Justification of the Concern over E-Commerces Effects on Tax Revenue - Coursework Example

Taxation Introduction: Economic growth of any country is dependent on performances of all the industries existed in the country. In most of the countries across the word, communications industry is increasingly becoming very significant. In the communications industry, Internet occupies a very significant place. In the present environment of globalization, markets of almost all goods and services have very competitive. Under such competitive market environment, the best survival strategy of any firm is to render services of world class standard. Here, Internet comes to a great help to firms by providing access to knowledge bank. Online business which is commonly known as e-commerce offers a completely new way of conducting business transactions by utilizing modern technology of the information society.1 E-commerce can be defined as “the use of electronic transmission medium (telecommunication) to engage in the exchange, including buying and selling of products and services requiring transportation either physically or digitally from location to location."2Introduction of ecommerce has been found to have produced some positive effects on economic performance of a country. It offers innovative ways of selling, delivering and receiving of goods and services and affects almost every industry and all aspects of business mechanisms and in this process dramatically contributes to productivity enhancement of the industries.3 In spite of producing so many good effects on economy, increasing e-commerce, however, results in growing concerns of government over the issue of tax loss for which e-trading is being increasing held responsible. There is a general perception that tax implications of e commerce is not always very positive, or in other words to say increasing ecommerce results in huge loss in tax revenue. It would be therefore interesting to see how far this kind concern or perception can be justified.4 Justification of the concern over e-commerce’s effects on tax revenue: Concerns over loss in tax revenue due to increase in e-commerce has not emerged without any valid base. A number of researchers have conducted various theoretical and empirical studies to find out implications of e-commerce on tax collection by government. They have found that e-commerce has some serious implications on tax collection by government. Increasing involvement of business enterprises in e-commerce has given birth to a number of problems in the area of sales tax collection by governments in many countries including Australia. As the tax laws for e-commerce are not very tight, it becomes easier for the traders to evade tariffs and other trade policy measures and that is where the question of loss of revenue rises. Actually e-commerce makes it easy to create business without creating permanent establishment where a seller is subjected to tax on his income. While analyzing the problems of e-taxation, the 1st thing that one can observe is that there is a huge chance of fraud and tax evasion. Though it is true that due to the improvement in information technology over the years the possibility of tax evasion has been reduced but empirical evidences have something else to say. For example, according to a paper published by ThreatMetrix on 19th December, 2008, $3.6 billion was lost in 2007 due to online fraud.5 So this has become quite obvious that online trading has resulted in a huge loss of revenue for the government. According to Donald Bruce and William F.Fox of center for Business and Economic research, the sales tax base for state and local government has been shrinking due to growth of remote sales including those made through e-commerce, the telephone and catalogs.6Bruce and Fox have held e-commerce in their paper as the major contributor to revue loss of the government. According to them, the loss of revenue is because of tax evasion and not because of tax avoidance as though the sales tax cannot be collected but the use tax is due.7 So it has become quite obvious that e-commerce is one of the primary reasons for the fall in revenue of the government both at the local and the state levels. Hence the increasing concerns over loss in governments’ tax revenue has some justification as in a number of countries like U.S.A., Canada, Australia and so on, the rapid expansion of e-commerce both the central and state governments are undergoing huge losses in their revenues. In the presence of expanding e-commerce, tax collection by governments becomes very complicated as most of the governments are lacking a comprehensive understanding of the modern information communication technologies, the complex characteristics of business process that Internet business system offers and finally as technique of Internet business has made the tax legislation’s operation in most of the countries facing increasing e-commerce more difficult. As a result a substantial amount of remote Internet business transactions remains untaxed.8 In the age of this modern internet based information and communication technology, in one hand consumers are increasingly developing a habit of browsing in shops on main streets but making their purchases online to evade tax, while on the other hand, small sellers are increasingly preferring opening up a website on tax free internet network in stead of building permanent establishment for conducting their businesses. All these have contributed to increase in revenue loss of the governments.9 Now the question that needs to be answered is that are there any international solutions to this problem? Can there be strategies that could be followed by the Governments, which could minimize this loss of revenue? Time has come for the countries to take appropriate steps to tackle this problem. Solution of the problem: Identifying the loopholes in the process of taxation can easily solve this problem. Government needs to undertake adequate measures or identifying the growing number of taxable transactions that are taking place in cyber space. The first and foremost thing that we need to understand is that there are certain basic drawbacks in the process of collection of taxes in e-commerce system. Once these drawbacks are identified then adequate measures could be taken to improve over these drawbacks and then this could free the system from the possible problems regarding the collection of revenues that e-commerce is facing at the present.10 Many research works have been done in this respect. One of the possible solutions to this problem can be tightening of the cyber laws. More the cyber laws are tightened less will be the possibility of fraud. And for this more advanced research in information technology becomes essential.11 The taxation of electronic commerce demands an international solution. This is because electronic commerce will increase the volume of international transactions but there are no international tax laws that could govern these transactions. After gathering adequate experiences over the years, countries across the world have understood that international trade and harmony can be enhanced by international cooperation and developing principles that are consistent and can be applied internationally. New rules and regulations that would suit the need of time need to be developed.12 OECD’s view in regard to permanent establishment and e-commerce: Permanent establishment refers to having a fixed place for conducting business. The benefit of e-commerce over permanent establishment is that e-commerce helps to create businesses without permanent establishments where the sellers are subjected to tax on their earnings. But e-commerce involves a loss in revenue for the governments both at the central and state levels, which is not very high in case of permanent establishments. OECD has defined permanent establishment as a business having a fixed place. But OECD does not view the ownership of a place as an essential factor for conducting business. According to OECD, businesses can be carried out on the premises of other people’s businesses, but the only criterion there would be that the place should not be used for temporary purpose. The OECD also specifies that the place of management is meant to be the actual decision making power and is different from an office. In case of overseas construction projects, the OECD model convention specifies that the project should be more than one-year duration in order to be called a permanent establishment. For an individual project only this time limit is considered, but if the same contactor is engaged in any other overseas project then the time involved in the other project is ignored and is not taken into consideration. The time counts from the day the work is started and the preparatory task is also taken into account including the work done by a sub contractor in case he is employed. OECD also provides definition of preparatory. An activity will be called preparatory only when it is not a very essential part of the activity of the whole enterprise that is it does not play a very significant role. In case of regional “management offices” of the international enterprises which are essentially big companies, OECD considers them as permanent establishments only if the management functions are being regionalized. Again a foreign enterprise will be called a permanent establishment even if it uses agents instead of employees who work on behalf of the companies. But if the independent agent carries on a business independently then they also carry the risk of transaction. In that case the independent agent would not be treated as a permanent establishment. Only those agents can be called permanent establishments if they carry the work wholly on behalf of the enterprise. OECD also clarifies that a subsidiary of a company will not be regarded as a permanent establishment. But the subsidiary acts as an agent and is not independent then only will it be called a permanent establishment.13 As regards the international tax problems created by electronic commerce, OECD also has its views on trading through e-commerce. Due to electronic commerce a person can carry on business with any country or in any country without being a resident of that country. OECD has stressed on effective management in this context. OECD, however, has not mentioned any uniform rule for determination of the source of income. In case of business income, the source of income is the place where the business is carried on. According to OECD a website may not be considered as a permanent establishment, but a computer server may be called only if the activities carried out by the computer server are not auxiliary in nature. OECD has placed its more stress on the place of the economic activity, rather than on the location of the technology.14 Conclusion: E-commerce is really expanding now. In this present scenario all that could be said that there is no other option but to go along with e-commerce and head towards a much more progressing world. But it is also true that e-commerce reduces the tax revenues of the government and opens the economy to more frauds and tax evasions, but it is also true that e-commerce eliminates the drawbacks of permanent establishments. OECD has defined and redefined its concepts of permanent establishment and has also believes in making more reforms in the taxation norms for e-commerce for increasing international cooperation and also development of principles having international basis. Read More