Electronic Commerce or E-commerce fierce refers commercial
activities: that areBased on the processing and transmission of digitized data including
text, sound and visual images over the Internet. Although only in its infancy, there is a
consensus that this medium has enormous potential and will affect companies as they
conduct business in the new millennium.
As e-commerce becomes more mainstream, serious issues arise concerning both income and
consumption taxation. These issues have yet to be resolved, however, this article will
outline some of the problems and questions that lie ahead.
The current technology associated with e-commerce is new but there have been other
technological advances over the years that have also impacted the way companies conduct
business in our economy. The introduction of the telegraph, telephone, computer, fax
machine and voice mail have all had varying degrees of influence in the technology of data
transmission. What is so remarkable about the Internet however, is that it has shrunk
physical distance to such an extent that it makes geography irrelevant. Transactions that
used to take weeks of days to be consummated can now be completed in hours and minutes.
E-commerce permits low-overhead capitalism to thrive, and as technology continues to
improve, electronic transactions will only increase in volume and dollar value.
The mechanics of the Internet are straightforward. A person requires a computer,
equipped with a mode of communication, usually a modem and a telephone or cable
connection, and communication software, often referred to as an Internet browser. The use
connects to the Internet (commonly referred to as the World Wide Web) by dialing a local
access number provided by an Internet Service Provider, or server. Once a connection has
been made, the user is said to be "online" and can connect to any web site or
home page on the Internet by keying in the appropriate Internet address.
Internet Service Providers also provide the user with their own individualized
electronic-mail account. This allows the user to communicate quickly and efficiently with
other s who have set up similar accounts anywhere in the world.
The home page " live" on a server which acts as a conduit between the
customers computer and the commercial seller on the Web. As long as the consumer can
send digitized text, sound images or video over the Internet he is capable of ordering
goods and services and performing financial transactions.
The Internet was originally designed by the United States military. Today, as private
enterprises connect to it and use it for commercial and individual activities, its reach
has extended beyond domestic borders and into the world of international commerce. This
has had serious implications on the way its transactions can be taxed.
When it comes to traditional forms of business, it is easy to identify when a company
has established a branch plant within a foreign jurisdiction. The bricks and mortar can be
easily identified. The taxation of profits generated from the plant either form part of
the income of consolidated enterprise or is considered to be separate income generated
from one of a series of local operations.
Bilateral tax treaties between countries iron out specifics of the above issues and
allocate taxing rights between treaty partners.
E-commerce transactions, on the other hand, are conducted without the benefit of bricks
and mortar. Digital technology knows no physical boundaries when global markets are
established over the Internet. A server can be located anywhere in the world without any
difference to the user.
As of now, e-commerce transactions resemble mail order catalogue sales of days gone by.
The taxation of such transactions fall within the jurisdiction of the country of residence
of the company fulfilling the order on behalf of the customer.
A company may nominally operate out of Toronto. In reality, its server can be located
in a tax haven in the middle of the Atlantic Ocean and it can arrange to have its wares
shipped to customers directly from suppliers located in United Stases. Who will have
jurisdiction on taxation matters its mind and management are in Canada, its server on the
Isle of Man and the heart of its operations flow from Alabama.
So far, this issue has yet to be resolved. Each of the three jurisdictions can
logically lay claim to be the location of the companys operations. The company would
probably prefer to have its operations taxed within the tax have, and will argue their
position accordingly. Today, they would probably be successful.
However, in the not too distant future, e-commerce will develop to such an extent that
ideas that were satisfactory for a bricks and mortar economy will not suffice for the new
technology. At that point the entire question of taxing e-commerce transactions will have
to be re-evaluated and re-negotiated into new treaties and protocols covering all the
trading nations of the world.