E-commerce tax: A sober view of cyberspace

OECD Centre for Tax Policy and Administration

Cyberspace will not be the tax-free haven some expected it to be. Still, e-commerce poses some difficult challenges for tax authorities. 

“What goes up must come down” may not be among the most sophisticated theories of economics, but the dot.com boom of 1996-2000 – and its subsequent crash – is a reminder that certainty in business remains a chimera. The hype is over. How many PowerPoint presentations did we sit through being told that an Internet year was equivalent to four months? Well, when it came to the downturn those presentations were proved right, as the speed of the crash showed. But while large numbers of over-hyped dot.coms have gone to the great recycle bin in the sky, the technology remains.

Nor, with the boom over, should tax policymakers feel tempted to go back to doing whatever it was they did before they knew what IPO meant. “Old-economy” companies have been delighted to hoover up the dot.com technology and expertise at knockdown prices. And as the old economy companies integrate new technology into their strategies, business models change too, not in a headline-grabbing way, but more subtly. These are not start-ups, but they have the global spread and access to markets to ensure that the tax issues that e-commerce raises will go on developing, if not deepening, offering new challenges and opportunities.

The OECD approach to tax and e-commerce has always been balanced: first, ensure that government tax revenues are secure and second, that obstacles are not put in the way of e-commerce development. That holds as true today as it did back in 1998 when the OECD’s Ottawa Taxation Framework Conditions set out the wider principles to be applied (see box). All our work since then has tried to ensure this balance is maintained.

If the bursting of the Internet bubble has changed our work, it is in the longer-term, more realistic view that it has allowed us to adopt. Take online music. A couple of years ago consumption taxes like VAT appeared to be under threat as MP3 and similar technologies created a business model whereby there might have been hundreds, if not thousands, of small enterprises scattered around the world delivering packets of music to customers anywhere for a few dollars a time. Given that consumption taxes are supposed to accrue to the country where the product is consumed, how tax authorities would identify where transactions had taken place and how to ensure collection and compliance were just a couple of the very tricky questions thrown up by the e-commerce revolution.

That rather muddy business model now seems less likely to take off, particularly in the wake of cases such as Napster, which will probably lead to the supply of music over the Internet remaining in the hands of the established music companies. A more probable scenario for online music, if it develops, will be for larger music companies to sell it by subscription, rather than pay-as-you-go. Such companies are more likely to have the resources to be tax compliant and deal with reasonable administrative burdens. Still, the tax challenges of e-commerce remain and the Guidelines of Place of Consumption have to be refined. Several questions still stand out. For instance, how can a customer’s country of residence be verified in an online transaction? Tracing technology is improving all the time and no doubt will hold future solutions, but for now tax administrations have to focus on several criteria, such as language or the size of the online transaction, with smaller ones, like downloading a few dollars’ worth of music, likely to be business-to-consumer (B2C).

Another question is how to define a business establishment for e-commerce purposes. Multinational insurance companies, for instance, that cannot recoup their VAT, have to pay tax on software they buy. The easiest approach is to pay the tax in the country of their headquarters. The challenge here is how to prevent companies from, say, opening offices in low tax jurisdictions where they have little or no business, simply to declare their taxes there. Already, it seems clear that while the dot.com crash affected mainly B2C e-commerce, business-to-business (B2B) transactions continue to develop, thanks to the ability of companies to forge new relationships globally through co-operative procurement designed to reduce costs and inventory. Covisint, a company set up by several car manufacturers in the US to pool procurement resources, is a good example of this. New relationships of this kind may well affect taxes.

Not that B2C issues have gone away and to facilitate collection of consumption taxes on cross-border trade for online delivery of software, music, images and the like, we are actively looking into the potential for the technology itself to assist both tax administrations and business. New business models are also emerging in the telecommunications industry. Suppliers in this sector now frequently provide content as well as simple telecommunication connections through their mobile phones. So, a UK resident whose mobile services are supplied by BT might not be charged VAT on phone calls made while travelling abroad, but under a likely new EU directive, may have to pay tax at the UK rate for downloading news content while on the same trip. Clearly, if telecommunications services are to be taxed at one rate in one country, but the text content at another rate in another country, the complexities for tax accounting will become daunting, particularly for telecommunications companies.

This is typical of the kind of tax issue that must be addressed as innovations progress and the business world evolves. Thankfully, with the hype out of the way, we can examine these questions carefully and calmly, without having to react to every latest news bite. But while there may be a little more time to solve the problems of e-commerce taxation, answers will have to be found. Internet time may have slowed a little, but it certainly has not stopped.


• “Tax administrations in an electronic world”, conference, Montreal, 2001. www.ae-tax.ca/langselect.html. 

• See: Taxation and Electronic Commerce: Implementing the Ottawa Taxation Framework Conditions, OECD, 2001.


The e-commerce tax framework

E-commerce is one area where no country or group of countries can go it alone and impose taxes without running the risk of double taxation. In 1998 ministers from 48 OECD countries and non-OECD economies, as well as representatives of the business community, met in Ottawa and agreed Taxation Framework Conditions for resolving e-commerce tax issues. The OECD is now working on implementing these. The programme is being carried out in close co-operation with regional tax organisations around the world.

The most urgent issue is that of consumption taxes where immediate decisions are required by enterprises engaged in e-commerce. Following publication in 2001 of agreed principles, the OECD expects to publish model guidelines for their implementation in 2002. Progress is also being made in the application of tax treaties to e-commerce transactions, the aim being to provide the continuity that business and governments demand. The 2002 update to the OECD’s Model Tax Convention will incorporate the outcome of this work.

©OECD Observer No 230, January 2002 

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