authorities urgently need to coordinate better with other government departments to obtain information on matters such as customs duty clearances. CONCLUSION From e-commerce to e-business. 23 February 2001). see Farrell and Yuen. enhanced connectivity with taxpayers. at 410. Electronic Commerce and International Taxation (Kluwer. 40. yet these must be balanced by regulatory controls preventing crime and tax fraud and ensuring personal data protection. database management tools. Privileges such as extended filing dates for tax returns could be granted to taxpayers who conduct their dealings with the tax authority electronically. In order for taxation rules to match eco- nomic reality. The OECD has clarified that the tax treatment should be the same in both cases reflecting the identical commercial substance. data mining and more powerful data analytical tools are important initial steps to ensure practical and cost-efficient taxation compliance.43 Tax collectors should concentrate their efforts on the major international corporations benefiting from the ebusiness world and demand information transparency and compliance with all reporting requirements. and the possibilities of expanding withholding taxes have tended to dominate the current debate involving e-business. perhaps more importantly. tax authorities need better data mining techniques. 26(12) InterTax (December 1998). Compare Quirk and Bentley. somewhat dated given recent developments in both Singapore and Hong Kong and does not cover the very significant response taken by the Indian High Powered Committee on Electronic Commerce and Taxation. International Tax Review 39 (July/August 2000). Tax policy makers need to strike a balance between providing incentives (where necessary) to promote the new ebusiness economy. It is not an easy task – but in the e-business world it is an imperative one. with the possible exceptions of gambling and adult content sites. To conclude. 38.38 Many tax authorities need to pay serious attention to upgrading their technology and staff training. Various jurisdictions including Singapore41 and Hong Kong42 have explicitly adopted this approach. electronic information can significantly enhance the ability of tax authorities to audit taxpayers and trace money flows. “Exemption of Software Payments from Withholding Tax” (Singapore. between the developed and the developing nations. ultimately benefiting from its multiplier effect. 41. e-business will flow in both directions and the increase in outsourcing will assist developing countries. Simplicity of rules and ease of compliance are obvious legislative and administrative goals. to ensure tax compliance and collection and to improve taxpayer service. but also make available a new range of tools to be used. many tax authorities need a change of attitude.40 Tax treatment needs to match economic reality. “Taxation of Electronic Business in a Globalizing World – Ten Demands for an Adaptation”. © 2003 International Bureau of Fiscal Documentation . 39 (Hong Kong. and between tax incentive and tax base protection. … The key to electronic data auditing is matching data across taxpayers. taxation authorities cannot afford to stagnate. and an audit policy39 that is inclined towards thoroughly examining various models of e-business. however. Compare Becker. See IRAS. The article is.37 The suggestions may be feasible but do they represent an unfair and onerous burden on the intermediaries? And who should pay for this? At the very least. referred to at footnote 3. 42.” 39. The Report by the Professional Data Assessment TAG (December 2000) on identifying the audit risks posed by the Internet e-commerce environment provides a very useful first step in this regard. notwithstanding this clear potential for conflict. Internet links up isolated islands of systemized units. July 2001). albeit in a different (tax audit) context.JANUARY 2003 ASIA-PACIFIC TAX BULLETIN 13 placed upon the payer in a B2B case and upon the credit card operators or banks in a B2C case. general registration and domain registration requirements. 6. The Hague. taxation policy makers should appreciate that purely virtual enterprises do not exist at present. And. and investment attraction. Technological changes create new problems. “Asia-Pacific Moves Up a Gear”. exploited properly. and choosing to levy tax on specific e-commerce transactions which might result in migration and loss of taxation revenue. and the OECD and other concerned organizations should continue to promote efforts to establish a platform for multilateral discussions. Just as securities regulators are implementing intranet-type systems and maintaining relational databases. See Departmental Interpretation and Practice Notes No. Yet.
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