Electronic commerce and Canada's tax administration.

On September 17, 1998, Tax Executives Institute submitted the following comments regarding Canada's tax administration of electronic commerce. The comments took the form of a letter from TEI President Lester D. Ezrati to Canadian Minister of National Revenue Herb Dhaliwal. The comments were prepared under the joint aegis of the Institute's Canadian Commodity Tax Committee, chaired by Munir A. Suleman of The Bank of Nova Scotia, and the Electronic Commerce Task Force of TEI's Canadian Income Tax Committee, chaired by Vincent Alicandri of Xerox Canada Ltd. Contributing substantially to the development of TEI's comments were Carol Felepchuk of IBM Canada Ltd., Glen S. Pye of Northern Telecom Ltd., and Alan Wheable of Canada Trust.

In April 1998, the Minister's Advisory Committee on Electronic Commerce released its report on Electronic Commerce and Canada's Tax Administration. The report examines the growth of electronic commerce in commercial and financial activities, summarizes tax policy and administrative issues that arise from electronic commerce, and makes a number of recommendations to address those issues. The report's recommendations, together with the private-sector comments they generate, will help shape the policy positions that the Government expects to announce in advance of the Organisation for Economic Cooperation and Development ministerial conference in October 1998. Tax Executives Institute is pleased to participate in the consultative process. We especially appreciate the opportunity to meet with representatives from Revenue Canada on August 18, in Toronto in order to discuss TEI's preliminary views. On behalf of TEI, I am pleased to submit the following comments confirming and clarifying the views expressed at that meeting.

Background

Tax Executives Institute is the principal association of corporate tax executives in North America. The Institute's 5,000 professionals manage the tax affairs of the leading 2,800 companies in Canada and the United States and must contend daily with the planning and compliance aspects of Canada's business tax laws. Canadians make up 10 percent of TEI's membership, with our Canadian members belonging to chapters in Calgary, Montreal, Toronto, and Vancouver, which together make up one of our eight geographic regions. In sum, TEI's membership includes representatives from most major industries including manufacturing, distributing, wholesaling, and retailing; real estate; transportation; financial services; telecommunications; and natural resources (including timber and integrated oil companies). The comments set forth in this letter reflect the views of the Institute as a whole, but more particularly those of our Canadian constituency.

TEI is concerned with issues of tax policy and administration and is dedicated to working with government agencies in Ottawa (and Washington), as well as in the provinces (and the states), to reduce the costs and burdens of tax compliance and administration to our common benefit. We are convinced that the administration of the tax laws in accordance with the highest standards of professional competence and integrity, as well as an atmosphere of mutual trust and confidence between business and government, will promote the efficient and equitable operation of the tax system. In furtherance of this principle, TEI supports efforts to improve the tax laws and their administration at all levels of government. We are pleased to respond to the invitation to comment on the recommendations set forth in the report to the Minister on Electronic Commerce and Canada's Tax Administration.

Introduction

Prefatorily, the report notes that a dramatic, global transformation of economic and commercial activity is underway, enabled by the convergence of computer and communications technology. That transformation, coupled with other emerging trends and collectively referred to under the rubric of electronic- or e-commerce, poses challenges to traditional principles of Canadian tax policy and administration. Indeed, the voice, data, and other digital telecommunications networks that comprise the Internet (as well as linking private networks) and enable e-commerce are global phenomena transcending jurisdictional boundaries. Hence, the tax policy and administrative issues arising from commercial exploitation of that worldwide network cannot be addressed unilaterally by any national or subnational jurisdiction. Governmental and private-sector cooperation are necessary in order to address the issues comprehensively without stifling the impetus and opportunity for growth in international trade that electronic commerce presents.

Hence, TEI is pleased that the Advisory Committee examined and summarized the studies of e-commerce conducted by other national governments and international organizations. More important, the report aptly summarizes the emerging international consensus on the tax treatment of electronic commerce:

The national governments

and international organizations

that have studied electronic

commerce issues acknowledge

that the global

range and implications of

electronic commerce require

broad international cooperation

and consensus on taxation

policies and principles.

The novel context of these

activities does not demand

novel tax treatment; rather,

it is generally agreed that

existing taxation concepts

and principles should be applied

and, if necessary,

adapted before they are replaced

by new concepts and

principles. It is also agreed

that tax systems should ensure

or achieve tax neutrality

and equity between traditional

and electronic commerce

activities, should be

simple to administer and

comply with, and should

avoid the imposition of multiple

taxation. Finally, it is

agreed that new or additional

taxes should not impede

the development of electronic

commerce.

TEI commends this summary to Revenue Canada and encourages the Government to adhere to these principles. We also encourage Revenue Canada to continue to work with business representatives and governmental organizations such as the OECD (as well as Canada's principal trading partners) to achieve international consensus on policies governing electronic commerce that are consistent with this general approach.

Before addressing the recommendations in the report, we have three overarching comments: the first is a caveat; the second, an offer; the third, an explanation of the form our comments follow. As a general caveat, there are a number of instances in the comments that follow where TEI expresses agreement with the recommendations set forth in the Advisory Committee's report. Our agreement with the report's recommendation, however, must be understood in the context in which it is made: a very high-level overview. Indeed, as detailed proposals are developed to address concrete issues, the opportunity for, and scope of possible, disagreement may increase. Moreover, in instances where we express agreement with a recommendation, TEI may already have expressed substantial disagreement with either current tax policy or the administration of a particular provision of the Income or Excise Tax Acts. Hence, our agreement with a recommendation in the report should not be viewed as con ceding prior objections or withdrawing previous comments. For example, TEI agrees in principle that the transfer-pricing rules applicable to the cross-border sale and delivery of goods through wholly digital means should be consistent with the rules for cross-border sale and delivery of tangible goods. Express agreement with the principle of consistent application of the transfer-pricing rules regardless of the form of the transaction, however, should not be construed as either tacit or implied agreement with the many technical uncertainties and administrative burdens to which taxpayers are subject as a result of the 1997 revision of Canada's transfer-pricing rules.

Next, in a number of places, the report recommends that Revenue Canada develop technical interpretation bulletins in order to provide guidance to taxpayers and Revenue Canada's auditors. TEI agrees that future guidance will be necessary and we shall be pleased to participate in the development of such interpretation bulletins.

Finally, as a matter of form, TEI's comments follow the order of presentation in the Advisory Committee's report. In other words, our letter restates the General Recommendations, comments upon them, then restates the enumerated Detailed Recommendations set forth in Chapter 6 of the report and, in turn, comments upon those specific recommendations. For the sake of convenience, the enumerated recommendations in the Advisory Committee's report are set forth in italics.

6.1 General Recommendations

6.1.1 Develop a Strategy for Electronic Commerce

The report recommends that the Government reaffirm its commitment to the goal of Canada becoming a world leader in electronic commerce and acknowledge the central role of the private sector in accomplishing this objective. TEI agrees.

The report also recommends that the Federal Government cooperate with the provincial and territorial governments to assist Canadian business in its pursuit of electronic commerce activities by providing a Canadian tax and commercial law environment that would be viewed as a model of cooperation throughout the world. TEI encourages the Government to adopt this recommendation because uniform laws, consistently applied, will permit electronic commerce to flourish in Canada.

6.1.2 Develop and Adopt Guiding Principles on Electronic Commerce

In order to provide greater confidence and security regarding the development of electronic commerce, the report recommends that the Government's policies governing electronic commerce be guided by the following principles:

* The management, promotion, and development of electronic commerce should be led by the private sector.

* Governments should create a favourable policy and legal environment for the growth of...