18 July 2006
Melbourne, 18 July 2006: A Melbourne tax lawyer says that the rising tide of business done on the internet at both the personal and corporate level is threatening the current international balance of regulated cross-border revenue collection for many countries.
Speaking at a worldwide gathering of tax experts in Stockholm Dr. Niv Tadmore a Clayton Utz partner said the purpose of the conference (The Source of Income in a Globalized Economy: Developing Source Rules for the 21st Century) was to address the issues emerging from the rapid changes occurring in business practices in the 21st century.
"While for most of us access to e-commerce is a wonderful advance, at the state level it will put enormous pressure on some governments because they will lose revenue. Longer term, an ongoing shrinkage of the tax pie can place pressure on community services and ultimately the community's well-being.
Dr Tadmore explained that historically governments have managed the revenue collection issues associated with international trade, such as who is taxed and whether it is taxed at the source or at the buyer end, through international tax treaties.
"However in cyber-space the generally accepted jurisdictional frameworks are in flux and one of the uncertainties is where a product should be taxed within the ecommerce chain," Dr Tadmore explained.
"Add to this the fact that enterprises that make copyright and content supplies require little infrastructure and don't need to operate from their 'original jurisdiction', so e-commerce creates a whole new spectrum of opportunities to structure the flow of profits through low-tax jurisdictions. Obviously, this could disadvantage competing businesses that need to pay the usual rate of tax on their profits.
"The OECD has been examining various issues concerning the interaction between taxation and electronic commerce. The direction in which the OECD is heading in terms of new international tax policy on e-commerce is to 'wait and see', and in the meantime continue to apply the existing rules. However, the existing rules were essentially developed more than 60 years ago. They do not cope very well with e-commerce. Their application requires ongoing interpretation, reinterpretation and stretching, and can result in inconsistency and uncertainty. Given that the processes of international tax reform and co-operation are very slow and that the evolution of electronic commerce is very fast, international tax reform is likely to be far behind the game.
"So if e-commerce starts to materially realign revenue allocation and nothing really is happening at the international level, the 'loser' state may see itself being denied its fair share of tax revenue and resort to unilateral action that could have some negative outcomes. For instance unilateral action may result in double taxation of e-commerce, it may be uncoordinated and non-uniform, it may develop into a range of incompatible systems and, like other tax measures, it may be difficult to change or uproot.
"Already a good number of countries are saying that they will not follow the OECD's approach and are reserving the right to tax critical aspects of electronic commerce transactions.
"In an ideal world we would have a new and coordinated international agreement on this issue, but this is not an ideal world. The growth of electronic commerce is likely to induce an uncoordinated and patchy process driven by a series of unilateral measures underpinned by the fear of some states that they are losing out in the electronic commerce game and want to stop the erosion of their tax base. Maybe such disharmony will eventually persuade states to agree on an acceptable way forward on some coordinated platform.
"As I see it there needs to be a new framework for the taxation of intellectual property supplies and with it a new framework for the taxation of digital intellectual supplies.
"The definition of royalties also needs to be broadened to apply to intellectual supplies digitally made over the internet or similar media. This is really a natural extension of the concept of royalties and its adaptation to the realities of the digital age.
"A coherent framework for the taxation of intellectual supplies should be based on the adaptation of the royalty definition to include digital intellectual supplies. It would impose a low rate of source taxation on such supplies, taking into account the need to balance the fiscal assertions of both the source and the residence states. The challenge will be administration and collection, and this could mean that, at least in the initial stages, only deductible payments will be subject to tax, " Dr Tadmore concluded.
