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JILT 2001 (2) - Subhajit Basu 2



Taxation of E-Commerce

by William J Craig

Tolley Publishing, 2000
ISBN 0-7545-0690-8

Reviewed by:
Subhajit Basu
MPhil, Liverpool John Moores University

1. Introduction

Commentators have identified several characteristics of e-commerce that impact on tax policy, but perhaps the most significant characteristic relevant for e-commerce and international tax policy purposes is the total irrelevance of geographical considerations in tax policy. Tax authorities will have increased difficulty identifying transactions and tracing where transactions take place. But the most difficult issues involve administration and enforcement of tax rules. Issues such as how to determine when a taxable event has occurred, audit trails, exchange of information, and tax collection are clearly difficult to implement when designing or implementing a tax policy for e-commerce.

Take the problem of jurisdiction for example. The question arises as to which states, if any, will have jurisdiction to impose (or require collection of) taxes on the sales or income generated by e-commerce. Do long-standing tax concepts such as permanent establishment (necessary to determine which country has a right to tax income, the source country where the income is generated or the residence country according to the principle taxing the income earned by its citizens and resident corporations abroad) retain relevancy to govern e-commerce? And what of the characterization of income. E-commerce has blurred the distinctions between different types of income (royalty vs. sales income vs. income from services). The extent that different tax consequences attend different classifications of income, the classification issue takes on new urgency.

Such complexities of taxation are occupying the minds of governments and International organisations that are tempting to work through suitable solutions. Solutions should be acceptable and feasible, that is do not discriminate among types of commerce, and which are simple and transparent and are capable of capturing the overwhelming majority of appropriate revenues, be easy to implement, and minimise burdensome record keeping and costs for all parties are not easily found.

This book written from a UK perspective draws attention towards the practical issues in relation to taxation of e-commerce. The book has a sub-title: 'Fiscal Regulation of the Internet', however the book is more narrowly argued on principles of taxation and does not contain procedural considerations involving administration and enforcement, topics that this sub-title might suggest may have been included.

The first part of the book revisits the traditional tax rules prevalent in nearly all complex economic systems, with a brief introduction to Internet and E-Commerce, and the technology responsible for their creation and growth. Separate sections cover the macro-economic effect (reference to Disintermediation and Residence), direct, income based taxation and VAT. Specific attention has been drawn on to the involvement of OECD (Ottawa Ministerial Conference in October 1998) reflecting the international desire to develop common solution.

2. Taxing E-Commerce

The second part of the book moves on to describe some of the challenges of e-commerce to taxation.

Whilst this section is less descriptive, its structure is logical and considerable effort has been given to explain developments in direct and indirect taxes in simple language. This part continues to discuss the structure of a typical Internet business and tax treatment includes treatment of losses in the different business models.

In the following two separate sections on International issues and e-commerce business profiles, the text outlines the complexities in starting an e-commerce business. Emphasis is placed on the issues of residence in relation to individuals and companies to explain the practical extent of the UK tax authorities' right to impose tax on a business or individual. This includes discussion on factors influencing the choice of location for setting up business, the UK's double taxation treaties, transfer pricing, and a short comparison between the systems prevailing in USA and UK communications (technological involvement) websites. Finally some comment is made on the UK government's commitment towards promoting e-commerce.

3. Case Studies

In the third part of the book, the author endeavours to apply the present tax rules to electronic commerce attempting to identify key issues that need to be addressed. This is done thoroughly and comprehensively. Description, evidence (the second case is an interview with the Managing Director of Prosys) and analysis form the consistent pattern (the third case being a software company making sales through internet, in three different scenarios). The author discusses with authority these issues within the context of individual case studies.

4. The New Millennium Framework

The fourth part of the book is concerned with proposals for taxation regimes. Although the analysis is sound, the conclusions presented as proposals are articulated in a rather disjointed manner, making it difficult for the reader to identify the unifying force of the argument. In this regard perhaps the section on security measures including digital signature was uncalled for. Nevertheless the section on Tax investigation and civil rights clearly explains the initiatives that can make e-government and e-business a successful reality.

5. Conclusion

The book represents a valuable contribution in bringing together the various facts and forces relating to the Internet and to electronic commerce and to raise questions about the implications for taxation. The book is invaluable to those thinking of becoming involved in e-commerce and will no doubt become a reference for e-entrepreneurs and their advisers.

I do however have a number of reservations. Most fundamental is that given the trans-national nature of e-commerce, I would liked to have seen more material on international tax principles. Many e-entrepreneurs are unlikely to set up a website only with the intention of keeping business within a specified geographical location. One can sympathise with the author who is trying to keep the text within a manageable size but some mention of the international dimension should have been included.

The section on indirect tax portion is too narrowly defined - the application of VAT principles on e-commerce fails to highlight the issues of the origin and destination model of taxation, particularly the difficulties of applying VAT to telecommunications companies, including internet service providers, as well as application of VAT principles to non-residents selling goods and services over the internet.

These reservations aside and although at times, some detail was lacking, the author has provided the essence of the issues in a readable form. The cartoons provide refreshing breaks!

This Book Review was published on 2 July 2001.

Citation: Basu S, 'Taxation of E-Commerce by William J Craig', Book Review, 2001 (2) The Journal of Information, Law and Technology (JILT) <>.New citation as at 1/1/04: <>.

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