2 ASIA-PACIFIC TAX BULLETIN JANUARY 2003

INTERNATIONAL

From E-Commerce to E-Business Taxation

Collin Lau and Andrew Halkyard

Although many e-merchants in recent times have experi-

Collin Lau is the Chief Financial Officer at Baring Private enced great, and often terminal, economic difficulties,
Equity Partners, Hong Kong. Andrew Halkyard is a there is an underlying momentum to e-transformation that
Professor at the Faculty of Law, University of Hong Kong.
will continue evolving in a myriad of innovative and revo-
lutionary ways of conducting business. In these circum-
stances, it seems an imperative for revenue authorities to
This article has undergone an additional refereeing pro- examine their approach and policy towards taxation of e-
cess.1 commerce more comprehensively than they have to date.
This examination should not be confined to, or dominated
by, the now more comfortable topics of whether an e-mer-
1. INTRODUCTION chant has a permanent establishment, how income from
online transactions should be characterized and where
Even after the current downturn and market corrections consumption of goods and services delivered electron-
resounding throughout stock markets worldwide, e-com- ically takes place. Important as these issues are, they
merce is still one of the most intriguing taxation topics of should be considered in the context of a broader study
the new millennium. Leading investment advisers and evaluating the total impact of e-transformation on business
financial institutions have published very optimistic fore- productivity, supply chain, economic cycles and sector
casts. Goldman Sachs, in a report issued in June 2000 en- differences.
titled “B2B E-Commerce/Internet”, predicted that busi-
ness-to-business (B2B) e-commerce alone should reach Put another way, revenue authorities should not simply
USD 4.5 trillion in 2005 (see Figure 1). The report focus upon taxation of e-commerce per se (such as the
assumes that B2B transactions will constitute approxi- B2C sale and purchase of goods typified by Amazon.com
mately 60% of total e-commerce whilst the remaining or the downloading of a Norton anti-virus program),
40% (approximately USD 3.2 trillion) will be contributed where attention is typically focused upon the location and
by business-to-consumer commerce (B2C). function of servers, characterization of income and place
of consumption. Instead, the analysis should extend more
FIGURE 1 broadly to ensure a deeper understanding of the nature of
e-business as it is today, and as it will develop tomorrow.
5,000
4,500 In this regard, it is tempting to argue that business func-
tions will simply and suddenly disappear into cyberspace
4,000 and to suggest that virtual companies will be able to oper-
3,500 ate with little presence anywhere except a site hosted by an
3,000 Internet service provider in a tax-free jurisdiction. But will
2,500
this happen? This article will contend that whilst commu-
nications efficiencies certainly allow some (perhaps
2,000 many) activities to be coordinated from a distance, all
1,500 enterprises still need to have real, and not virtual, people,
1,000 assets and business operations. It will be contended that a
balanced approach should be taken in assessing the impact
500 of e-business on taxation systems worldwide and that it is
0 not necessarily harmful for developing and technology
1999 2000 2001 2002 2003 2004 2005 importing countries. Outsourcing to lower-cost environ-
ments now occurs in many economic sectors. There is no
(USD billion) reason to suggest that this should not continue in an e-
US
business context.
Non-Japan Asia The theme of this article is that only when the “richness”
Rest of world of e-business is appreciated, can the traditional taxation
EU questions of residence, attribution of profits, characteriza-
Japan

Source: GS Research estimates. 1. The authors wish to thank Gary Sprague, Baker & McKenzie, Palo Alto for
his useful comments and, in particular, for his challenging queries on an earlier
draft of this article. We would also like to acknowledge the helpful suggestions
provided by the anonymous referee. The usual disclaimer applies.
© 2003 International Bureau of Fiscal Documentation
JANUARY 2003 ASIA-PACIFIC TAX BULLETIN
tion and source of income, as well as tax compliance and
administration, be considered in a proper context. Section
2. of this article commences with an overview of the cur-
rent views and future work programme of the OECD
towards taxation of e-commerce and, where relevant,
notes converging and diverging approaches taken in vari-
ous jurisdictions. Section 3. discusses the implications of
enlarging the scope of our study from e-commerce to e-
business. Section 4. provides examples of e-business mod-
els and introduces the challenges facing revenue author-
ities today. Section 5. analyses those challenges and
examines in practical terms what this means for tax admin-
istration and enforcement. Section 6. provides a conclu-
sion.
2. OECD DEVELOPMENTS AND PROPOSALS
FOR TAXING E-COMMERCE
It is trite, but true, that taxation of e-commerce is a major
concern for international agencies and tax authorities
worldwide. In Europe, North America, and Australia and
in many Asian countries (particularly Singapore and
India) substantial research2 has been conducted on the
impact of e-commerce on taxation.3 Among the plethora
of books, reports, articles and papers produced on this
topic however, the work of the Organization for Economic
Co-operation and Development (OECD) stands out as the
most significant, given its commitment to consulting
broadly with governments worldwide as well as with the
business community to develop an integrated and compre-
hensive approach to taxation of e-commerce. Of particular
interest will be its measure of success in reaching an
accommodation with the European Union regarding con-
sumption tax issues,4 and whether in this context it is pos-
sible to implement a fully electronic or technological solu-
tion to the problems of levying and paying consumption
taxes on online sales and services.5
In its initial consultations, the OECD focused upon the
implications of the Internet, private intranet networks and
emerging payment technologies for tax policy and tax
administration.6 The theme throughout this initial report
(which is still reflected in the OECD’s work today) is that
if governments are to successfully meet the challenges
posed by e-commerce for taxation systems, a global co-
coordinated approach is required to tax a truly global phe-
nomenon.7 This report paved the way for a statement of
broad taxation principles that should apply to e-com-
merce.8 Jeffrey Owens, Head of Fiscal Affairs, OECD has
summarized the conclusions reached in the report as fol-
lows:9
1. The same principles that governments apply to taxation
of conventional commerce should apply equally to e-
commerce, namely:
a. Neutrality – taxation should seek to be neutral and
equitable between different forms of e-commerce
and between conventional and electronic com-
merce,10 thus avoiding double taxation or uninten-
tional non-taxation. Business decisions should be
motivated by economic, rather than by tax, consid-
2. Two useful general resources, relevant for the period until the release of the
various OECD reports (described below), are Butler et al., “The Taxation of
Global E-Commerce”, Asia-Pacific Tax Bulletin (July 2000), at 200; and Doern-
© 2003 International Bureau of Fiscal Documentation
3
berg and Hinnekens, Electronic Commerce and International Taxation (Kluwer
Law International, 1999). See further, Torregrossa and Babington, “Interna-
tional E-Commerce Bibliography”, Tax Notes International (23 October 2000),
at 1917. All the reports published over the past two years by the OECD can be
accessed electronically at www.oecd.org/EN/home/0,,EN-home-22-nodirec
torate-no-no–22,00.html (accessed 27 November 2002). In addition to the well-
known and well-established taxation journals, a specialist journal devoted to the
taxation of e-commerce entitled Tax Planning International e-Commerce is pub-
lished monthly.
3. A provocative and interesting conclusion is submitted by Krever, “Elec-
tronic Commerce and Taxation – A Summary of the Emerging Issues”, Asia-
Pacific Tax Bulletin (June 2000), at 151, who states: “A more sober study will
reveal that in many respects much of the hyperbole about e-commerce and tax is
just that and in the overall scheme of things the impact of e-commerce on tax
systems may be limited. It is the case, however, that e-commerce will place
enormous strains on some aspects of consumption tax bases and will test the
boundaries of some important international income tax concepts such as the
source of income and the definition of a ‘permanent establishment’.” See also
Mattson, “Demystifying Taxation of Global Electronic Commerce: Let’s Get On
With the Business of [e-Business]” (paper submitted to the OECD for its 1997
round table discussion on 18 November 1997: see footnote 6 ), and Boyle, Peter-
son, Sample, Schottenstein and Sprague, “The Emerging International Tax En-
vironment for Electronic Commerce”, 28 Tax Management International Jour-
nal (11 June 1999), at 357, who conclude: “As tax systems survived the
telegraph, they will surely survive the Internet”. Many other commentators how-
ever, have expressed grave concerns over the implications of e-commerce for
taxation systems worldwide. For example, Warren, “Australia – Taxation of
Internet Trade”, Asia-Pacific Tax Bulletin (November 1998), at 412, echoes a
common theme in stating: “The unprecedented level of international cooperation
over such a short period of time on the Internet challenge to established com-
merce highlights the seriousness with which governments and tax authorities
view the rapid recent growth in the Internet.” Other commentators, most notably
Chang Hee Lee, “Impact of E-Commerce on Allocation of Tax Revenue
Between Developed and Developing Countries”, Tax Notes International (21
June 1999), at 2569, show a critical scepticism in accepting the arguments put
forward by developed countries in either maintaining the status quo or extending
the existing rules into the digital era. In Professor Lee’s view, “developing coun-
tries have not much choice but to suffer.” (See further, Baxi and Shah, “Elec-
tronic Commerce Taxation Evolves in India”, Tax Notes International (23 Octo-
ber 2000) at 1923-1933). This sentiment has been taken up, in no small measure,
by the Indian High Powered Committee on Electronic Commerce and Taxation
which, in its report dated 6 September 2001, concluded that “applying the exist-
ing principles and rules to e-commerce does not ensure certainty of tax burden
and maintenance of the existing equilibrium in sharing of tax revenues between
countries of residence and source.” The Committee indicated that possible equi-
librium could be achieved by subjecting to withholding tax all (and not just e-
commerce) tax-deductible payments made to a foreign enterprise: see http://fin-
min.nic.in/fdrev (click on “Central Board of Direct Taxes”). It should be noted
that the Committee’s report has not yet been adopted by India as an official gov-
ernment statement. See further, Patel, “India Takes a Bold Approach to E-Com-
merce”, International Tax Review (February 2002), at 42 and Shah and Shroff,
“India – Government Solicits Comments on Taxation of E-Commerce”, Tax
Notes International (11 February 2002), at 575.
4. See Hinnekens, “An Updated Overview of the European VAT Rules Con-
cerning Electronic Commerce”, EC Tax Review (2002/2), at 65. As did Krever,
footnote 3 , various commentators within the Asian region have indicated that
the main challenge to taxation authorities posed by e-commerce lies in their abil-
ity to fairly apply and collect consumption tax: see, e.g., Rae, “A Taxing Ques-
tion”, e-Finance (September 2000), at 20-23.
5. See Gnaedinger, “ECONFIN Addresses Savings Tax, E-Commerce VAT”,
Tax Notes International (24 December 2001), at 1251; and Ball, “Digitized Ser-
vices and the Unresolved Question of Taxation”, International Tax Review
(November 2001), at 26.
6. “Electronic Commerce: The Challenges to Tax Authorities and Taxpayers”
(Paris, 1997), a paper prepared by the OECD’s Committee on Fiscal Affairs
(CFA) for an informal round table discussion between business and government
held in Turku, Finland on 18 November 1997.
7. Id., at Paras. 6-9.
8. “Electronic Commerce: Taxation Framework Conditions” (OECD, Paris,
1998), prepared by the CFA for the OECD Ministerial Conference held in
Ottawa, Canada on 8 October 1998.
9. See Owens, “Taxation and E-Commerce: Progress Report” (2000), 29(1)
INTERTAX 10-11.
10. Drew and Napier, “Tax Issues”, Your Guide to e-Commerce Law in Singa-
pore (Singapore, 2000), put it this way: “notwithstanding the desire to expand
the growth of e-commerce, the digital age should not be exempted from the nor-
mal remit of taxation.”
4 ASIA-PACIFIC TAX BULLETIN
erations;
b. Efficiency – compliance costs for business and
administration costs for governments should be
minimized as far as possible;
c. Certainty and simplicity – tax rules should be clear
and simple to understand so that taxpayers know
where they stand;
d. Effectiveness and fairness – taxation should pro-
duce the right amount of tax at the right time, and
the potential for evasion and avoidance should be
minimized;
e. Flexibility – taxation systems should be flexible
and dynamic to ensure they keep pace with techno-
logical and commercial developments.
2. These principles can be applied through existing tax
rules, and any new or revised administrative measures
in the framework of those rules should be directed
towards the application of existing taxation principles.
There should be no discriminatory tax treatment on e-
commerce.
3. The technologies underlying e-commerce offer signifi-
cant opportunities for improved taxpayer services,
which governments should actively pursue.
4. The process of implementing these principles should
involve an intensive dialogue with business, non-busi-
ness taxpayer groups, and non-OECD member
economies.
The OECD Ministerial conference held in Ottawa in Octo-
ber 199811 endorsed the principles summarized above.
Subsequently, the CFA of the OECD proceeded to imple-
ment these taxation framework conditions by establishing
five Technical Assistance Groups (TAGs). These comprise
government officials from OECD as well as non-OECD
states, and representatives of the international business
community. The work carried out by these TAGs has
focused upon three major areas:12
(1) Consumption tax issues – A Consumption Tax
TAG has been examining, in the context of cross-
border transactions, the principle of taxation at the
place of consumption and the collection mecha-
nisms that best serve to ensure the effective opera-
tion of this principle. The Consumption Tax
TAG’s report proposes guidelines defining the
place of taxation for cross-border services and
intangible property by reference to the recipient’s
business establishment (for B2B transactions) and
by reference to the recipient’s usual jurisdiction of
residence (for B2C transactions).13
(2) International direct tax issues – The work of
another TAG, known as the Treaty Characteriza-
tion TAG, has focused upon the definition of roy-
alties in the OECD Model Tax Convention in the
context of a wide range of payments made in e-
commerce transactions. This work mainly
involves questions of characterizing income (as
either royalties, service fees or proceeds from the
sale of goods) arising from different types of e-
commerce transactions.14 In two independent exer-
cises, changes have been made to the Commentary
on Art. 5 of the OECD Model Tax Convention,
clarifying the application of the permanent estab-
lishment definition to e-commerce15 and reports
have been issued concerning profit attribution to a
permanent establishment, both generally, and
© 2003 International Bureau of Fiscal Documentation
JANUARY 2003
specifically relating to permanent establishments
involved in e-commerce transactions.16
(3) Tax administration issues – A detailed examina-
tion is being made of the opportunities e-com-
merce technology offers for improving taxpayer
service, promoting and assisting taxpayer compli-
ance, and focusing upon the challenges e-com-
merce presents to established methods of tax audit
and collection.17
Given the undeniable US-centric focus on matters of
direct taxation (which is bound to change), it is hardly sur-
prising that the OECD’s work on permanent establish-
ments, residence, characterization of income, and transfer
pricing in the context of e-commerce has attracted a great
deal of publicity and comment.18 To provide important
background to the main theme of this article, it is useful to
provide an overview of the more contentious issues.
Permanent establishments. The revised Commentary to
Art. 5 of the OECD Model Tax Convention19 clearly states
that a non-resident enterprise with an Internet web site
11. See footnote 8 .
12. See Owens, footnote 9. An excellent historical, yet still current and com-
prehensive commentary on the work of the OECD on taxation of e-commerce
can be found in Lambooij, Sinyor and Chew, “Recent OECD Initiatives With E-
Commerce Taxation”, Tax Notes International (23 April 2001), at 2091. See fur-
ther, Hersey, “International Reaction to OECD E-commerce Proposals”, Tax
Planning International e-commerce (2002/02), at 17.
13. The Consumption Tax TAG released its Report on E-Commerce and Con-
sumption Taxes in December 2000. Common ground was covered in a further
OECD report entitled “Consumption Tax Aspects of Electronic Commerce – A
Report from Working Party No 9 on Consumption Taxes to The Committee on
Fiscal Affairs” (February 2001) [the Work Plan of Working Party No. 9 2001-
2003 can be accessed electronically at www.oecd.org]. The Technology TAG
also published a report in December 2000 on the technological implications of
various models considered for collecting consumption taxes on cross-border e-
commerce transactions.
14. See report released on 1 February 2001 of the TAG to Working Party No.
1 of the CFA on Treaty Characterization Issues Arising from E-Commerce.
15. Changes to the Commentary were adopted by the CFA on 22 December
2000. In February 2001, the CFA also released a discussion paper of the Busi-
ness Profits TAG entitled “The Impact of the Communications Revolution on
the Application of ‘Place of Effective Management’ as a Tiebreaker Rule” to
determine a corporation’s place of residence.
16. The Business Profits TAG released a discussion paper in February 2001
entitled “Attribution of Profit to a Permanent Establishment Involved in Elec-
tronic Transactions”. See further, the CFA’s “Discussion Draft on the Attribu-
tion of Profits to Permanent Establishment”, released on 8 February 2001. These
reports address allocation of profits to permanent establishments, and discuss
transfer pricing issues in the context of a working hypothesis involving a per-
manent establishment being treated as a distinct and functionally separate enter-
prise.
17. In December 2000, the Technology TAG issued a report on the tax admin-
istration aspects of e-commerce, albeit mainly in the context of examining col-
lection problems in levying consumption taxes on cross-border e-commerce
transactions. Also in December 2000, the Professional Data Assessment TAG
released a report examining, inter alia, emerging standards or statements of best
practice relevant for accessing electronic data and assessing its reliability. In
February 2001, the Forum on Strategic Management issued a further report to
the CFA on the challenges and opportunities facing tax administration generally
in an e-commerce context. The common theme of these various reports focuses
upon how to ensure effective tax compliance in an e-commerce environment and
considers the measures needed to secure international cooperation between rev-
enue authorities.
18. See particularly Lambooij, Sinyor and Chew, “Recent OECD Initiatives
With E-Commerce Taxation”, Tax Notes International (23 April 2001), at 2091,
and the references contained therein.
19. Adopted by the CFA on 22 December 2000 and published by the OECD
Directorate for Financial, Fiscal and Enterprise Affairs on 9 January 2001. The
JANUARY 2003 ASIA-PACIFIC TAX BULLETIN
alone would not be regarded as having a permanent estab-
lishment in the country in which the web site is located.
The permanent establishment concept is of course crucial
to the assessment of business profits under Art. 7 of the
OECD Model Tax Convention. Art. 5(1) defines a per-
manent establishment as “a fixed place of business
through which the business of an enterprise is wholly or
partly carried on” and Art. 5(2) provides that it may mean
“a place of management, a branch, an office, a factory and
a workshop”.
The revised Commentary explores various challenges
posed by e-commerce to the current wording of the per-
manent establishment concept detailed in Art. 5. Among
other things, the revised Commentary considers:
– what are the predominant factors in ascertaining the
principal place of business and what level of presence
is required to constitute a taxable presence in a place;
– the length of time required to establish permanency;
– whether a permanent establishment requires personnel
to maintain and/or to operate, given the alternatives
that exist for extensive automation;
– independent contractual arrangements with informa-
tion technology service providers (ISPs) to manage the
facilities, whether certain of those arrangements could
amount to an agency and, if so, whether an agent
habitually exercises powers on behalf of its principal;
– excluded activities, and activities of an auxiliary and
preparatory nature; and
– the core activities or essential functions of the web site
and servers.
As indicated above, the revised Commentary clarifies that
a web site cannot of itself be considered a permanent
establishment. Similarly, an Internet service provider
(ISP) normally will not constitute a dependent agent of
another enterprise so as to constitute a permanent estab-
lishment of that enterprise. By way of contrast, a server
within a country could amount to a permanent establish-
ment if the server is at the disposal (owned or leased) of
the enterprise carrying on business through a web site, the
enterprise carries on business functions through it for a
sufficient period of time and those functions must be sig-
nificant as well as an essential or core part of the enter-
prise’s business activities.20
Although the contrary view that a server can never amount
to a permanent establishment has been described as
“extreme”,21 there is merit in moving away from a server-
centric concept. Web infrastructure is highly mobile, and
exists in layers. The topology is usually distributed, and
consists of operating systems, databases, middleware,
servers, other hardware devices (such as routers, switches,
firewall boxes, cache and edge storage devices) and soft-
ware. They can be co-located in a multitude of locations,
subject to availability, cost, bandwidth as well as other
commercial and political considerations. It is not at all
clear how the OECD view takes account of the ease, or
difficulty, of a business setting up sub-URLs.22 In short, to
equate a permanent establishment with the location of a
server seems highly vulnerable to manipulation and
arguably overly simplistic.
In many common law jurisdictions, the place where a
company is resident, and thus carries on business, can be
© 2003 International Bureau of Fiscal Documentation
5
established by determining where the business of the com-
pany was managed and controlled by its Board of Direct-
ors.23 In a net-centric society, directors, employees and
business partners can be connected remotely and seam-
lessly. It would be redundant to elaborate that the modern
e-commerce environment renders the common law tests
for residence, at best, outdated.
In the OECD Model Tax Convention, the “place of effect-
ive management” is used as a tie-breaker rule to determine
corporate residence. The strains placed upon this rule by
the impact of modern communications are recognized in a
Discussion Paper from the Business Profits TAG on Mon-
itoring the Application of Existing Treaty Norms for the
Taxation of Business Profits, even though the conclusion
is reached that “in the majority of cases, [the rule] will pro-
vide the right result”.24
One could also consider other common multinational e-
business practices concerning the ownership and leasing
of hardware devices, and the use of services provided by
ISPs. As indicated above, organizational designs are
highly versatile and there are generally a variety of ways
to achieve the same business objectives. The totality of
these matters makes the determination of whether a per-
manent establishment exists without human intervention
in an e-commerce environment increasingly problematic.
Income characterization. This issue concerns the classifi-
cation of various types of e-commerce income as either
royalties or income from the sale of goods or income from
the provision of services. Unless they can be attributed to
a permanent establishment in the place of payment or use,
CFA is currently awaiting a report from the Business Profits TAG on the topic
of “Monitoring the Application of Existing Treaty Norms for the Taxation of
Business Profits in the Context of Electronic Commerce”. This report will exam-
ine the issue of whether changes should be made to the OECD Model Tax Con-
vention in order to properly allocate taxing jurisdiction to e-commerce activity
(the proposed future work programme of the Business Profits TAG, set out in its
preliminary report dated December 2000, can be viewed electronically at
www.oecd.org).
20. Several countries, including the United Kingdom, consider that in no cir-
cumstances can a server constitute a permanent establishment: see HM Customs
and Excise Press Release No. 8/2001 dated 12 February 2001. Singapore takes
the same view: see IRAS, “Income Tax Guide on E-Commerce”, (Singapore, 23
February 2001). The contrasting approaches of the OECD and countries such as
the United Kingdom and Singapore, as well as France (whose stance is appar-
ently at a midpoint between the OECD and the UK positions: see Mwba-
Mboma, “France, OECD Take Different Views of Unstaffed Servers as Perman-
ent Establishments”, Tax Notes International (3 June 2002), at 1107), highlight
a key problem, namely, whether the existing definition of permanent establish-
ment in double tax agreements such as the OECD Model Tax Convention can
achieve a fair allocation of tax revenue between the countries involved in inter-
national e-commerce. As noted above, this matter is currently being considered
by the Business Profits TAG in its study on Monitoring the Application of the
Existing Treaty Norms for the Taxation of Business Profits in the Context of
Electronic Commerce. The future work of this TAG will include “identification
of alternatives to the current treaty rules for determining the taxing rights of
source and residence countries and to the current treaty rules for allocation of
profits between taxing jurisdictions.” It will be very interesting to see how the
TAG deals with the report of the Indian High Powered Committee on Electronic
Commerce and Taxation, described at footnote 3 .
21. See Owens, footnote 9. On the other hand, a similar epithet could be
ascribed to the Spanish position, which envisages the possibility that even a web
site allowing market accessibility can constitute a permanent establishment.
22. Such as .com.hk and .com.cn.
23. A leading authority for this proposition is the House of Lords decision in
McMillan v. Guest [1942] AC 561.
24. See footnote 15, at Para. 76.
6 ASIA-PACIFIC TAX BULLETIN
royalties are invariably subject to withholding tax on a
gross basis. Conversely, different tax treatment (including
the imposition of consumption taxes) may apply if the
income can be classified as income resulting from the sale
of goods or the provision of services. The characterization
of income as royalties or sale proceeds or service fees will
decide the extent to which tax jurisdiction will benefit and
this, in turn, may depend upon whether the home and
source jurisdictions are net exporters or importers of tech-
nology.
The Treaty Characterization TAG formulated its conclu-
sions by insisting on neutrality of taxation between trad-
itional commerce and e-commerce. In the now typical
example of buying “virtual” books, by downloading the
content and the right to read without the right to reproduce,
it seems logical that taxation treatment should be no dif-
ferent from that applying to buying a paperback. In this
context, as in many cases, substance prevailed over form.
It is interesting, however, to speculate upon which coun-
tries stand to benefit from this approach. In the old econ-
omy, local companies such as The Utopian Book Center
probably never imagined that it could escape liability to
Utopian income tax on its book retailing operations. In the
new economy, the same Book Center may well have dis-
appeared.
But this analysis is incomplete. When taking a snapshot
“before and after” comparison of a business function that
is “replaced” by e-commerce, one should also ask whether
the function moved to a different jurisdiction (in which
case there has indeed been a transfer of value adding activ-
ity from one jurisdiction to another) or whether the func-
tion simply has now been automated out of existence (as in
the case of the hand loom weavers in industrializing
Britain). If the function disappeared altogether, then it
seems inappropriate to argue that this is a loss to importing
countries that needs to be compensated in some way in the
international tax system.
Returning to the example above, why did the Utopian
Book Center disappear? If it disappeared because modern
logistics allow centralized warehouses, the function has
moved from one place to another. If people are happy
shopping online, then the function truly disappeared
because shoppers no longer need a building to go to touch
what they may purchase. Have additional personnel been
retained elsewhere (for example, to establish and maintain
the web site) that the traditional bookstore did not need to
employ? A broader study should also consider what the
same communications efficiencies that led to closing the
bookstore are doing elsewhere in the Utopian economy.
For instance, perhaps Utopia now also exports domestic-
ally produced products via web sales and no longer needs
to employ distributors in cities in the source countries with
which it trades.
Transfer pricing. The OECD recognizes that transfer pric-
ing issues will be increasingly important in the e-com-
merce age.25 E-commerce is more collaborative and dis-
persed than traditional forms of commerce, and its supply
chain is intrinsically connected. It facilitates connectivity
both intra-group and inter-group. An example is an e-mer-
chant based in Singapore who receives and processes
orders through servers in ten different locations, manufac-
© 2003 International Bureau of Fiscal Documentation
JANUARY 2003
tures its goods in Thailand, sends the finished products to
four regional hubs for storage, delivers to 50 countries
where title passes, and finally receives payments through
its New York bank account. This is already a highly sim-
plified example, because in each interface there are oppor-
tunities to outsource, or find other ways to manage the
relevant profit-earning operations. The group might have
the choice of setting up either branches or subsidiaries, or
possibly it could be virtually established and have no
physical presence in any of the countries in which its prod-
ucts are sold. Today’s technology allows changes to the
processing server for an individual customer, because
physical distance and time zones do not matter to anything
like the same extent as previously. Profit-making opera-
tions may also depend on the load balancing of different
servers at the time the transaction takes place.
It does not, however, follow from this example that all
value creation simply falls through the cracks. The group
postulated above will doubtless be a fairly big one, with
many employees and assets. Although the example
assumes that the group has no physical presence in the
countries where its sells its products, most companies
today (rightly) think that they need a local marketing pres-
ence if they are going to penetrate a market to any signifi-
cant extent.
Whatever business model is adopted, for financial control,
internal management, and numerous other commercial
reasons (including satisfying taxation authorities), an e-
group would generally still wish to set up a transfer pricing
policy to reward operations performed by different group
entities, where these are established. As e-commerce fos-
ters the proliferation of cross-border activities, inter-
national tax planning will become increasingly important
and increasingly complex. Examining the totality of facts,
it will be difficult in terms of determining appropriate
transfer pricing to decide which business functions should
carry greater weight, particularly given that e-commerce
has changed the way of intermediation and distribution of
business flows to a significant extent. It is no small won-
der therefore, that taxpayers and tax collectors alike are
struggling to determine which business functions are sig-
nificant and agree a suitable allocation of profits thereto.26
Tax administration and collection. It is a fine balancing act
to legislate on the basis of an intellectual and equitable
framework on the one hand and to take proper consider-
ation of enforcement barriers and administrative practical-
ities on the other. Inaction on the part of taxation authori-
ties in today’s e-business environment is simply not an
option. Taxation authorities worldwide appreciate that
obtaining information from taxpayers and related parties
and ensuring tax compliance in an e-commerce world will
be a burgeoning problem.
Numerous questions arise in this regard. How should
transaction records be kept and where? What is the appro-
priate record keeping standard and how detailed should
25. See documents referred to at footnote 16 . See further, Li Jinyan, “Slicing
the Digital Pie With a Traditional Knife – Effectiveness of the Arm’s Length
Principle in the Age of E-Commerce”, Tax Notes International (19 November
2001), at 775.
26. Id.
JANUARY 2003 ASIA-PACIFIC TAX BULLETIN
this be? How should the constraints under various privacy
and personal data laws be balanced with the need to ensure
tax compliance? Is it feasible or appropriate to require an
e-merchant to obtain a business (or consumption tax) reg-
istration in every place in which sales are made or services
provided? How should parity treatment be ensured
between new e-merchants and old-style catalogue houses
that export goods from a remote location? These are some
of the many questions to be considered.
Future work programme. The following is a recent sum-
mary of the OECD’s objectives and work programme in
the area of e-commerce and taxation (source: OECD web
site, accessed 27 November 2002):
At its meeting in January 2001 the CFA has agreed to
progress further the work towards the implementation of the
taxation framework conditions and the strengthening of the
international dialogue.
The CFA has narrowed the focus of the main fields of fur-
ther work to a number of key issues. These include, amongst
others:
– On direct tax issues, allocation of income.
– On consumption tax issues, the role of technology-
based systems in tax collection.
– On tax administration issues, the means to address sig-
nificant compliance challenges and to exploit taxpayer
service opportunities.
In line with its working methods since Ottawa [1998], the
CFA intends to take forward this further work through its
subsidiary bodies (Working Parties, etc.) with continued
input from, and close working with, business, non-member
economies and the European Commission. In January 2001,
the CFA not only endorsed the elements of a work pro-
gramme for 2001-03, but also approved proposals for a con-
tinuation and refinement of the TAG process.
Technical Advisory Groups (TAGs)
As of 1 April 2001, the following TAG arrangements will
operate. There will be three TAGs:
– A Business Profits TAG continuing to pursue the man-
date of the previous TAG.
– A Consumption Tax TAG, again continued to advise
and support the work on consumption tax related ques-
tions.
– A Compliance, Information, and Documentation TAG,
which will build upon the work of the previous Profes-
sional Data Assessment TAG and examine a broader
range of tax administration issues.
These three TAGs will be supported by a smaller Technol-
ogy Panel which will provide technical advice as
required/requested, either directly or by acting as a conduit
for advice from experts in the wider business and technol-
ogy community.
The CFA will continue to undertake its work on the taxation
aspects of electronic commerce in an open and transparent
manner with the express aim of continuing to strengthen the
emerging international consensus on these issues. Working
in partnership with the international business community,
and with economies outside the OECD, remains central to
building that international consensus and so providing the
certainty and confidence that governments and business
both seek.
© 2003 International Bureau of Fiscal Documentation
7
3. FROM E-COMMERCE TO E-BUSINESS
As indicated above, the theme of this article is that revenue
authorities should not simply focus upon taxation of e-
commerce per se. Rather, their analysis should extend
more broadly to ensure a deeper understanding of the
nature of e-business as it is today, and as it will develop
tomorrow. This proposition is best highlighted by repre-
sentatives of business themselves who (correctly) point
out:
The Internet has fundamentally changed how business is
conducted in local, national, and multinational environ-
ments. … Although much attention is given to the prolifer-
ating use of the Internet as a marketing and sales tool, less
attention is placed on the innovative efforts to streamline
other core business functions over the Internet. Business
functions such as product innovation, production (including
delivery of services), administration, accounting and
finance, and customer service have all been made more effi-
cient through the use of the Internet. Internet-related tech-
nologies not only offer automation of routine administrative
and financial functions, but also allow business the flexibil-
ity to obtain resources and to structure operations in the
most cost-effective and efficient manner. As a result, enter-
prises are able to locate personnel and other value producing
activities in those places which yield the greatest return on
investment.27
There are many reasons to broaden our scope of investiga-
tion from e-commerce to e-business in order to properly
assess the taxation implications arising. For example:
– Tax authorities should direct their efforts to where the
real money is. Only a minority of B2C and B2B com-
panies are making profits today. Whilst the potential
must not be ignored or underestimated, and the levy-
ing and collection of consumption taxes obviously
must be satisfactorily resolved, it is a truism that cus-
tomer acquisition costs are huge. It is increasingly evi-
dent that enterprises of the old and new economies are
merging to create an extended line of viable business
platforms. Consider AOL’s merger with Time Warner.
This “clicks and mortar” operation is not confined to
pure B2C business. It offers products and services in
both a physical and a virtual context.
– Because a “clicks and mortar” business operates in a
hybrid context, and many such businesses are the
result of gigantic mergers, the taxation issues arising
are increasingly complicated. The complexities lie
first in the even greater multiplicity of companies
within the group structure, the variety of services and
products offered, and the means of delivery. For exam-
ple, various group subsidiaries of a business informa-
tion/infotainment multinational enterprise may draw
upon the same customer relation database (or even use
the same local salesman) to offer privileged products
to the same customer, such as local cable services and
an international stock news service transmitted from
an offshore hub. Transfer pricing issues need to be
resolved and there may be free riders on income gen-
27. Draft memorandum dated 5 September 2001 to the Members of the Busi-
ness Profits TAG from the Business Representatives on the TAG, a copy of
which is on file with the author.
8 ASIA-PACIFIC TAX BULLETIN JANUARY 2003

eration. The same circumstances exist in the e-finan-
cial services world. The complexity lies in the fact
that, even in the old economy, because of diversity of
business, tax planning and other commercial consider-
ations, the present corporate and tax structure for
many multinational groups is already Byzantine. Hav-
ing the liberty to engage in e-business dramatically
reduces the barriers of physical distance. Globaliza-
tion is made easier. Identification of “who does what,
and where” is more difficult. Source-based rules
become vulnerable, and the application of residence-
based rules for taxation contain various grey areas.
Change in the way business is conducted is the norm.
– The world economy works increasingly in a dynamic
and interactive pattern. E-business emerges in tandem
with the exponential growth of Internet connectivity.
In the meantime, it accelerates and fuels the momen-
tum of globalization, whereby the supply chain is
increasing worldwide. Economic boom and bust rise
and fall more spontaneously than before, and are
fuelled by the real or almost real time availability of
information in a networked world. For instance, if a
computer systems provider wants to cut inventory, its
Taiwanese OEM manufacturers and the semi-conduct-
ors foundries are immediately adversely affected, and
the components-makers in Mainland China need to
reduce output. These effects reduce GDP growth in
several countries, and the whole spectrum of a value
chain comprising various industries can be adversely
affected within a very short period of time.28 Any tax
authority and government finance ministry may
quickly need to deal with, and react to, these volatile
changes in taxable sources.
– An increasingly interconnected global economy
means that we are seeing an exponential growth of
business outsourcing. The world today is more mobile,
collaborative and working on distributed efforts than
ever before. One typical example is application pro-
gramming. There is no need for all software program-
mers to sit in the same place and work out a product.
Costs and availability of skilled labour make India and
China attractive to justify an outsourcing of efforts to
these countries. The assembly is in the Net. For exam-
ple, if an enterprise migrates its programming centre to
a tax-free zone in Bangalore, and the bulk of its prod-
uct specifications is finished there, the Indian contri-
bution to the product development could be signifi-
cant. Indeed, it is not unusual today for e-business
enterprises to operate customer contact centres and
service support functions in India and also China. Nat-
urally, taxation questions will focus upon what consti-
tutes the fairest way to allocate tax profits between the
home and host countries. An application may be a pro-
prietary product, with very few comparables available
to carry out a traditional transfer pricing study. Ultim-
ately, how profit attribution between the developed
and the developing nations in areas such as this may
well shape international tax policy for many years to
come.
– It is interesting also to note the difference in the pace
of e-transformation amongst various industries and
sectors. This is illustrated by the data table from Gold-
28. To be fair, it should be emphasized that this example postulates a case of
recession; in more prosperous times the affected entities can benefit substan-
tially.

FIGURE 2

US E-Commerce Penetration Rates By Vertical Industry, 1999-2005E (%)

1999 2000 2001 2002 2003 2004 2005

agriculture, forestry, fishing 2.0 4.0 6.0 8.0 10.0 12.0 14.0
business services 1.0 2.0 3.0 4.0 6.0 10.0 12.0
chemicals and allied products 1.5 4.0 8.0 11.0 16.0 21.0 26.0
communications 2.0 5.0 9.0 12.0 17.0 22.0 28.0
construction 0.6 0.7 0.9 1.2 2.0 7.0 12.0
electronic/other electric equipment 6.0 8.5 12.0 16.5 21.0 25.5 30.0
energy: oil/gas/petroleum mine/mfg. 2.5 4.5 7.0 10.0 13.0 16.0 19.0
finance, insurance, real estate 0.5 1.2 3.4 5.9 8.4 10.9 13.4
food, beverage, tobacco 0.3 1.1 1.2 1.3 3.0 6.0 10.0
government 1.0 2.0 3.0 4.0 6.0 8.0 12.0
health service 0.5 1.0 2.0 4.0 6.0 9.0 15.0
hotels and other lodging places 1.5 3.0 8.0 13.0 17.0 21.0 25.0
industrial equipment 0.5 1.2 3.7 6.2 8.7 12.0 15.0
instrument and related products 0.6 1.1 3.6 8.1 12.6 17.1 21.6
legal services 0.5 1.0 2.0 4.0 6.0 9.0 11.0
metals (extraction and fabrication) 1.5 5.0 8.0 10.5 15.0 20.0 25.0
motor vehicles and equipment 0.2 2.7 6.2 9.7 13.2 17.5 17.5
paper and allied products 0.2. 1.1 3.9 6.6 9.4 12.1 14.8
printing and publishing 0.5 1.0 2.0 5.0 8.0 12.0 15.0
rubber and miscellaneous plastics 1.5 5.0 8.0 10.5 15.0 20.0 25.0
transportation 1.0 2.5 4.0 6.5 9.0 11.0 13.0
utilities (electric/gas/sanitary services) 2.5 4.5 7.0 10.0 13.0 16.0 19.0
wholesale trade 0.4 1.0 2.0 4.0 7.0 12.0 18.0
other industries 1.0 2.0 4.0 6.0 10.0 16.0 19.0
Source: GS Research estimates.
© 2003 International Bureau of Fiscal Documentation
JANUARY 2003 ASIA-PACIFIC TAX BULLETIN 9

man Sachs published in June 2000, as shown in Figure
2.
Whilst it is hard to imagine e-agriculture (other than an
agricultural B2B marketplace on the web, this industry
is still land-driven), the telecommunications industry
is definitely the most affected by Internet connectivity.
Formerly, a whole building was needed to accommo-
date a telephone exchange serving only a few blocks,
and it needed to be local to avoid expensive distance
charges. Today, technology allows the operator to
anchor the exchange in a number of handy boxes and
in a remote location. Voice over Internet Protocol
(VoIP) is a reality. Taxation authorities are naturally
asking whether, and how, they can tax a phone/data
operator that does not have a taxable presence locally.
Telephone companies have traditionally been large tax
contributors to the revenue, but we may now see many
different competitive local exchange carriers and long
distance carriers adopting various business models,
with or without a local presence.
4. EXAMPLES OF VARIOUS E-BUSINESS
MODELS
E-business encompasses a broad range of businesses
including:
– various specific models of Internet businesses such as
B2C, B2B, application service provider (ASP), Inter-
net service provider (ISP), Internet content provider
(ICP), consumer to consumer (C2C), hardware, soft-
ware, networked IT services, Internet data centre
(IDC), wireless Internet, aggregator, outsourcing, cer-
tification authority (CA), call centres and many other
diverse business models; and
– brick-and-mortar operations transformed by Internet
technologies (into click-and-mortar or dot-corpora-
tions) can be found in any conventional industry or
sector today. We are living in a networked world. Our
world is like the chart below (Figure 3), but in a multi-
plicity of modules.
To properly understand how e-businesses are working, it is
useful to select certain of these business models and exam-
ine them in detail.
4.1. Application service provider (ASP)
An ASP delivers applications and software services over
the Internet. Formerly, an end-user needed to buy a shrink-
wrap software CD for installation on its own server
located at its own office. More complex software such as
ERP or CRM solutions had to be installed locally, and sale
and post-sales services were performed on site (Figure 4).
Under the old business methodology, the locality of the
profit arising from a product sale was clear.
However, technology in the e-business world is changing
rapidly and competitive businesses need to constantly
upgrade. Product obsolescence can take place overnight.
An ASP model aims to develop and host applications cen-
trally. Customers can then subscribe to the services, access
the programming through Internet broadband, and pay as
and when they use. The applications are numerous, from

FIGURE 3

ASP
ASP Server/DB Servers

SUPPLIER/
PARTNER

ISP

ISP ISP

INTERNET
REMOTE Core Optical ENTERPRISES
OFFICE Networking Access

ISP ISP

ISP
WIRELESS
OFFICE

HOME NETWORKS

© 2003 International Bureau of Fiscal Documentation

10 ASIA-PACIFIC TAX BULLETIN JANUARY 2003

FIGURE 4

REMOTE ISP
OFFICE

ISP ISP

INTERNET ASP
Core Optical ASP Server/
Networking Access DB Servers

ISP ISP

WIRELESS
OFFICE ISP

the basics of having web-based personal organizers to
fully-fledged manufacturing and production planning
tools. It is not for taxation reasons but for genuine com-
mercial necessity that ASP models are growing rapidly.
The challenge to tax authorities worldwide is that the loca-
tion of the ASP, its servers, and customer support team can
be remote and offshore. The ASP can also work through a
number of portals such as AOL or Yahoo to resell its prod-
ucts. That helps eliminate the necessity of having a sales
office in each country in which it sells.29 It needs a pro-
gramming and product development office, but this can
easily be anchored in an Asian country that provides
appropriate tax incentives. Its customer support functions
are accessed through the Internet, because physical on-site
maintenance based on an ASP model is not generally
required.30
29. It is, however, only fair to record that many companies operate on the basis
that they do need a physical sales presence in the source country. Furthermore,
the larger the transaction, the less comfortable a buyer may be to procure some-
thing expensive from the Internet without any local sales or support activity.
30. Interestingly, the Inland Revenue Department in Hong Kong has publicly
stated in Departmental Interpretation and Practice Notes No. 39 (Hong Kong,
July 2001) that a typical ASP model derives service income (and not royalties)
and is thus only liable to business profits tax if the ASP carries on business in
Hong Kong (which typically it does not). By way of contrast, although in a con-
text not totally analogous to an ASP model, India’s Authority for Advance Rul-
ing has determined that payments received by a US company from an Indian
company for the use of computer systems situated abroad are taxable in India as
royalty income: see Tax Notes International (5 July 1999), at 11.

FIGURE 5

China

REMOTE
NETWORK
MANAGE- ISP
Japan
MENT
CENTRE
ISP ISP

INTERNET
Core Optical
Networking Access

ISP ISP

Korea
ISP

Hong Kong
India

© 2003 International Bureau of Fiscal Documentation

JANUARY 2003 ASIA-PACIFIC TAX BULLETIN
4.2. Remote network management and IT services
A remote network management and IT service provider
helps corporations maintain and monitor their own net-
works. As virtual distance is not proportional to physical
distance, the physical location of the service provider can
be flexible. (See Figure 5.) This contrasts with the old
economy where a plumber or repair technician must have
a physical proximity to the clients. In the old PSTN net-
works, IDD charges or dedicated lease lines are costly and
mobility is therefore limited. However, in the Internet
world, this will depend on bandwidth availability from
point to point, as well as other market factors.
Assume China offers very competitive tax and commer-
cial incentives at certain special economic zones (which it
does), and makes available ample bandwidth. In this
event, there could be enormous incentives for network ser-
vice providers to move their operations to those zones, and
offer cost-conscious clients (for instance, banks and other
service providers) more economical network management
services on a remote control basis. Initially, customers
with a regional presence are likely to be primary targets.
The network operation centre might be exempted from
any direct or indirect taxes. The customers are scattered in
many countries and the service provider may not have any
physical presence in those locations. The whole operation
may be viewed from the perspective of the countries in
which the customers are located as an export of services
from China. In short, this is a new business model, which
is becoming increasingly popular in the e-business world.
Taxation authorities will need to review whether and how
such entities can be subject to tax in their respective juris-
dictions.
To compare the model described above with that existing
in the old world (when it is not networked), the mainten-
ance technician needs to work on-site, the customer sup-
port may be nearby or in the same city, and the storage sys-
FIGURE 6
Merchant (e.g.
Payment Pro-
Consumer Amazon,
cessor
eToys, etc.)
order online
– send transaction info.
– request authorization
send authorization
complete sale
© 2003 International Bureau of Fiscal Documentation
11
tem is local to the clients. These can all be changed in the
remote Internet model. If broadband continues to improve,
a remote centre can help maintain, monitor, programme,
store, broadcast, distribute, survey, and perform numerous
other functions as if the computer centre is established
locally. Again, it is not so much a question of technical
feasibility that will stop this development; rather, it will be
political and security concerns that slow down the pace of
outsourcing, particularly where confidential information is
involved.
4.3. Aggregators
The final example (Figure 6) involves aggregators. These
are service providers that provide back-end services to
merchants or banks on a regional basis. All online credit
card transactions within a region can be aggregated by one
single payment acquirer/processor who then handles the
authentication, verification, fraud screening, and autho-
rization request before clearing with a card issuer such as
VISA/MasterCard (that serves as an exchange). Banks and
merchants can then focus on their core competence with-
out being distracted by considerations of Internet security
and networking infrastructure.
Under the old economy, these operations must be situated
locally to support the local banks and the local merchants.
Remote monitoring is costly, regional infrastructure could
be prohibitively expensive, and the security concerns
might not be satisfactorily resolved. However, in the new
economy these matters are all largely resolved.
Card-Issuing
Visanet (Mas-
Bank
terCard/VISA)
– format verification
request
(number/add.)
– conduct fraud
screening
– request authorization
request authorization
– evaluate cardmember
account
– authorize transaction
send authorization
12 ASIA-PACIFIC TAX BULLETIN
5. CHALLENGES FOR TAX AUTHORITIES
The general perceived wisdom, to which tax authorities
universally appear to subscribe, is that their major chal-
lenges regarding e-commerce are:
– identifying the taxpayer – especially when an Internet
user is involved;
– identifying audit risks and developing audit trails to
ensure compliance;
– obtaining access to verifiable information and docu-
ments;
– obtaining access to encrypted data;
– developing a response to the advent of electronic
money (e-cash); and
– ensuring an efficient mechanism for collecting tax,
especially from non-resident taxpayers.31
The continuing work of the OECD, through the Compli-
ance, Information, and Documentation TAG, with the sup-
port of the Technology Panel, reflects appreciation of
these challenges. Specifically, these bodies are continuing
to monitor and evaluate developments in Internet technol-
ogy, including commercially developed Internet standards
and protocols, with a view to determining whether the
technology creates challenges or opportunities for tax
administration tasks such as identifying taxpayers, verify-
ing taxpayer information and facilitating cost-efficient
collection of tax. The emphasis here is not restricted sim-
ply to efficient tax administration, because use of new
technology can improve standards of taxpayer service.
Hopefully this work will build upon the study of the Pro-
fessional Data Assessment TAG, which examined how
external professionals remotely access client/taxpayer
data and assess the data for authenticity, completeness,
reliability and verifiability, with a view to adopting or
adapting such methods, as appropriate, for tax administra-
tion in the e-commerce environment.32 Meeting these chal-
lenges are obviously critical policy objectives – and it is
instructive, as can been seen from the work of the OECD
and many taxation authorities worldwide, that this goal is
being pursued in tandem with considering technical issues
concerning taxation of e-commerce.
At a very basic level, it is not trite to reiterate that tax pol-
icy and law should be certain, clear, fair, effective, flexible
and not ad hoc. Yet, notwithstanding both hard work and
commitment displayed by many governments and inter-
national bodies in moving towards fair solutions in the tax-
ation of e-commerce, many commentators and businesses
have voiced, and continue to voice, concerns about the
present confusions and uncertainty in the application of
tax regulations in this area.33 At the very least, because of
the nature of e-commerce transactions “new ways of
administering the old rules may be necessary”.34 The need
for clarification and perfection of existing tax rules is well
recognized; achieving this is a challenge that remains with
us.
In an article published by Red Herring forecasting the top
ten trends for technology and business in 2001, the fol-
lowing prediction was made: “The Internet falls under the
regulation of international accords.”35 If this prediction has
any validity, even in the short term, there is already an
urgent need for more intra/inter-government and multi-
© 2003 International Bureau of Fiscal Documentation
JANUARY 2003
jurisdictional liaison and agreement to synchronize the
taxation treatment and exchange of information applicable
to an e-business world.
Many taxation authorities need to modernize their oper-
ations, radically. In short, an attitude change is an impera-
tive. Many tax officials still cling to the fallacy of living in
an “EDP” world, in which IT is none of their business
because it “belongs” to the realm of IT specialists. Without
knowing the e-business world and how fast it is changing
(in relation to all of business methodology, ideas, and busi-
ness models), taxation officials will forever be playing
catch up.36
There is also an increasing need to monitor cross-border
business activities on the Internet, and the obvious ques-
tion is how well equipped are tax authorities today in
handling all the new electronic means of data flows? Sug-
gestions have been made to collect data and ultimately
taxes from those entities without a presence in the source
country by way of withholding taxes, the obligation being
31. See Guttman, “CIAT Examines E-Commerce Challenge to Tax Adminis-
tration”, Tax Notes International (11 October 1999), at 1393. Note also that, in
accordance with the OECD’s Taxation Framework Conditions (see footnote 8 ),
the goal will be to develop international mechanisms for collecting tax. See fur-
ther, Australian Taxation Office, Tax and the Internet: Second Report (1999),
chapter 6 and Electronic Commerce and Canada’s Tax Administration, A
Report to the Minister of National Revenue from the Minister’s Advisory Com-
mittee on Electronic Commerce (1 April 1998): both reports support the need for
increased multilateral cooperation.
32. See reports cited at footnote 17 . See further, Lejeune, Merrill, Farrell and
Boutellis, “Policy Making in the E-Business Era”, Tax Notes International (23
October 2000), at 1842.
33. See, for instance, Edgar, “Tax & E-Commerce – OECD and EU Develop-
ments”, (2000) 1(2) International Tax Planning Journal.
34. See Boyle, Peterson, Sample, Schottenstein and Sprague, “The Emerging
International Tax Environment for Electronic Commerce”, Tax Management
Memorandum (1999), at 122. Compare the conclusion reached by The US
Department of the Treasury, Selected Tax Policy Implications of Global Elec-
tronic Commerce 2 (27 November 1996), available electronically at
http://ustreas.gov/taxpolicy/internet: “In the area of tax administration and com-
pliance, electronic commerce may create new variations on old issues as well as
new categories of issues. The major compliance issue posed by electronic com-
merce is the extent to which electronic money is analogous to cash and thus cre-
ates the potential for anonymous and untraceable transactions. Another signifi-
cant category of issues involves identifying parties to communications and
transactions utilizing these new technologies and verifying records when trans-
actions are conducted electronically. However, developments in the science of
encryption and related technologies may lead to systems that verify the identity
of persons online and ensure the veracity of electronic documents.”Compare
also the views of the Netherlands Ministry of Finance on tax administration and
collection expressed in its paper to Parliament on 4 May 1998: “Electronic com-
merce will influence the way taxes are levied, and will probably necessitate new
rules regarding supervision and fraud prevention. International collaboration
will be required … The current rules for inspection, supervision and the duty to
preserve files will also be applicable to Internet files. As a result of the increas-
ing international electronic market there will be an increased need for inter-
national cooperation and exchange of information.” (Reproduced in de Bruin,
“Netherlands Publishes Position Paper on Internet Taxation”, Tax Notes Inter-
national (18 May 1998), at 1551.) See further, Australian Taxation Office, Tax
and the Internet: Second Report (1999), chapter 6.
35. Red Herring, “The Top 10 Trends in Business and Technology in 2001”,
December 2000.
36. Krever, footnote 3, at 161, alludes to this issue, albeit in a different (tax
audit) context by stating: “A thorough understanding of the business is the first
step towards putting together the pieces of the puzzle … to compute taxpayers’
true incomes.” The point is made very clearly by the Commissioner of the Inland
Revenue Authority of Singapore, Koh Cher Siang, who is quoted as saying that
“tax administrators must be able to conduct their transactions with e-commerce
business with the same ability that the businesses have among themselves.”
(Reported in Tax Notes International (27 November 2000), at 2460.
JANUARY 2003 ASIA-PACIFIC TAX BULLETIN
placed upon the payer in a B2B case and upon the credit
card operators or banks in a B2C case.37 The suggestions
may be feasible but do they represent an unfair and oner-
ous burden on the intermediaries? And who should pay for
this? At the very least, electronic filing, enhanced connec-
tivity with taxpayers, data mining and more powerful data
analytical tools are important initial steps to ensure prac-
tical and cost-efficient taxation compliance.38
Many tax authorities need to pay serious attention to
upgrading their technology and staff training. Internet
links up isolated islands of systemized units. Just as secur-
ities regulators are implementing intranet-type systems
and maintaining relational databases, tax authorities need
better data mining techniques, database management
tools, and an audit policy39 that is inclined towards thor-
oughly examining various models of e-business. In tech-
nologically advanced and rich countries a move could be
made to ensure that taxpayers must be online and on the
Internet. Privileges such as extended filing dates for tax
returns could be granted to taxpayers who conduct their
dealings with the tax authority electronically.
Many tax authorities urgently need to coordinate better
with other government departments to obtain information
on matters such as customs duty clearances, general regis-
tration and domain registration requirements, and invest-
ment attraction.
Tax policy makers need to strike a balance between pro-
viding incentives (where necessary) to promote the new e-
business economy, ultimately benefiting from its multi-
plier effect, and choosing to levy tax on specific
e-commerce transactions which might result in migration
and loss of taxation revenue. Simplicity of rules and ease
of compliance are obvious legislative and administrative
goals; yet these must be balanced by regulatory controls
preventing crime and tax fraud and ensuring personal data
protection.40
Tax treatment needs to match economic reality. For
instance, the sale of a shrink-wrap Microsoft Office is in
substance no different from selling via downloading. The
OECD has clarified that the tax treatment should be the
same in both cases reflecting the identical commercial
substance. Various jurisdictions including Singapore41 and
Hong Kong42 have explicitly adopted this approach. Such
clarification is necessary from other tax authorities.43
Tax collectors should concentrate their efforts on the
major international corporations benefiting from the e-
business world and demand information transparency and
compliance with all reporting requirements.
6. CONCLUSION
From e-commerce to e-business, the world economy con-
tinues to evolve. In order for taxation rules to match eco-
© 2003 International Bureau of Fiscal Documentation
13
nomic reality, taxation authorities cannot afford to stag-
nate. Technological changes create new problems, but also
make available a new range of tools to be used, to ensure
tax compliance and collection and to improve taxpayer
service. Although issues relating to residence, permanent
establishment, income characterization, and the possibil-
ities of expanding withholding taxes have tended to dom-
inate the current debate involving e-business, transfer
pricing and consumption taxes are undoubtedly matters
that will ultimately be of significant increasing concern. It
is in these areas where the interests of developed and
developing countries most obviously intersect. Yet,
notwithstanding this clear potential for conflict, taxation
policy makers should appreciate that purely virtual enter-
prises do not exist at present, with the possible exceptions
of gambling and adult content sites. And, perhaps more
importantly, e-business will flow in both directions and the
increase in outsourcing will assist developing countries.
To conclude, many tax authorities need a change of atti-
tude, and the OECD and other concerned organizations
should continue to promote efforts to establish a platform
for multilateral discussions. International tax policy is a
fine balancing act, between the developed and the devel-
oping nations, between the old and the new economy,
between the conservative and the liberal, and between tax
incentive and tax base protection. It is not an easy task –
but in the e-business world it is an imperative one.
37. See The International Fiscal Association Report by Doernberg and Hin-
nekens, Electronic Commerce and International Taxation (Kluwer, The Hague,
1999). Compare Quirk and Bentley, “A Proposal for Electronic Tax Collection
in the Context of Tax-Driven Reform of Banking Laws” (1999) 10 JBFLP 125
and (1999) 14 Journal of International Banking Law.
38. Krever, footnote 3, at 161-162 reaches a similar conclusion, albeit in a dif-
ferent (tax audit) context. He concludes: “While the digitalization of modern
commerce and the electronic shift of funds are sometimes seen by tax adminis-
trators as hindrances to effective audit techniques, exploited properly, electronic
information can significantly enhance the ability of tax authorities to audit tax-
payers and trace money flows. … The key to electronic data auditing is match-
ing data across taxpayers.”
39. The Report by the Professional Data Assessment TAG (December 2000)
on identifying the audit risks posed by the Internet e-commerce environment
provides a very useful first step in this regard.
40. Compare Becker, “Taxation of Electronic Business in a Globalizing World
– Ten Demands for an Adaptation”, 26(12) InterTax (December 1998), at 410.
41. See IRAS, “Exemption of Software Payments from Withholding Tax”
(Singapore, 23 February 2001).
42. See Departmental Interpretation and Practice Notes No. 39 (Hong Kong,
July 2001).
43. For comparative purposes, see Farrell and Yuen, “Asia-Pacific Moves Up
a Gear”, International Tax Review 39 (July/August 2000). The authors examine
the Asian response to taxation of e-business. The article is, however, somewhat
dated given recent developments in both Singapore and Hong Kong and does not
cover the very significant response taken by the Indian High Powered Commit-
tee on Electronic Commerce and Taxation, referred to at footnote 3.