Going where no taxman has gone before: preliminary conclusions and recommendations drawn from a decade of debate on the international taxation of e-commerce.

• Author: Pastukhov, Oleksandr

1. INTRODUCTION

   The advent of e-commerce has forever changed how business is done. Internet operations have launched even the smallest of undertakings into global markets and have made them part of an important industry with enormous potential. Such potential has led to enormous success: in 2008, despite the recession, online retail sales in the United States alone reached $133.6 billion, (1) up from overall sales of $22 billion in 1998. (2)

   Governments throughout the world and relevant international organizations have recognized that if e-commerce remains beyond the purview of tax authorities, it will present a significant problem for public finances. (3) In the face of aging populations and their strain on national pension systems, lost tax revenue from e-commerce is not just another tax leak that budgets can afford. However, "the application of today's taxing regimes to the contemporary world of telecommunications and electronic commerce is uncertain, inconsistent, and complex." (4) The challenge for governments is to design a tax regime fit for this new cross-jurisdictional electronic environment.

   The power to tax is one of the most fundamental prerogatives of every sovereign state. Raising tax revenue is a state's powerful instrument of macroeconomic management. Taxation affects legal, economic, social, political and fiscal conditions in any country. Therefore, it is not surprising that e-commerce was quick to appear on governments' tax radars. However, the world's governments have been guarded in their reactions to suggested changes in their tax systems, as well as in the existing system of international taxation. (5)

   As more and more businesses and individuals rely on the Internet as their primary source of revenue, tax authorities around the world are seeking a uniform solution for taxing e-commerce. The Organization for Economic Co-operation and Development (OECD), the European Union (EU), and the U.S., Australian, and Canadian governments, among others, have issued reports identifying the critical tax issues raised by the advent of e-commerce. (6) Unfortunately, the current position of governments worldwide can best be characterized as "wait and see." (7) Despite a number of forums convened, commissions appointed and white papers issued, there remains little international accord, national legislation, or case law on the taxation of e-commerce. In the United States, Congress continues to ignore the Supreme Court's invitation in Quill v. North Dakota to legislate on the sales/use tax issue (8) and continues to extend the moratorium on new Internet access taxes, which was originally imposed in 1998. (9) The World Trade Organization (WTO) has also maintained its own moratorium on customs duties on e-commerce, (l0) introduced as early as 1998. (11)

   Similarly, academia addressed various issues of taxing Internet business with great enthusiasm in the early days of e-commerce, but now seems to be losing interest in the issue. (12) Since governments and relevant international organizations are not taking action on Internet taxation, academics are writing less on the subject.

   At the same time, "[w]hile talk about e-commerce tax issues has decreased in the past few years, the existence, and perhaps extent, of such issues has not decreased." (13) What is more, "[t]he Internet continues to grow, sales continue to increase, and consequently [one] must implement the solution now or risk repairing havoc later." (14) This is exactly why inquiries into the tax aspects of doing business online should continue.

   This article reflects on the past decade of debate regarding the proper design of an international taxation regime that would fully reflect the new economic realities brought about by e-commerce. It starts with both challenging and confirming some presumptions about contemporary e-commerce taxation and then offers a set of guidelines for reforming the international taxation regime.

2. DEFINING THE STATUS QUO

   1. E-commerce should not be immune from taxation.

      The answer to Professor Subhajit Basu's question "To tax or not to tax?" (15) should definitely be answered in the affirmative. A decision not to tax e-commerce in one country can adversely impact other countries' economies. The revenue implications of the non-taxation of server and website hosts under any possible scenario are far-reaching. Tax-flee cyberspace means that the country of residence where an e-commerce company is based almost exclusively enjoys the collection of tax revenue from e-commerce. Those best poised to benefit from the current global tax regime are the industrialized countries since they currently produce the lion's share of the world's e-commerce goods and services. (16) Under the national tax laws, e-commerce sales made by companies residing in the developed world are taxed locally in the country of residence as corporate income, even if the underlying sales are made in the developing countries. Not surprisingly, the U.S. Department of Treasury discussed moving toward a residence-based system that would only permit governments of countries where e-commerce businesses are based to tax profits resulting from e-commerce operations. (17) However, nations that are net importers of e-commerce goods and services suffer revenue losses under a residence-based taxation system since they have no opportunity to tax the stream of commerce from the industrialized world. These countries consider the exemption of such commerce from taxation as unjust because importing nations have historically been entitled to tax significant foreign business activities occurring within their borders by virtue of the permanent establishment doctrine. (18)

   2. E-commerce tax issues are also issues of international taxation.

      While some information technology law professors and Internet enthusiasts advocate a hands-off approach, (19) most tax law academics and practitioners lean toward answering Professor Basu's question in the affirmative. (20) However, the questions "How?" and "When?" still remain. The problems faced by legislators and policy makers attempting to fashion a taxing scheme for e-commerce transactions are many and diverse. (21) A single Internet purchase taking only a few seconds to complete can involve several jurisdictions, including the location of the buyer, the location of the buyer's Internet service provider, the location of the retailer, the physical location of the retailer's server, and the location of the bank issuing the credit card used for payment in the transaction. The fact that goods and services purchased over the Internet can take digital, rather than tangible, form further complicates the problems of taxation. The lack of uniformity in tax laws leads to different taxing jurisdictions creating different solutions to the same problems, which ultimately ends with taxing authorities "perplexed over which country should have taxation rights in complex international electronic transactions." (22)

   3. An effective response to the problems of e-commerce taxation can only be international in scope.

      Since decisions to tax e-commerce have international tax law implications, effective solutions must be internationally coordinated. Any of these solutions will have to involve a broad multilateral effort because of the nature of e-commerce, the world's first truly borderless form of international commerce. In the absence of any form of world tax authority, the OECD continues to be the appropriate forum to arrive at a multilateral solution. (23) The OECD has made its position clear by suggesting that any new rules should "achieve a fair sharing of the tax base," but has yet to elaborate on what is meant by "fair." (24) Only after clearly identifying all the interests that need to be preserved can the OECD formulate proposals based on its own set of guiding principles, which might achieve an effective multilateral, "internationally consistent taxation approach to electronic commerce." (25)

   4. Stakeholders' positions are uncertain and conflicting.

      Since the Internet is still perceived as a new medium whose full ramifications are not clearly understood, governments worldwide are exercising extreme caution with respect to the taxation of e-commerce. They are apprehensive about adopting new tax rules because such rules may lead to unexpected economic consequences and to further tax base erosion. (26) The business community and tax consultants are not advocating for new rules either, since the existing rules are often favorable to business interests. Under the current rules, the right of a jurisdiction to tax a particular transaction or entity does not arise unless a taxpayer has a physical connection to the jurisdiction. (27) By this logic, the taxpayer can take the position that it lacks the required physical connection to the taxing jurisdiction in an intangible e-commerce transaction. Making matters even more complex, many lobbying groups are deeply divided between the conflicting approaches to the issue, rendering many of their official positions on critical determinations neutral or...