Problems in E-commerce Tax

6.3 Problems in E-commerce Tax

1. Problems concerning international tax distribution and domestic tax revenue

(1) Exemption of e-commerce customs. US first set up an exemption of customs of online intangible goods (e.g. electronic publications, e-journals and software etc.). At present American enterprises constitute 2/3 of all the e-commerce network companies all over the world, and the US also takes a primary part in digital products around the world. If the customs of digital products is exempted, the American enterprises will be able to go over the tariff barrier and benefit a lot in this trade. The EU members announced the “Report on Protection of Tax Revenue and Stimulation of e-commerce” in June, 1998, and achieved agreement with the US on exemption of e-commerce tariff. However, EU also forced the US to agree to impose indirect tax on digital products on the Internet, and insist that the tax be levied inside EU countries. On the other hand, most developing countries hoped to impose tariff on e-commerce (digital products) to protect their own industry and defend state sovereignty.

(2) Favorable taxing on e-commerce. Internet Tax Freedom Act passed in the US in October 1998 prescribed that Internet Access Taxes are temporarily exempted (or called deferred taxation) in 3 years to 2001. Moreover, multiple or discriminating taxing on e-commerce should be avoided. As for tax on long-distance sale, the nations and states should not impose tax on such sellers who visit the long-distance website (their server is in another country), which is regarded as a factor to impose tax. On one hand, this avoids unfavorable effect on e-commerce caused by unnecessary taxing and speeds up the development of US E-commerce (as for the avenue loss of state and local government caused by exemption of e-commerce can be covered by means of the transfer payment of federal government); on the other hand, the relevant laws inside the US could not carry out fair and effective supervision on e-commerce, thus the US government insists to impose favorable tax policy on e-commerce.

Based on this, we should begin to carry out our own favorable policies for e-commerce (according to international convention, the tax exemption on e-commerce generally lasts for 2 of e-commerce, our taxation will not be shocked intensely by global e-commerce. We can still make tax administration of tangible goods trade involved in e-commerce by customs, and make tax administration of digital products such as software, databases products and audio-video products etc.). The guideline is to formulate favorable taxation polices for both e-commerce and hi-tech industries closely related to e-commerce with the premise of defending state sovereignty

Introduction to E-commerce

and guaranteeing national revenue. These favorable polices will not influence our national revenue but speeds up the development of e-commerce.

(3) New tax imposed on e-commerce. In 1998, some governments and experts proposed in UN conference, that the new tax on e-commerce, “Bit (denomination of electronic information flow rate) Tax”, should be imposed on e-commerce except the tax, which is strongly objected by the US and EU on being put forward. At present, most countries have reached an agreement on not imposing “Bit Tax” on e-commerce. In 1999, the UNDP still insisted on collecting bit tax on e-commerce, namely, 1 cent for every 100 e-mails more than 10,000 bits, which will be used to make up the expenses of network construction in under-developed countries. This measure is understandable but actually with many problems: the behavior of e-commerce, price of goods and services and profits as well cannot

be identified on the basis of information flow (at present, Internet boasts some free services.). To summarize, Bit Tax does not go with the “fair and neutral” principle. Furthermore, if a company is with large network flux (information flow), it indicates that the company pays more, including tax, to make use of the communication line for a longer time.

2. Restatement about the taxation

(1) Identification of standing body. In international tax law, the standing body is a very important concept in tax jurisdiction. If the citizen of a contractor nation does not maintain a standing body in the other contractor country, the other side will not be able to impose tax on the citizen. That is, taxing power goes to the country where he lives. Otherwise, the source country will impose tax on the standing body for its profits and other incomes. There are three standards to determine the standing body:

ķ Business location standard. In the prototype of OECD and UN, standing body is defined as the fixed place that an enterprise carries out all or part of the business. The enterprise engaged in e-commerce usually rents a space in the server (that is, a website) provided by the Internet Server provider of a country to trade on the Internet, fixed business places and staff in such country, while some enterprises set up a website at home or in a third country. Thus some countries proposed that the website or server should be the standing body, and should be taxed on. Some even proposed that the website with any profits, whether in the enterprise country or the third country, should be taxed on.

ĸ Deputy standard. If a non-citizen has an independent deputy within a tax jurisdictional area, this dependent deputy has the right to sign contracts in the name of a non-citizen, the activities of this dependent deputy should be deemed as a standing body. It is still controversial whether an ISP can become a dependent deputy or not. If a certain ISP is outside a national jurisdiction, but its activities are inside this jurisdiction, it cannot be deemed as a standing body (namely, a dependent deputy); if the activities that ISP performs for clients are only a part of the normal activities inside a jurisdiction, this ISP cannot be a standing body

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(dependent deputy); only when the activities of the ISP completely represent those of a non-citizen, can the ISP be considered as a standing body.

Ĺ Activity standard. If a person does not have the right to sign contracts on behalf of a non-citizen, but always provides, reserves, and delivers goods/ commodities within a national jurisdiction for non-citizen, we should consider that this non-citizen has a standing body within a national jurisdiction. Then, does it constitute a standing body with a server within a national jurisdiction? OECD thinks that if the business of the enterprise is primarily by automatic equipment, and the activities are restricted to setting up, operating, controlling and monitoring the equipment, it can be considered as a standing body. According to the documents of US Department of Treasury, e-commerce will not become a standing body, since it does not qualify the standard of it. Or it is the exception of the standard. In terms of American tax conventions, a warehouse or storage does not constitute a standing body. Since the computer server is like a warehouse or storage, the existence of a server within a national jurisdiction will not become a standing body, for it is not a stationary business location, nor complies with the standard of a standing body.

(2) The property of income. Most tax conventions and corresponding laws have different prescriptions of different types of taxes. But the international law of income property is suitable for e-commerce. Given the tax pact, if a non-citizen has business profits from sales of goods in sourcing country, profits can be taxed by sourcing country only when the profits are obtained from standing body. As for the non-citizen’s royalties and compensations of personal services obtained in his sourcing country, the sourcing country can impose withholding tax. However, in the e-commerce era, the difference of the three profits mentioned above has become vague, and the software sale is a case in point. As for the income from services, traditionally, a service provider should go to the client location, but currently a service provider will not have to go to where the client resides to provide service, many of which can be provided online, such as online medical diagnosis.

(3) Taxation compliance. The problems mainly result from Electronic Money, the identification of e-commerce participators, the disappearance of go-betweens and the storage of accounting records.

ķ Electronic Money (EM). EM, a convertible currency, is electronic and digital, which can be transferred rapidly at a low cost. Meanwhile, EM, a systematic currency, can be tracked and stored. Moreover, it requires high security and an intermediate to initialize the system. There are two kinds of EM systems. The first one is an account system, similar to an auditor, which is usually maintained by the third party such as a bank, and provides a way of keeping track of the currency flow in an entire economic activity; the second kind is a non-account system, similar to cash currency, which cannot be tracked. From the perspective of taxation, EM transfer is not easy to supervise, for EM cash can be transferred abroad at a low cost. In virtue of the maturity of technology, EM (non-account

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EM in particular) can be used as payment over long distance via Internet, which may impose a tremendous strike on taxation. Traditional tax evasion is limited since the amount cannot be too large. In EM, however, because the amount is usually huge, and it is stealthy and free of tracking, the chance of tax evasion is very significant. Thus the tax administrations in some countries are trying to solve potential tax evasion by adopting new technologies to improve the tracking mechanism of EM.

ĸ The identification of participants of e-commerce. For tax administrations, the identification of participants of e-commerce is of vital importance for the execution of taxation laws. For example, the identification of an online trader has

a bearing on jurisdiction. Currently, EC is exploring a solution: the e-commerce companies make a kind of digital certificate (DC), issued by a committed intermediate, which can be used to identify another person online. The committed intermediate will be responsible for identifying the involvers’ identities and taking background investigation. DC will generate a trace, which will facilitate the tax administration to track the online trades and accordingly out down the falsification of account books by traders on the Internet.

Ĺ Disappearance of intermediates. In an e-commerce trade, product or service provider can provide the products to customers directly without intermediates (e.g. agents, wholesalers and retailers), which may exert an influence on taxation in the following three aspects:

The tax originally imposed on the intermediates may disappear. Internationally, some countries may have more tax while others less.

The disappearance of intermediates will complicate taxation. The original substantial tax taken from the minor intermediates has to be imposed on major consumers with petty tax.

Tax declaration will be weakened. Tax administrations can audit the intermediates that can provide information concerned and withhold tax, but once they disappear, many inexperienced tax payers will become a part of e-commerce, which adds load to tax administrations. The US has proposed two solutions concerning this problem: on the one hand, confirm jurisdiction according to international common understanding and bilateral taxation pact. On the other hand, the stakeholders co-develop software or equipment to deal with withholding taxation and other declarations.

ĺ Storage of record. In e-commerce, tax payers engaged in sales and services may not create a paper record. The trade has become digital, and all these records may take the electronic forms that can be alerted easily. Moreover, tax payers engaged in tangible goods sales may also receive electronic order and issue electronic invoice. Therefore, electronic records and documents concerned must

be investigated and verified to minimize tax evasion.

3. Taxation Jurisdiction

(1) Transfer pricing problem. According to persons in Europe, US and OECD, the current international transfer pricing criterion basically fits e-commerce. However, as e-commerce is not restricted by space, the tax administration has faced growing difficulties in tracking, identifying and confirming international

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trades. Therefore, as all nations have been supplementing, revising and perfecting the current transfer pricing criterion, the construction of facilities (hardware, software, and standard included) tax administrator shall be reinforced to improve the quality of data check in e-commerce.

(2) The identification of digital products property. How to identify the property of downloadable digital products (electronic publications and software etc.)? In the conference of OECD in October 1998, EU proposed that because most countries adopt value-added tax revenue, and the supply of digital products is regarded as supply of labors and the digital products be imposed value-added tax, which the US was forced to accept.

(3) Taxation jurisdiction problem. In e-commerce taxation, tax administrations could not easily track and identify the tremendous transaction data as the proof of tax. Then it is proposed by European and American countries that an e-commerce tax collection mechanism should be established based on the supervision paying system. The two sides (the buyer and the seller) in e-commerce have to balance through banks with all orders and data stored in computers, the participators cannot be completely anonymous. With the paying system as the supervision emphasis, tax administrations could conveniently take control of the e-commerce transaction data to determine the ratal. Our country can refer to the new model, developed by European and American countries, in selecting e-commerce models.

4. Common matters in domestic e-commerce

(1) The primary income source of the network company and probable taxation ķ Network charge, the charge taken from customers in terms of time and fixed

amount is the primary income source of network companies. The network service belongs to communication business, which should be taxed at a 3% rate.

ĸ Network advertisement charge, namely, the charge taken when one publishes advertisements on the Internet. Advertisement publication belongs to advertising

business, which should be taxed at the rate of 5%.

Ĺ Domain registry charge, the charge taken from applying for domains home or abroad for clients. This belongs to factorage in service industry, which should

be taxed in dual channels. On the one hand, 5% of agency charge in all with no deduction of registration fee shall be taxed as sales tax. On the other hand, 10% of registration fee shall be taxed as withholding taxation before paying websites of other countries.

ĺ Charge from web page manufacture and maintenance. Web page, a form of electronic document on the Internet, is primarily for introducing enterprise culture, products and business, and collecting feedback from customers. This sort of charge

should be taxed at 5% in terms of service industry.

Ļ Server rent. This kind of charge should be taxed at 5% in terms of leasing in service industry. All incomes of network companies should be strictly differentiated,

for not all of the business should be taxed at a rate of 3% in terms of the communication business.

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(2) The content of e-taxation service ķ E-taxation service. It functions in the following two aspects. First, it

provides access to taxation documents, such as rules, and policies. Second, it provides the submission and handling of taxation by way of electronic information. For instance, various deferred declaration reports, and e-mails can be dealt with by telephones, faxes, and Internet etc. Processing transactions concerning taxes could be via network, such as submitting a delay report via e-mails or faxes.

ĸ Electronic declaration. Tax payers transfer declarations to tax administration directly by making use of various tools (e.g. telephones and computers) in such communication network as telephone network, packet switch network and DDN etc. This realizes the exchanges of electronic information between tax payers and tax administrations and the electrification of declaration. This form of declaration best suits on the condition that the legal and technical conditions are complete.

Ĺ E-taxpaying means taxation balancing of tax administrations, banks and cash offices via computer networks, which realizes the payment of taxation (cash flow) without paper, but the prerequisite is a good e-paying system.

ĺ Other forms of service. For example, there are the integration of electronic declaration and taxation system, which collects and use of data of financial statement and invoices.

(3) Networking schemes of e-taxation Since different tax administrations and banks use different computer systems,

the networking might have several patterns: ķ taxation systems establish connections with other units by equipment of Internet and software distribution of batch files connected by public data exchange network (such as X.25, DDN, FR) or routers. For the security reason, independent routers and static routing scheme should be employed, and the secrecy of FR address and router configuration should be enforced. Data transfer can be carried out either by FTP, e-mails or multi-platform IBM Message Queue management software. This method requires less investment and low-cost maintenance, but cannot support real time access. ĸ Establish intranet among departments. Different departments and units can share information and data while outside departments cannot login in. Bookstores and banks can have unified and authorized data format to facilitate data exchange. The departments interconnected by networks and large-scale databases establish integrated management system with high-speed and reliable DDN or FR line and the technology of distributed database to realize data sharing by database backup. They can also use TCP/IP protocols to realize the sharing of functions and data among tax administrations and banks. The exterior network has a high degree of data sharing, but requires investment and high-standard maintenance; while batch data switch is relatively easy to manage. Ĺ VPN technology. Though it is up to date and undergoing a rapid development, it is not mature and widely applied and not suitable for platform development.

(4) Commitment on banks to pay tax directly If tax payers sign an agreement with banks and taxation administration, the tax

administration will compute the amount of tax due, and inform the bank to make

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balance in the tax payer’s account. These actions are done by the bank under the commission of the tax payer, thus it is named direct bank commission taxation. After finishing taxation declaration, the tax payers will notice the bank, the toll unit (tax office), bank account of receipt and payment banks and tax, and then the payment bank keep balance between the tax payer’s account and the receipt. This action can be done on the condition that the tax payer notices the banks initiatively, thus it is called “notice to tax”.

(5) The domestic e-commerce taxation At present, differences of laws and financial systems in our country and those

in other countries (the developed ones in particular) lead to the differences in taxation involved in e-commerce. Therefore, e-commerce in our country has the following problems.

ķ Administration of Value-added invoice in e-commerce transaction. Currently the income of the domestic e-commerce companies comes from the service fees

proportional with the total trade amount of B2B and B2C business. In order to gain sufficient service fees, e-commerce companies usually require the enterprises(mainly sales between enterprises) to transfer the payment deducted by the service fee to the account and then to the account of the other enterprises with the added value tax invoice discharged by online companies. This results in the difference between the amount on the invoice and on the enterprise bank account. In this case, value added tax should not be imposed on in terms of regulations of value-added tax management. Thus some e-commerce companies one after another apply to be general tax payers of value-added tax, and “change” the original business mode, that is, purchasing goods from an enterprise and then selling them out. Actually, the commodities are also transferred from one firm to another, with the payment transferred to an e-commerce company. Thus, the e-commerce company has to make a fake storage (“virtual storage”), but this behavior does not accord with administrative regulations. However, if the e-commerce company establishes physical storages, it will lose the advantages of reducing cost. In light of proposal of tax administration, e-commerce companies have to establish a sound commercial credit to solve it so as to solve the problems mentioned above.

ĸ Invoice generated by computer in e-commerce trade. Most programs in e-commerce trade of some network companies are run online, while invoice is generated off line, which requires five or six employees specializing in writing invoices. This, accordingly, increases business cost on the one hand, and decreases trade speed on the other hand. Some service companies propose that taxation companies should make some trials on computer-generated invoice, and carry them out in practice after acquiring experience, which is considered as a beneficial and feasible technology by tax administration.

Ĺ Multiple accounts in e-commerce companies. Now the bank accounts opened by clients (consumers and enterprises) in e-commerce are spread throughout the commercial banks and urban credit corporations. However, the commercial

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banks (including urban credit corporations) are not completely interconnected, so the fund transfer usually needs 3 to 7 days, which is a great impediment to the development of e-commerce. Thus taxation administrations point out that the best solution to this problem is to establish a sound, secure, fast and convenient financial system. Before the system is established the national administration of technical supervision can register the enterprises using universal enterprise code. In this way, even if the enterprise has several accounts, the tax administration can administer the taxation of the enterprises according to the registration number.

ĺ The legal validity of the e-commerce transaction. The experience of e-commerce laws proves that, the legal validity of e-commerce data is the prerequisite of the establishment of e-commerce legal systems (now the network technology can guarantee the security and validity of e-commerce data). In current laws, the regulations concerning digital data usually require that electronic data (Bit) be restored to paperwork, which is the same with traditional commercial management. This is not suitable for the development of e-commerce and leads to the lack of legal instrument in business, tax management and administration of law. For example, some online transactions (mainly not extensive transactions) involve execution after the payment is due.

Ļ The foundation of taxation lies in that tax administrations can control the tax payers’ property via certain means, for example, the accounts and commodities of the tax payer can be closed, frozen or auctioned. However, with the flourish of intellectual industry and the e-commerce, the property of tax payers is not easy to

be tracked by tax administrations. Thus, this brings about a new problem in the taxation. If the taxpayer sells his intellectual products by electronic information,

e.g. selling the software/program developed by him by downloading and has an account abroad, it will be very difficult for the tax administration to execute any measures, for the tax payer does not have anything that is concrete to be executed by the tax administrations. In addition, the universal cooperation between tax administrations is in great need when freezing bank account and transferring tax need. In that case, it is doubtful whether lien security claim for tax and imposing on tax mean something to tax payers in the intellectual industry.