Strategies in E-commerce Taxation

6.5 Strategies in E-commerce Taxation

The problems caused by online transactions have drawn attention of the governments and the international society. Many experts proposed various solutions via conferences, media, and articles. Some of them are listed as follows:

1. The scholars’ perspective: open new taxes. New taxes proposed include bit tax and Tobin tax

(1) Bit Tax: It means to impose taxes on each digital unit, including data collection, voice communication, and image transmission. Currently, bit tax remains controversial, for there might be many problems in this solution. Actually, this solution will seriously impede the development of network. However, the advocates think that those flaws can be overcome by making some websites tax free. The bit tax solution is objected by the enterprises, the reason being that this solution is too aggressive. As for this, the governments agree with the enterprises.

(2) Tobin Tax: It means that imposing tax in proportion to the currency flow of online transactions. This solution also has a lot of problems, for instance, the Tobin tax will decrease the amount of stock investment and impulse tax base. Moreover, this solution does not consider the currency flow is interest or bonus. Thus the tax payers will try to minimize the taxation.

Although the two solutions mentioned above have great influence, many countries and organizations do not adopt them when making policies.

2. The US perspective

The US published the e-commerce outline “A Framework For Global Electronic Commerce” in July 1997, in which five principles were proposed: the development of the Internet should be lead by private entities; the government should avoid imposing inappropriate restrictions on e-commerce; if the official interference is necessary, it should support a predictive, uniform and simple legal environment

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of e-commerce; the government should recognize the essence of the Internet; the development of e-commerce should have a global base. According to these principles, the relevant taxation principles should include: no impediment or discrimination against any specific trade; simple, transparent and executable; reducing the cost of maintaining the records; accustomed to the domestic taxation system. With respect to customs, the report thinks the digital commodities or services transmitted via Internet should be free of taxation. Since the Internet has no definite boundaries, the online transactions should be classified into two categories, the digital commodities such as software, music and movies should

be tax-free; on the other hand, the commodities that are transmitted in traditional ways should conform to the existing taxation regulations even if the contract is online. Moreover, in this report it is said that the online commercial activities have no definite and fixed geographical routes, which is historically the characteristic of the commodity trade. Therefore, although it is possible to make orders online, the commodities should still be imposed tax. Now many countries are seeking new sources of income, maybe they will try to impose tax on the global e-commerce. Thus the US government proposed that the WTO and other organizations should declare that the Internet is a tax-free zone. This issue should

be dealt with timely to ensure that this principle is established. Furthermore, the US government believes that e-commerce suits the existing tax regulations, and no new tax should be imposed on e-commerce. E-commerce taxation should conform to the principle of international taxation and should be easy to carry out by governments and avoid double tariffs.

Later, in the conference among OECD ministers and the conference among WTO ministers in 1998, the participants all agreed not to impose tax on e-commerce. The global standard conference in Oct. 1997 supported the US perspective that Internet should be private-oriented. In 1998 the US and Japan promised not to administrate e-commerce. And the France and US also came into common understanding to maintain fluent information. The US and EU stated that they made no governmental management of network. And afterward, the US, Holland, Korea, and Australia all made declarations to support the US policy of e-commerce.

In 1998,the US promulgated Internet Tax Freedom Act. (The 1998 Internet Tax Freedom Act.) and a series of tax-free policies about online transactions. However, with the flourish of Internet and e-commerce, more and more consumers have defrayed more and more money which leads to the dispute on imposing taxes on e-commerce becomes aboil. In 1999, a report published by the Jupiter Communications of the US indicates that most of the retail of e-commerce ($400,000,000,000 that year) is produced at the cost of the traditional tradesman. Since it is not prescribed that taxes should be imposed on online transactions, consumers can now shop online without being imposed. But the government is worried about the loss of taxes and the necessary retail taxes imposed from the traditional tradesman. They say that the earning of taxes will decrease and then the infrastructure and service expense will have to be cut, unless the taxes are

Introduction to E-commerce

imposed on online transactions. On the contrary, the opponents sneer at the above worries and point out that online transactions account for a little proportion of the total consumption expense and taxes will restrain the increase brought by Internet.

In a word, as the advocator, pioneer and beneficiary of the development of Internet and e-commerce, on the one hand, the US carried out a series of effective policies and laws on e-commerce development. For instance, the policy that governments should interfere the development of e-commerce speeds up the development of e-commerce and Internet to a large extent. On the other hand, there are unsuccessful aspects, for example, it is the loose management of Internet and e-commerce that results in hidden trouble in management and law. Nevertheless, we should recognize its stand and measures to safeguard its own interests. Take the fact that e-commerce are exempted from tariffs as an example. Of course, we also admit that imposing on e-commerce completely is indeed very difficult from the perspective of technology and management. However, it is beyond doubt that the United States is the biggest beneficiary by announcing tax exemption of e-commerce before conducting a thorough study on this issue with other countries. Because the object of complete e-commerce is simply software, books and audio-video products most of which are exported by the United States. With the flourish of Internet and e-commerce, there will be more and more digital products, and it is very likely that United States will be in a dominant position all along. Therefore, as to the idea proposed by United States that tariff should be exempted from e-commerce, but some countries expressed disagreement or made no comments on it. In addition, it is very difficult to refer to some practice of the US because countries vary greatly in Internet assess tax, and service tax.

3. Solution to e-commerce taxation by OECD

At the conference in Finland in November 1997, OECD came to an agreement as follows: any motion on taxes should ensure the neutrality and reasonable revenue distributing to avoid double taxation and excessive implementation costs; the taxes implement is more exigent than that of taxes policy; the government and businessmen should jointly work out the solution to tax; international cooperation is of great importance; the tax system should be based on the global trend; the taxes should not be the barrier for the e-commerce development; e-commerce should not undermine the tax system and should avoid “Bit Tax” as much as possible.

At another meeting on e-commerce taxation in October 1998, OECD further clarified: revenue should be built on neutral, effective, reliable, simple, fair and flexible principles; it is not practical to set up another tax system under the current system. If the traditional business involved in entity transaction was force to adopt policies of the e-commerce, it would lead to inequality such as double taxation and so on.

4. Canada

In April 1997, Canada Taxation Bureau set up the e-Commerce Advisory

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Committee to study the domestic and international e-commerce development. The Committee, in April 1998, completed a report, “E-commerce and the Canadian Tax”, on how to ensure the integrity of Canadian tax system. As to Canada’s policy on e-commerce, the report recommended that:

The private sector should be in a dominant position in e-commerce development, management and promotion.

To ensure the growth of e-commerce, the government should create an enabling policy and legislative environment, and recognize the importance of removing all obstacles to e-commerce as soon as possible.

Though different in forms, electronic transactions and traditional transactions have the same tax levy.

The government should avoid excessive regulations, limits and taxes to e-commerce.

The government should understand the Internet, and should be a model in the use of Internet and e-commerce.

Economic policies in revenue should be neutral, equal, simple and feasible to avoid multiple taxations and realize rational distribution of taxes.

In addition, the report also suggested: “Bit Tax”, the consumption tax imposed on digital information transmission, breach the principle of not imposing taxes on electronic transactions. Although some foreign jurisdictions had brought forward or started testing “Bit Tax”, the Committee believed that “Bit Tax” would hinder the growth of e-commerce. The Commission also believes that some major issues are from the jurisdiction conflicts of collecting multiple transactions jurisdiction. The proposed solution would be international jurisdiction on the competition between reasonable revenue sharing and mutual cooperation. They also considered whether Canada should advocate for income tax, benefits and the international distribution or not. One of the possible ways is that commercial enterprises, in several jurisdictions, apply the global income distribution formula. And a global distribution formula should include the following three main points: recognition of the tax levy, including the branch offices and branches of the enterprises; recognition of global interest income, particularly different criteria for the calculation of profit and loss of different jurisdictions; recognizing the jurisdiction of competition between the distribution of its benefits formula.

As to the income tax returns on e-commerce issues, the Committee compartmentalized them into intended ones and unintended ones.

For the former, measures that could be taken are as follows: ķ Canadian tax authorities should work out a set of methods that can recognize online commercial activities, for example, network search software to track tax evasion. ĸ Checking the existing tax law to find rules that provide penalties for failure to comply with the law to ensure its effectiveness. Ĺ Financial institutions must report the certain amount of cash or cash equivalent of transactions to the tax authorities.

For the latter, the measures are: ķ Informing taxpayers of elementary tax rules on online commercial activities. ĸ Implement the website links on revenue to expand education and manage.

Introduction to E-commerce

With regard to multiple jurisdiction on e-commerce taxation, the Commission holds: any enterprise in Canada shall be imposed on taxes and the location is the base of Canadian taxes. As it is more difficult to distinguish the location of an e-commerce company, the Committee recommends that the Department of Finance Canadian and the tax treaties signed should jointly work to deliberate how to shorten eligibility authorization process to reduce the impact of double taxation on taxpayers and should issue a notice to stress the importance of modern telecommunications living. In addition, the springing up of e-commerce makes it difficult to judge whether the commercial activities take place in Canada. Meanwhile, it is more difficult to judge whether the business operating outside, whose central management organization is not in Canada, has reported timely and appropriately the interest from their international transactions. Accordingly, the Committee recommends that tax authorities should check whether the income tax law on “commercial” defined appropriately in the e-commerce environment and emphasize the impact of modern telecommunications technology on “residence” and “engaged in business outside Canada”. In addition, the report also pointed out: in an electronic environment, whether the concept “permanent positions” is effective? If so, how much does this concept influence e-commerce; if not, whether it should be replaced by another concept? Since relevant international treaties formulated partly by Canada stipulates that non-Canadian residents engaged in business in Canada pay tax if and only if their income are from business permanently in Canada.

As to tariffs on e-commerce, the Committee found: Canadian legislative policy demands that various states of every import transaction in tax calculation and reporting needs, including the original, the import and export transactions, and so on shall be made clear. The policies prescribe that rules shall be observed in obtaining records and appropriateness of the import and export transactions to ensure Canadian financial institutions information to confirm. As to e-commerce, tax authorities, together with the relevant, should formulate a set of e-commerce standards, the establishment of a standard format for storing information about the identification and qualification authorization in particular. In Canada, it is generally thought that the tariff applies only to tangible commodities, and because goods in electronic transmission are not material entities so they were not within the scope of taxation. The Committee did not comment on this phenomenon, but they held that tangible goods or commodities transferred in electronic transactions and goods or similar goods that are still trading traditional should not have different tax treatment.

Finally, the report also put forward the constructive proposals on the record- keeping, record encryption, digital signature and digital bill. On the record encryption, the report figured out that if the taxpayers do not provide the decryption key, it is difficult for Canadian tax authorities to learn and use those encrypted information. So if the original proposals were not declassified document encrypted or decryption key were not provided to the Canadian tax authorities,

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Canadian tax authorities could deny the existence of such information in Canada or seek judicial relief.

5. Method of EU to solve the problem of e-commerce taxation

EU thinks that revising the existing taxation principles will be better than introducing new taxes and levies; European Commission proposes imposing a capital gains tax on the European consumers doing e-commerce on the Internet. The EU is not prepared to increase new tax on e-commerce activities, they do not want to remove the existing e-commerce taxes. E-commerce activities must fulfill tax obligations. Otherwise it would lead to unfair competition.

6. Strategies of ECTSG

ECTSG thinks that the taxation policies should conform the following standards to fit the development of e-commerce: neutral principle, the transactions involved in different purchase ways and by various applications should be equally treated; avoiding dual international taxation, import/export should conform a uniform standard; reducing the administrative cost.

7. Strategies of developing countries

The developing countries still have disagreement with proposal by US Department Treasury that taxation should be based on citizen jurisdiction, since by doing so the developing countries will suffer a great loss from importing technologies. Thus, with regard to taxation jurisdiction, there is great need for coordination between the developing countries and developed countries in the problem of taxation jurisdiction.

8. The strategy of e-commerce taxation in our country

Presently, our view on taxation shall be updated gradually and the legal system of taxation shall be perfected.

(1) Establish specific e-commerce taxation registration system. That is, the tax payer should go to the tax administration to register after completing the online transaction. First of all, the tax payer applies for registration of e-commerce taxation fills in forms and submits relevant materials, especially the key backup of the super user password. Moreover, the tax administrations audit the materials submitted by the tax payer carefully. Moreover, keep the information secret and had better set up a management system for passwords.

(2) Establish a favorable tax rate to enable separate taxation. E-commerce can help the enterprises reduce cost and promote efficiency, thus should be favorably taxed on the condition that the enterprises balance separately.

(3) supplementing items concerning about e-commerce taxation to improve the existing law system. When it comes to establish our taxation regulations, for the sake of national benefits we should stick to both person principle and location

Introduction to E-commerce

principle because the fact that we are still a developing country. Meanwhile the characteristics of e-commerce in China shall be taken into consideration when stipulating supplementary terms on e-commerce in our existing value-added taxes, consumption taxes, income taxes, and tariff.

(4) Upgrade tax collection and management system with functional improvement. Increase tax collection and inspection by making use of computer network technology. There is a temporary method by placing software of tracking statistics taxation in the wisdom server so that it automatically calculate taxes in each transaction in terms of type and the amount of taxable income from the transaction. However, in the long run, it is necessary to develop a powerful e-taxation system to store documents and statements to complete a paperless tax. This will not only improve the taxation management of the traditional trade, but also meet the requirements of the development of electronic commerce taxation.

(5) Train the financial professionals with knowledge of information and tax. In the Internet era, the development of taxation cannot do well without talents. E-commerce and tax collection, tax evasion and leak stoppage, tax avoidance and the anti-tax avoidance are attributable to the competition of technology and talent. Currently, most of China’s tax departments are lack of network technicians and related personnel are lack of the necessary knowledge of e-commerce. Therefore, in order to conform to the trend of the times and e-commerce revenue control at the front of e-commerce, it is necessary to make great efforts to train compound talent both mastering taxation and information knowledge.

(6) Actively promote international cooperation and coordination. Strengthen tax administration by collecting, handling, and storing information. The focus of e-commerce management is to strengthen exchanging international information and intelligence, because e-commerce is a network-based, open trade and it is difficult for tax department of a single country to fully grasp the information of transnational taxpayers. Tax evasion through online business can be prevented on the condition that tax departments make close cooperation to collect information and intelligence of the distribution sites of taxpayers in the rest of the world, especially sites located in tax havens from all over the world.

(7) Set up a special body to carry out extensive, and thorough research on issues involved in e-commerce. As China’s e-commerce started relatively late, facing the problems derived from the development of e-commerce, particularly the challenges posed by e-commerce on the traditional tax system, tax policy and the current international tax arrangements, it is necessary to conduct research to understand, grasp the latest trends in e-commerce and international development trends, and in light of China’s specific conditions and changes in the taxation system and raise plan of our country. In the view of author, China should set up a special body to study electronic commerce so as to speed up the development of e-commerce by tax regulations and polices and to speed up our economic globalization to promote the steady economic growth of our country.

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