Taxation of E-commerce: Traversing the Principles route

E-commerce, a hot topic for researchers and policy makers for ten years now, has really posed some significant problems for them. As for me, who always believes that law follows society and constantly keeps finding ways and means to come up with the challenge of regulation in societal interaction and moulding of human behaviour, this does not come as a surprise. This new phenomenon of contractual relationships between unknown buyers and sellers, whose only common link is the e-platform which offers them facilities of their interaction (for e.g. e-bay and Amazon to some extent) has really rendered obsolete the concept of 'identity of parties' in contractual law terms. But nonetheless the system is thriving fast, laws or no-laws to govern it, and is fast becoming the norm for both business and individual transactions worldwide.

This has also led to the problem of taxation (though some consider that tax is a problem in itself and I surely sympathize with them) of such transactions which take place through the electronic medium and thus are not only hard to trace but also hard to take into account and apply the traditional jurisdictional based regimes of taxation of such transactions and the income derived therefrom. The first and foremost approach towards dealing with such situations can be attributed to the Ottawa Conference on E-Commerce (1998) organized upon the behest of OECD. While the Conference as such was one simply focusing on e-commerce and the re-thinking required to be done in the legal arena in regard to this emerging area was not one specifically meant to shape the principles or policy basis for taxing such transactions, nonetheless the outcome of the Conference did shed some light on that aspect as well. [click here for the conclusions drawn from the Conference]

The conclusions drawn as regard taxation of e-commerce from the Ottawa Conference were as under;

• neutrality between e-commerce and offline business transactions to be maintained and ensured;
• efficiency in respect of compliance costs (for tax-payers) and administrative costs (for tax-collectors) to be maintained;
• certainty of tax rules to be ensured (such that the system would draw compliance); and
• simplicity in the rules to be promoted (also to draw compliance).

But then any tax theory student can tell you that calling these principles as principles meant for taxation of e-commerce is really a non-starter for these are the most generally and foremost principles of tax policy rather than being coming any close to be specific and exclusive to taxation of e-commerce. Nonetheless we had a start as regards taxation of e-commerce transactions with the Ottawa Conference coming out with these conclusions as regards accommodations sought and the adjustments required to be made in the normal tax rules were concerned.

But then the Ottawa Conference was just a starter. The extension of principles of taxation for bringing into ambit e-commerce transactions took off at the initiative of OECD when in 2000 it released it clarification to Commentary to Article 5 of the OECD Model Convention with respect to taxes on Income and Capital. This clarification related to the application of the principle of 'Permanent Establishment' (really one of the most talked about principles in international tax plane) to e-commerce. [click here for the full text of the 2000 clarification]

Issuance of this clarification, however, did not stop the OECD from working on this area and it came out in 2001 with a Discussion Paper on the aspect of applying the existing principles of double-tax treaties for taxation of business profits arising on account of e-commerce [click here for full text of 2001 discussion paper] and based upon this discussion paper, the Committee of Fiscal Affairs (the key committee on taxation in the OECD) in 2002 adopted a 'Report on Treaty Characterization issues arising from e-commerce' [click here for the full text of the 2002 Report]

This 2002 Report is a key document to understanding the treatment to be meted to income arising from e-commerce for it goes a long way in establishing principles and facets for understanding and characterizing the income arising from e-commerce transactions. Given the fact that most double tax conventions in the world are based upon the OECD model, the 2002 Report's adaptation in the OECD model goes a long way in incorporating these principles within the legally enforceable framework in international tax arena, and therefore a recommended base for starting the understanding of these issues.

However, acknowledging the limits of dealing with e-commence transactions only a double tax convention level, in 2003 OECD again came out with another documents, perhaps this one more comprehensively covering the issues that the former ones but lacked authority as it was only a discussion paper seeking answer to the issue 'Are the current treaty tax rules for taxing business profits appropriate for e-commerce?' [click here for the full text of the 2003 Discussion paper] This is an important starting point for dissecting e-commerce taxation as it not only traverses through the various principles involved but also critically examines the existing rules and the seeks the road for reform. The conclusions reached in the discussion papers are not very promising and therefore it is not surprising that no official follow up action has been taken up on this discussion paper.

So the situation as it stands today is that income from e-commence is taxed (on the international level) under the various double tax conventions which may or may not be based upon the OECD model. As far as consumption taxes are concerned, while the general tendencies of most governments have been to simply extent the general rules of consumption tax to transactions characterized as one of e-commerce, the EC is always looking into the matter and has some special rules under the Sixth VAT Directive [Directive 67/227] and the Recast Sixth VAT Directive [Directive 2006/112] as regards the place of supply and taxation of goods and services delivered through the medium of e-commence. [click here to read more in this regard]

So as of now, the taxation of e-commerce can best be described as a transition area, with states and international organizations yet to find concrete basis for giving a full thrust go at taxation of e-commence transactions purely on a principle-approach basis rather than an ad-hoc one meant simply to disallow loss of revenues.


For further readings, I would suggest the following;

1. A comprehensive link to E-Commerce Taxation
2. Global Internet Policy Initiative's version on Taxation of E-Commerce
3. BILETA's 16th Annual Conference Report on Taxation of E-Commerce
4. OECD Observer's article on E-Commerce and Taxation