World Trade Organization Revenue Implications of E-Commerce for Development Geneva, Switzerland 22 April 2002 Electronic Commerce and the Challenge for Tax Administration

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World Trade OrganizationRevenue Implications of
E-Commerce for DevelopmentGeneva,
Switzerland22 April 2002Electronic Commerce
and the Challenge forTax Administration

• Walter Hellerstein
• Francis Shackelford Professor of Taxation
• University of Georgia Law School

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Key Attributes of E-Commerce with Tax
Implications

• Ability to Establish Public and Private Global
  Communications Systems
• Disintermediation
• Development of Encrypted Information
• Increased Integration of Business Functions
• Greater Flexibility in Business Organization
• Fragmentation of Economic Activity

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Technical Features of Internetwith Tax
Implications

• Lack of Central Control
• Lack of Central Registration
• Difficulty of Tracing Transactions
• Weak Correspondence Between Domain Name (Internet
  Address) and Reality

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Dangers E-Commerce Poses for Territorial Tax
Regimes

• Magnitude of Increase in Cross-Border
  Transactions
• Digitization of Information
• difficulty of identifying source, origin, and
  destination of transactions
• Tax Administration Issues
• audit trails
• verification of parties to transactions

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Opportunities E-Commerce Creates for Tax
Administration

• Streamlining of Tax Administration
• replacing paper with electronic data interchange
  (EDI)
• electronic filing of tax returns
• automation of tax collection process
• OECD Working Party 9 Subgroup on E-Commerce
• Streamlined Sales Tax Project (US)

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Overview of Concerns

• Direct Taxes
• Jurisdictional Issues
• PE definition as applied to electronic commerce
• Characterization/Sourcing Issues
• Transfer Pricing Issues

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Direct Tax Issues

• Jurisdiction to Tax
• Residence-based taxation
• Source-based taxation
• income effectively connected with trade or
  business within the United States
• permanent establishment
• OECD Working Partys proposed changes to treaty
  commentary

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Direct Taxes

• Characterization and Sourcing Issues
• Treaty Issues
• OECD Treaty Characterization TAG
• Ordering and downloading of digital products
• Website hosting
• Software maintenance and other customer support
• Data warehouse and retrieval

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Direct Taxes

• Transfer Pricing Issues
• use of intranets
• fewer paper trails
• identification of transactions with related
  parties
• difficulty of valuing contributions of related
  parties

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Overview of Concerns

• Indirect Taxes (VAT, Retail Sales Tax)
• Where consumption of electronic supplies occurs
• Administrative collection concerns with
  cross-border digital transactions
• Collection by remote sellers (US)

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KEY ISSUES UNDER VAT/RST
B2B TANGIBLE
B2C TANGIBLE
B2B DIGITAL
B2C DIGITAL
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Indirect Versus Direct Tax Issues

• Jacques Sasseville (OECD)
• Consumption tax issues are urgent, but not
  fundamental
• Income tax issues are fundamental, but not urgent

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Conclusion

• Extraordinary Problems and Opportunities
• Possibilities versus probabilities
• Stay Tuned