E-commerce and taxation: a virtual reality

Fiscal Affairs Division

David Rooney

Taxing e-commerce is a global challenge for governments and business alike. It is also not without its controversies. We asked Simon Woodside of OECD’s Fiscal Affairs division to explain. 

Observer: Why is taxing e-commerce such a controversial issue?

Simon Woodside: Everyone likes to argue about tax. And the tax treatment of e-commerce is no exception. Some of the controversy stems from such notions as the idea that e-commerce is somehow so special that governments shouldn’t tax it at all. That’s not an argument that I buy – there’s no rational case for granting e-commerce more favourable tax treatment than conventional trade. That would only distort the market and if, as expected, e-commerce continues to grow, it could lead to an expanding hole in the revenue base.

E-commerce gets more of the headlines, probably because it’s recognised as such an important new feature of the global economy. It does beg fundamental questions about the way our taxation systems work – whether it’s taxation of company profits or taxation of private consumption. The technology that makes e-commerce what it is puts more of a spotlight on the possible challenges to effective taxation – just how do you tax a cyber-business, or all those sales over the Net? E-commerce makes international trade in particular so much easier, and so the debate about taxation moves up the international level, too. That’s where the OECD fits in.

Most mainstream opinion accepts that e-commerce should properly fall in the taxation net. What we need to consider is how that works internationally, to provide the same level of certainty to governments and businesses that we aim for today in relation to conventional commerce. We need to be clear about where taxation takes place, and how – especially to avoid the risks of double taxation, or unintentional non-taxation.

Observer: What are the problems of taxing e-commerce?

SW: The priority has to be to identify practical and reasonable ways of applying internationally accepted taxation norms to e-commerce; and, where necessary, of clarifying or developing those norms. So, for example, for direct tax purposes, we’re clarifying how such concepts as ‘permanent establishment’ – that’s the rule which determines the right of a state to tax the profits of an enterprise of another state – should operate in the electronic world. Elsewhere, for indirect taxes (such as value-added tax, or VAT) we’re confirming how international transactions should be treated, and tackling such tricky issues as how you collect the tax on a product that is delivered online.

So, yes, there are a good few technical issues that need to be examined in detail. And that’s precisely what the OECD process is all about – bringing together, through our Technical Advisory Groups, experts from business and government. And those government representatives are not only from OECD member economies, but from many other economies too – Singapore, Brazil, South Africa, China, India to name just a few. And, of course, we are looking for additional input from participants at the Dubai 2001 conference.

The key thing is to maintain and strengthen the international dialogue. On the whole, there aren't any fundamental differences of opinion, although there are some differences of emphasis. It's important that we recognise these.

Observer: Is it purely a trans-border issue, or are there domestic complications too?

SW: Not entirely – although the focus of the OECD's work has been on the international aspects of taxation. That's where we have the strongest role to play. That's why, too, we're so committed to a dialogue that actively involves economies across the globe.

At the domestic level, one of the most important issues is how governments can seize the opportunities presented by e-commerce technologies to improve taxpayer service, whether it's electronic filing, electronic transfer of payments, or just Internet access to tax-related information. There's a lot that governments can do and are doing here – and the OECD is actively promoting these efforts.

Observer: Why is there so much fuss right now about how VAT systems should apply to e-commerce?

SW: Most of the fuss is actually about a relatively small part of the overall picture – namely b-to-c (business-to-consumer) cross-border deliveries online from, say, a US supplier to private consumers in Germany. The vast majority of e-commerce is b-to-b (business to business) – whether it's domestic or international – and there are existing VAT principles and collection systems that can be readily applied here. So the focus is then on B2C transactions. Here too, in many instances, existing tax collection mechanisms can work – especially when the transaction involves goods, or is a domestic one.

It's the international online deliveries that present the greatest challenge, especially when the supplier has no presence at all in the jurisdiction of the customer. Self-assessment by individuals is never a great way to secure this sort of tax – but looking to the supplier to collect the tax, as is the norm for VAT-type taxes, is not so easy either because the supplier is in another state. There are no simple answers right now – governments and businesses are agreed on that. We're agreed too that the best way forward is to look towards technology-based systems – for example, ones where the tax calculation and remittal is undertaken by a trusted third party as part of the online transaction. There's a lot more work needed on the detail of such systems. In the interim, states are probably going to have to consider implementing a simplified registration system for such non-resident suppliers.

Observer: Where do countries stand on e-commerce taxation?

SW: OECD and many non-OECD countries, as well as the business community, are firmly committed to the basic principles as set out in the Taxation Framework Conditions (endorsed at the Ottawa Ministerial Conference in October 1998). Those conditions are the foundation for all our current work – all the participants in the debate, government and business, recognise them as such.

Observer: What are those basic principles?

SW: In short, non-discriminatory treatment of e-commerce; the application of existing rules and concepts; the importance of a fair sharing of the tax base internationally; and a commitment to pursuing these ends through intensified dialogue with business and non-OECD members. Since Ottawa we've achieved a broad level of consensus on such issues as the interpretation of the existing permanent establishment rules, the characterisation of business income for tax purposes, and the way forward on VAT. In early 2001 we'll be issuing comprehensive reports on these and other topics, and so starting to draw firm conclusions from the work of the past couple of years.

Observer: Finally, some people argue that e-tax is unworkable and go to the extreme of saying it will spell an end to government. What do you think of these views?

SW: I think they're misguided.

E-commerce can and will be taxed – the important thing is that it be taxed fairly and efficiently (just like conventional commerce). There's no question of governments suddenly allowing their tax revenues to evaporate. Talk of the "end of government" is wishful thinking on the part of a maverick (and slightly naïve) fringe. The truth is, governments are duty-bound to provide their citizens with core services (schools, hospitals, transport infrastructure, social security provisions, etc.). Private provision may be possible in some cases, but in practice taxation still plays a central role in securing the funds to pay for those services. So taxation of e-commerce is a normal part of the accepted pattern of how our countries operate. What tax administrations have to do is exploit the technology available to improve taxpayer service and at a lower cost. It's not the "end of government" we should be talking about, but the emergence and development of "e-government".

Visit www.oecd.org/daf 

©OECD Observer No 224, January 2001

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