The rapid growth of World Wide Web has established importance of communicating multimedia contents and user- friendly interfaces. At the same time, the ease in using web browsing and authoring software has encouraged the number of internet users and computers connect to internet. Product and service information can be easily provided to buyers and sellers on the internet so that business has found new channel to do commercial transactions through the internet so called e-commerce.
According to Hanefah et al (2005) the trend of e-commerce has become the more preferred way of doing business nowadays. It is a tool used for business communication across national borders. A lot of companies are taking the opportunity to develop business through this new means.
E-commerce can be simply defined as "any transaction that involves money and is done over the Internet" (Donert, 2000: 42). In fact, e-commerce mechanisms make customers going shopping through internet. Goods and services are available wherever and whenever. From comfortable room, customer can purchase its needs from any place in the world. As a result, the borderless of e-commerce has given rise of tax issues. This is because the absence of permanent establishment (PE) is unknown. A number of studies have discussed the tax issues raised by conducting e- commerce in many countries such as United States, European Union, Canada and so forth. In United States for example, there has been a heating debate in terms of taxing or not to tax e-commerce. In deed, there are two groups with regards of taxing e-commerce. The first group is the proponents of taxing e-commerce, who called for neutrality and fairness, suggest that e-commerce taxing is necessary not only for fairness to retailers, but also to raise revenue for governments. In contrast, opponent of taxing e-commerce lobby for exempting such new business. They claimed that tax will hinder e-commerce growth. Victor and Jih (2006).
In addition, there are many questions with respect to tax e-commerce. Is it appropriate to tax e-commerce?. Is the existing tax regime fitting e-commence? If so, how e-commerce be taxed in the absence of permanent establishment (PE).
The aim of this paper is to look into some studies that have been done in terms of taxing e-commerce. This paper is organized as follows: section one will look at development of e-commerce. Section two will focus on proponents and opponents of taxing e-commerce. Section three will concentrate on OECD initiatives and the concept of PE. Then, it will be concluded this work.
The development of e-commerce:
The primary stage of electronic commerce (e-commerce) started from using electronic data interchange (EDI) between business and business over private networks. The use of (EDI) was the most important business development that changes business transactions from paper-based to electronic-based. However, EDI is limited to small group of users. Choi (1997) mentioned several reasons important reason being that EDI requires a large amount of capital investments because EDI is a private network and transactions depend on proprietary software. A new hardware and software need to be developed each time when a new EDI system is developed. In addition, EDI transactions are limited to machine to machine communications on machine readable forms. Therefore, in the first stage of e-commerce, the business transactions are limited to a small group.
According to the revolution of e-commerce occurred when the internet was developed. The internet provides a different communication method than EDI. The openness of the internet in the 1990s facilitated connections between computers and supported exchange of data in various platforms.
The rapid growth of the world web, for example, has established the importance of communicating multimedia contents and user-friendly interfaces. At the same time, the ease in using web browsers and authoring software, such as Hyper text Markup Language (HTML), has spurred the number of internet users and computers to connect to the internet. Product and service information can be easily provided to buyers and sellers on the internet. With this potential, business has found a new channel to do commercial transactions through internet.
Generally, e-commerce can be categorized into three types: business to business (B2B) business to consumer (B2C) and business to government (B2G). For B2B, e-commerce facilitates supplier management, inventory management, distribution management and payment management by linking an individual company's business with outside suppliers and distributor parties. For B2C, E-commerce is used as a way to connect consumers to business. Customers can learn about products through electronic publishing, buy products with electronic money and find online information about existing and new products or services over the network. Almost all of commerce studies concern with these first two types (B2b and B2C) there is not much attention paid to B2G. this is because the B2G is not developed so far and it has limited services. Nowadays, the main electronic transaction in B2G is tax services.
2. Should e-commerce be taxed?
E-commerce has emerged as an electronic market place where consumers can purchase almost any good as if they are shopping from a catalogue. In fact, the technique of e-commerce has become the more preferred way of doing business…. More and more corporations are taking the chance to enlarge business through this new instrument. Unluckily, as e-commerce business deals transacted over the internet, whereby the physical presence of trade is not in existence, thus, tax collection issues has appeared. Hanefah, Othman and Hassan (2005). In this section, we look at the opposing views in terms of taxing e-commerce.
2.1 proponents of taxed e-commerce:
The first group, the pro-taxation group, believes that electronic commerce should be taxed just like regular commerce because:
- Governments are at a danger of losing their existing tax base because of more customers' purchasing goods from out-of-state over the Internet.
-Allowing tax exemption for electronic goods and services that are the same to goods and services purchased in traditional supplies is not fair, e.g., not taxing an electronic book that is do downloaded directly online while taxing the hardcopy of the same book sold in a store.
- It is also unfair to consumers when their tax liability depends on how they buy a good rather than how much they buy. Especially since mostly the richer consumers have access to electronic commerce services, banning taxes on electronic transactions allows the richer group of people to pay fewer sales taxes while the poorer part of the people still has to pay the traditional taxes.
- Loss of jobs is another disadvantage of exemption of e-commerce from tax. This is because online sale already has huge cost advantages due to its ability to cut out the middlemen like wholesalers and distributors by getting the product directly from producer to consumer. So, even without tax incentives, electronic commerce has competitive advantage over traditional merchants and will continue to grow.
- The failure to tax mail order and online sales has shaped an "unjust" and "uneven" playing field for traditional commerce. The traditional retailers have a legitimate fairness argument when they see customers come to the store to locate items they want to purchase, only to leave and order the things over the Internet just to flee the sales tax.
3. Arguments against Internet Taxation
Believers of anti-taxation, however, argue that e-commerce has in fact created many jobs by moving retailing to the net. Among these jobs, they count trucking and package-delivery sectors. Further, they argue that E- commerce decries the cost of products for consumer compared to the cost of items dealing with traditional business. In fact, e-commerce help to increase the number of sales by allowing the consumer to buy more things, thus benefiting a wider number of manufacturers. In addition, taxing e-commerce the same way as conventional businesses brings about other concerns and complications, because:
- Nowadays, a lot of small businesses are able to provide consumers outside of their area. As a result, if jurisdictions tax e-commerce, they will hinder the growth of such new business as well as costing governments huge revenues in the long run.
- The traditional tax regimes are unsuitable for the e-commerce due to the electronic and border-spanning nature of the Internet. Indeed without significant sales tax simplification the requirements of online business to collect and remit sales taxes to multiple tax agencies would be costly. Serious modifications and different enforcement mechanisms are necessary in order for these regimes to work for electronic marketplace. Further, they argue that no evidence has been presented to date to prove any discernable unfair advantage of E-retailers over the traditional retail outlets. Remote sellers do not use the services provided by sales taxes that local retailers enjoy, such as police and fire protection, roads, and education. In fact, the alleged advantage of sales with no sales tax is dispelled by the extra costs incurred from shipping charges that must be paid for tangible goods purchased online. According to the tax opponents, imposing tax on electronic commerce would break the permanent establishment(EP), threaten state sovereignty and consumer privacy, and stifle electronic commerce growth due to the bureaucratic red tape and increased cost that will be passed on to the consumer (Haas. 2004).
Permanent establishment:
According to Kernighan and Klassen (2004), the potential problems posed by e-commerce for national tax administrations center on two key concepts in the tax legislation in most countries: the permanent establishment (PE) concept and transfer pricing. In general, company is usually taxed in country only if it has operations sufficient to maintain a PE there. To further explain this concept, many tax treaties specify that a PE exist in a particular country if the company (1) has a fixed place of business, such as a premises or place of management with some degree of permanence, or (2) carries on a business through employees or dependent agents who have authority to conclude contracts of on behalf of the company.
The OECD in the commentary on its model Tax convention clearly states that a non-resident enterprise with an Internet web site alone would not be regarded as having a permanent establishment in the country in which the web site is located. Thus, OECD defines a permanent establishment as "a fixed place of business through which the business of an enterprise is wholly or partly carried on". On other words the permanent establishment is a physical presence such as a place of management, a branch, an office, a factory and a workshop and so on.
In addition, Lau and Halyard (2003) state that a web site cannot by itself be considered a permanent establishment. Likewise, an Internet service provider (ISP) usually will not represent a dependent agent of another enterprise so as to constitute a permanent establishment of that enterprise. By way of contrast, a server within a country could amount to a permanent establishment if the server is at the disposal (owned or leased) of the enterprise carrying on business through a web site.
Permanent establishment:
According to Carnaghan and Klassen (2004), the potential problems posed by e-commerce for national tax administrations center on two key concepts in the tax legislation in most countries: the permanent establishment (PE) concept and transfer pricing. In general, company is usually taxed in country only if it has operations sufficient to maintain a PE there. To further explain this concept, many tax treaties specify that a PE exist in a particular country if the company (1) has a fixed place of business, such as a premises or place of management with some degree of permanence, or (2) carries on a business through employees or dependent agents who have authority to conclude contracts of on behalf of the company.
The OECD in the commentary on its model Tax convention clearly states that a non-resident enterprise with an Internet web site alone would not be regarded as having a permanent establishment in the country in which the web site is located. Thus, OECD defines a permanent establishment as "a fixed place of business through which the business of an enterprise is wholly or partly carried on". On other words the permanent establishment is a physical presence such as a place of management, a branch, an office, a factory and a workshop and so on.
In addition, Lau and Halyard (2003) state that a web site cannot of itself be considered a permanent establishment. Likewise, an Internet service provider (ISP) usually will not represent a dependent agent of another enterprise so as to constitute a permanent establishment of that enterprise. By way of contrast, a server within a country could amount to a permanent establishment 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 significant as well as an essential or core part of the enterprise's business activities.
In brief, Website by itself does not have any tangible property. Its exact location is also unknown. Therefore, the website by itself cannot be treated as PE. Similarly, internet server provider (ISP) does not have authority to conclude contracts on behalf of the enterprise. Thus, ISP can not be treated as either a PE or a 'dependent agent' of the enterprise.
Tax problem in e-commerce environment:
According to Carnaghan and Klassen (2004), the potential problems posed by e-commerce for national tax administrations center on two key concepts in the tax legislation in most countries: the permanent establishment (PE) concept and transfer pricing. Based on the traditional tax administration in most countries wide-reaching, income is taxed based on the territorial concept in which the location of the taxpayer will be the basis used to charge the income or profits. in general, income is charged based on the scope of tax categories, such as territorial or derived, globe income scope, or derived and remittance basis. Countries such as the United States of America and Japan practice the world income scope whereas Malaysia and Singapore use the derived and remittance income scope. Hong Kong and Middle East countries such as Jordan, on the other hand, favor the territorial or derived scope of charging income.
In general, company is usually taxed in country only if it has operations sufficient to maintain a PE there. To further explain this concept, many tax treaties specify that a PE exist in a particular country if the company (1) has a fixed place of business, such as a premises or place of management with some degree of permanence, or (2) carries on a business through employees or dependent agents who have authority to conclude contracts of on behalf of the company. Thus, the tax jurisdiction to charge the income of taxpayer would be the place where the physical of taxpayer is known. However, the determenats of PE in the case of the e-commerce would be a problem. Othman, Hanifah and Bidin (2004).
A study by Othman et al (2004) points out that 90% of the respondents agreed that the current definition of PE does affect the concept of income in e-commerce environment. The results indicate that the respondents perceived the current definition of PE, if used in e-commerce environment would result in tax loss, double taxation, and tax evasion. According to Horn(2003) stated e-commerce posed tax administration problems to many tax authorities problem(Horn, 2003). In fact, the current tax regimes have been designed to suit the traditional business models but not e-commerce. Moreover, the sales and use tax issues are also points of concern with regards to e-commerce (Horn, 2003).
As a matter of fact, In United States, current industry and academic studies project American States will lose between $ 10-20 billion in sales tax revenues by 2003, $45.2 in 2006 and as much as $54.8 billion by 2011.Revenue losses from e-commerce generally arise because e-commerce enables a significant increase in remote sales, thereby causing a shift from collecting sales taxes at the point of sale to collecting use taxes for goods used, consumed, or stored in a jurisdiction. The resulting revenue losses are generally the result of tax evasion, not tax avoidance; since the use tax is due even if the sales tax cannot be collected. (Horn, 2003).
"To allow electronic commerce to develop, it is vital for tax system to provide legal certainty (so that tax obligations are clear, transparent and predictable), and tax neutrality (so there are no extra burden on these new activities as compared to more traditional commerce). The potential spread, untraceability and anonymity of electronic transactions may also create new possibilities for tax avoidance and evasion. These to be address in order to be safeguard the revenue interests of government and prevent market distortions… the goal is threefold: to provide legal certainty , to avoid undue revenue loses and to ensure neutrality". A European Initiative in Electronic Commerce,April 15,1997 http://europa.eu.int/ISPO/electronic/legal/documents/com97-157/economic.pdf(p.19).
Development of e-commerce tax:
The influence of e-commerce on tax administration is concerned by many countries. Nevertheless, only a few developed countries to investigate their current tax regime. For instance, the United States of America passed
The Organization for Economic Co-operation and Development (OECD) has taken many proposals to highlight the importance of e-commerce through discussions and conferences. The OECD Model Tax Convention is considered to be the standard for taxing e-commerce and it has been accepted by a lot of countries worldwide (Scally, 2002). The organization concentrated on three main areas most affected by ecommerce, namely international direct tax, consumption tax, and the application of PE to e-commerce (Moran and Kummer, 2003). The OECD Electronic Commerce and Taxation Conference held in October 1998 has reached a consensus relating to various issues concerning e-commerce and resulted in a joint declaration on taxation and e-commerce, further, the Ottawa Conference concluded that government and companies must cooperate to apply a taxation framework for e-commerce in order to realize the full potential of new technologies. The conference representatives considered new technologies have a great potential to simplify tax systems and improve taxpayer services using the same principles that are adopted in the current tax system. Sequentially, in October 1999, the OECD Working Group on Tax Conventions proposed the application of PE definition for e-commerce transactions, as many countries have adopted the definition as a guide to address the issues on PE in their respective jurisdictions.
The OECD later updated the guideline with regards to PE where issues pertaining to e-commerce are discussed. The update has identified 28 different transactions and related payments involving varying degrees of e-commerce (Scally, 2002). The OECD Model as reference in determining permanent establishment. Article 5 of OECD Model Income Tax Treaty, has identified criteria for determining permanent establishment. Fixed place of business is the main criteria as to the justification of permanent establishment in a jurisdiction. Articles 5 of GECD Model conclude that a website does not create a permanent establishment. This is so because the nature of a website itself explained that it could not be considered as being a fixed place of business (Scally, 2002). Article 5 also specifies that server could be considered as having a permanent establishment if fulfilled the time and location of business requirement. In this sense, a server which has a sufficient of time period in a jurisdiction and conduct a business activity although without a presence of personnel (no human intervention) would constitute a permanent establishment, also the business activities are not of preparatory and auxiliary in nature (Merill, 2001). However, the commentary, in particular, on Article 5 (on PE) of the guideline is narrow because it is confined to the consideration of the present definition of PE without discussing the broader and important issues such as proposed changes that should be made to the definition or whether the concept should be abandoned.(Hanifa,Othman and Hassan,2005).
United Kingdom (UK) has its views on websites and server as to represent a permanent establishment since UK does not considered server and websites to have enough presence to establish as fixed place of business (Merill, 2001). United States in its U.S Model Convention on permanent establishment also has permanent establishment as a physical presence of business (Sweet, 1998).
Similar to the OECD Model, where time and location of business of a server would constitute permanent establishment, Germany has always fall back on its Pipeline case. The Second Chamber of German Supreme Tax Court has concluded the permanent establishment concept related to automatic equipment in German. This case highlight that the presence of personnel is not considered being significant in establishing permanent establishment. As long as the equipment fulfilled the criteria of carrying on or operating business in a jurisdiction that it would be considered as having a permanent establishment in that jurisdiction (Scally, 2002).
contracts in the name of the non-resident (Singh, 2003). Therefore, if a foreign company sets up a branch (or has a place of management, an office, a factory, a workshop or a mine, an oil or gas well, a quarry or any other place of extraction of natural resources) would deemed a permanent establishment. Thus any profit attributable to such an establishment would be liable under Section 4 of Income Tax Act 1967.
The Singapore Government has launched the ECommerce Hotbed (ECH) program which provides web site hosting information on e-commerce and the E-Commerce Master Plan to drive the pervasive use of e-commerce and to strengthen Singapore's position as an international e-commerce hub (Chan & Hawamdeh, 2002).
The Singapore Government's initiatives in establishing ecommerce economy have motivated many companies in Singapore to deploy the e-commerce platform introduced by the government for their online businesses. In a survey 'ICT adoption by businesses in Singapore', the results indicate that 80 ;:--ereent of the organisations surveyed have access to the web and 5: percent are implementing e-commerce earnings. Through ma.ny e-commerce infrastructure plans and the positive response trom the citizens, Singapore would be able to achieve its vision ot becoming the major e-commerce hub in the region (Foley & Fang Khoo, 2000),
In February 2001, Singapore's Inland Revenue Authority issued guideline on E-Commerce Tax. The guideline is known as income Tax Guide on E-Commerce (2001). This guideline was published to educate companies on income tax treatment on e-commerce. It is a guide to be used in solving various situations where income from e-commerce transactions sourced in Singapore will be taxed using the Singapore current income tax law and principles. The guideline introduced situations such as:
a company with business operations in Singapore, which has set up a website in Singapore,
a company with business operations in Singapore, which has set up a website in a foreign country,
a company with business operations in Singapore, which has set up a website and branch in a foreign country,
a company with business operations outside Singapore, which has set up a website in Singapore, and
e) a company with business operations outside Singapore, which has set up a website and branch in Singapore.
The guideline also explains and tackles the issue as to how PE is established in an e-commerce environment. It specifically states that the mere presence of a physical server in Singapore will not mean trading in Singapore. However, significant questions still remain as to how income should be classified for Singapore's income tax purposes.
Malaysia has taken the stand to adopt principles as prescribed by OECD Model on permanent establishment. Malaysia is yet to produce any guidelines in regards to application of e-commerce in relation to permanent establishment. It has adopted similar platform as many other countries such as Australia and Canada to use the OECD Model (Kasipillai, 2002). In Malaysian perspective permanent establishment is conclude to be a fixed place of business through which the business of an enterprise is wholly or partly carried on or a dependent agent who has, and habitually exercise, authority to conclude contracts in the name ofthe non-resident (Singh, 2003). Therefore, if a foreign company sets up a branch (or has a place of management, an office, a factory, a workshop or a mine, an oil or gas well, a quarry or any other place of extraction of natural resources) would deemed a permanent establishment. Thus any profit attributable to such an establishment would be liable under Section 4 of Income Tax Act 1967.
In their research on Italian SMEs. Santarelli and D'Altri (2003) found that e-commerce was viewed as a cost-minimizing marketing channel. A 1999 Asia-Pacific Economic Cooperation (APEC) study reported in Rosson (2000) suggests that reaching international markets is a motivator for some firms, while increasing revenue and reducing costs are of moderate overall importance.
