An Outline of Tax in E-commerce

6.1 An Outline of Tax in E-commerce

Tax is a specific distribution relation formed by forcibly collecting practicality or currency according to the national laws.

1. The categorization of traditional tax revenue

(1) In terms of collecting objects, it can be divided into income tax, transfer tax, estate tax and action tax.

(2) In term of tax jurisdiction, it can be divided into domestic tax, foreign tax, international tax. According to the jurisdiction of government, tax can be divided into national tax and local tax. Taxes can be classified into direct tax and indirect tax, according to whether the nominal payers being real payer.

2. The concept of tax jurisdiction

Jurisdiction, a very important concept in the international tax law system, refers to the right that a government collects tax from individuals. Tax jurisdiction means complete independence of a sovereign nation in tax revenue administration and tax legislation. Moreover, it stands for denial to any foreign interferences or controls.

There are two principles concerning jurisdiction: location principle and person principle.

(1) Location principle: The nation is entitled to tax on all income generated within the boundary of the nation and all property on the territory, no matter whether the income receiver or the estate holder is the citizen of the nation.

(2) Person principle: The nation is entitled to tax on all income and all estate belongings to its citizens (including natural and legal persons) all over the world, regardless of whether the income is generated inside or outside the nation. Citizen jurisdiction is also called nationality jurisdiction.

It is distance and time that give e-commerce advantages over traditional trade. That is, anyone with a computer, a modem and a telephone will be able to participate in international trade through Internet, which makes e-commerce moveable. Meanwhile, more and more trades are paperless or anonymous without invoice. With the disappearance of account books and invoice, the paper vouchers of taxation invalidate audit. So e-commerce possesses the feature of the concealment. These two features bring about the following problems:

ķ The loss of tax revenue. As e-commerce is bringing more convenient trade mode and less cost, more and more multinational enterprises are employing e-commerce. The development of e-commerce makes the tax departments unable to carry out corresponding levy strategies, and work out corresponding systematic laws to regulate the e-commerce behaviors of enterprises, which results in a lack of tax management and great loss in tax revenue. Theoretically, tax losses on e-commerce are primarily customs, consumption, value added tax, income tax and stamp duty, etc. Since it is effective to avoid tax by e-commerce, some enterprises try to avoid tax by making trade online, which causes chaos in the market.

6 E-commerce and Tax

ĸ The difficulty of tax administration and check caused by digitalization of tax credence. Traditional tax administration is based on physical credence, accounting volume, and various report forms, auditing the validity and authenticity. But the report forms and credence in e-commerce are all transmitted electronically, which can be easily modified or deleted without leaving any traces. Thus it is very difficult to carry out tax check in the traditional way. So in the long term view, the existing tax system should be improved to be adapted to the development of e-commerce; however, at present, more effective measures shall be taken to administer e-commerce.

Ĺ Loss of tax. Owing to the flourish of online trade, more and more enterprises, especially the multinational corporations move their business online, and accordingly traditional trade decreases. However, corresponding strategies and law system have not been carried out to regulate the online trade, which leads to a loss of tax revenue. It is conservatively estimated that our country had lost 1.3 billion RMB from online trade in 1998, and the rate is increasing by 40% per year.

ĺ Increase of audit difficulty. Traditional tax administration has to depend on account volumes, but online trade is carried out without paper media, the account

volumes and invoices can be filled in computers; and the credence can be easily modified, thus the tax administrators generally could not perceive the details of the business, and it is easy to cheat on tax. In addition, because of the development of encryption technologies, tax payers can protect their information using password, which brings about the difficulties in collecting information.

Ļ Possibility of avoiding paying tax caused by Internet. The global Internet enables the enterprises to gain more benefit from business, at the same time, enables the enterprises to avoid taxes as well. Moreover, the application of network and encryption technology makes bargaining easier and concealed. Thus the competition of tax administration and tax evasion will be fiercer.

ļ Chaos in tax administration. As the boundary between physical products and information service online becomes more obscure, tax administrators find there is nothing to do with intelligence property sales and paid consultations. Many trade products have been transformed into “digital information” and transmitted on the Internet, making it difficult to determine whether a certain income is a sale income, a service income or a license fee. Due to the confusion in this categorization, the tax administration becomes a mess. Online trade occurs in a cyber space instead of a specific location, so it is impossible to associate an income with a specific location, and it is difficult to identify the tax payer.

Ľ Inclination to a jurisdictional conflict. The national jurisdiction is a key problem in tax, and currently most countries are exerting both location jurisdiction and citizen jurisdiction, and the duplicated taxation is usually exempted by a two-side tax convention. However, both methods in Internet trade will face challenges. First, the development of Internet will undoubtedly weaken the location jurisdiction. Foreign enterprises only need to install intelligent authorization servers to trade digital products, but the behavior of servers is hard to classify or

Introduction to E-commerce

analyze, and the buyer of the products is also hard to identify. Internet enables the service industry to break through the restriction of territory, and the service provider could be anywhere. As a result, e-commerce has made it controversial to judge the location. Moreover, citizen jurisdiction faces challenge as well. Now it is the administration center that determines citizen identification. However, some unprecedented situations may become real as e-commerce comes into being. For example, the administration center of an enterprise may exist in several countries or no country at all. In this case, the tax administration will be unable to levy tax according to person principle.

ľ Difficulty in collecting information resulted from the multinational trade on the Internet. One of the most promising domains of Internet is international trade, and anyone involved in the trade will expect to reduce the cost to domestic trade, financial service being a necessary condition to this. To stimulate the development of online trade, Internet has begun to provide tax protections for some districts. Domestic banks are the primary information sources of tax administration; administrations can retrieve information by checking the bank accounts to get information of the tax payers and judge if the declaration is true. Even if the administration does not impose frequent inspection, the potential tax evaders will realize the risks. If the information source is located abroad, this supervision mechanism will be discounted largely, which makes tax evasion possible.

The rapid development of online trade imposes great challenges to traditional tax jurisdiction, but it is not insuperable. Since online trade is still at its initial phase, it is not late to take measures.