Summary
Some traditional notions of taxation may not be applicable to electronic commerce and may lose their meaning in the electronic age. Notions of source-based taxation, "permanent establishment" as it is used in tax treaties, and the Internal Revenue Code's understanding of international trade are outdated for purposes of the Internet. Completely new notions of taxation may not be necessary for electronic commerce, however. Other traditional notions, such as residence-based taxation, may be revised and applied to electronic commerce.
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Extract
Formulating international tax laws in the age of electronic commerce: the possible ascendancy of residence-based taxation in an era of eroding traditional income tax principles.
INTRODUCTION
In recent years, the number of Internet participants around the world has expanded dramatically, "with user estimates [in 1996] ranging from 30-60 million, and growing rapidly."(1) This growing user base has resulted in a significant increase in the amount of business conducted over the Internet.(2) In 1996, income from Internet transactions grew immensely, topping the one billion dollar mark for the first time.(3) The growth-to-date of electronic commerce ("E-commerce"), though substantial, pales in comparison to the anticipated increase in electronically conducted business over the next few years. One research group predicts annual Internet sales of $327 billion by the year 2002.(4) As the trend toward E-commerce gains momentum, fewer transactions will conform to conventional means of doing business. This increasing reliance on the Internet for conducting transactions has already created challenging and novel questions in several areas of law.(5) The impact that technological developments have had on existing legal principles "has provoked some scholars to argue that cyberspace needs laws of its own."(6) In the area of international taxation, the changing business landscape caused by the surge in E-commerce at the very least warrants a review of existing principles in light of new technologies.(7) Certain long-standing international tax concepts evolved in a simpler economic era when easily traceable, "physical" transactions dominated the business world.(8) The tendency of E-commerce to eliminate geographical boundaries and "to blur ... the source and character of income"(9) may threaten the continued viability of such concepts, which include: (1) source-based taxation; (2) the tax treaty concept of "permanent establishment" ("PE"); and (3) the Internal Revenue Code (the "Code") concept of "U.S. trade or business."(10) The amount of attention and resources that international taxing authorities are devoting to E-commerce taxation issues underscores the importance of addressing these issues sooner rather than later.(11) One commentator stresses that "[t]he international tax issues surrounding intangibles, electronic commerce, and communications technologies ... strike at the heart of change and uncertainty in international tax."(12) In formulating tax policy to deal with the new business technologies, tax authorities should strive to avoid impeding the development of E-commerce.(13) Achieving this goal will require an international consensus regarding the taxation of E-commerce.(14) A consistent, internationally accepted approach to the taxation of electronic transactions will provide certainty to the growing number of taxpayers engaged in E-commerce. More importantly, a unified approach will mitigate the potential for double taxation (as well as tax evasion) which arises when tax authorities adopt inconsistent methods of taxing similar electronic transactions. Double taxation would artificially inflate the cost of cross-border electronic transactions relative to domestic E-commerce transactions.(15) Failure to deal effectively with the possibility of double taxation, therefore, could prevent worldwide E-commerce from realizing its full potential.(16) Concededly, the policy of pursuing international agreement on the taxation of cross-border flows of income--in order to provide certainty and prevent double taxation--is also applicable to conventional modes of commerce. The ability of E-commerce, however, to remove physical barriers to international trade and thus permit cross-border transactions to take place with increasing frequency reveals the greater need for an internationally coordinated approach to the taxation of E-commerce. Barriers to international agreement may arise because the residents of one country might be situated differently in relation to E-commerce than the residents of another country. For example, a major exporter of electronic goods and services like the United States might desire to tax E-commerce on a residence basis. Another country whose residents are primarily importers and users of electronic goods and services might prefer a "source-of-payment" tax rule. Consequently, it would be unrealistic to expect all international taxing authorities to agree on a single, unified approach to the taxation of E-commerce. Nonetheless, a common approach, if agreed upon by a significant number of nations, could go a long way toward alleviating the problem of double taxation. Good policy also dictates that taxing authorities pursue the application of the neutrality principle wherever possible. The Treasury Department strongly advocates the neutrality principle, which "requires that the tax system treat economically similar income equally, regardless of whether earned through electronic means or through more conventional channels of commerce."(17) Under a successfully operating "neutral" tax system, "tax rules would not affect economic choices about ... commercial activ...See the full content of this document
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