How will taxes effect e-commerce in a global economy?

RATIONALE

The rationale behind this research proposal presentation involves the process of E-commerce and Taxation as how the taxes effect e-commerce within the global economy as the Internet Tax Freedom Act, provides ban on the state taxation of Internet transactions and that the legislators are expected to vote on whether to extend the ban or to make it permanent within issues and that the decision will affect e-commerce businesses. This issue impacts on any business selling goods and services over the Internet that the Internet taxation issue doesn't directly affect e-commerce in the global economy as e-commerce has grown and struggled to establish itself as the Act prohibits taxes on Internet access, taxes on specific products sold online that are not taxed offline and duplicate taxes on transactions that the states could tax.  Electronic commerce tax administration in Canada was the subject of Tax Executives Institute (TEI) comments to Canada's Minister of National Revenue as it should continue to receive input from the business community in the efforts to work towards better agreement on taxation of electronic commerce. Several specific issues were addressed.

 

 

 

 

 

 

The proposal will examine the growth of electronic commerce in commercial activities and administrative issues that arise from electronic commerce and adopt the important methods to address certain issues. The research aims and objectives will help shape the policy positions to participate in the consultative process in order to appreciate the opportunity to discuss such views.

 

AIMS AND OBJECTIVES

The aims and objectives for this research proposal will need to understand how e-commerce and taxation works in effect to the global economy in Canada with support to TEI as this presentation aims to give a clear emphasis of e-commerce taxation as to what it brings forth for the positive integration of its aspects within the reality of achieving a better global economy in e-commerce business success and opportunities. The Canadian government should work to develop the necessary legal framework for electronic commerce to ensure effective intellectual property protection in the digital environment; clear rules on jurisdiction, applicable law, and enforcement and on liability and contractual obligations involved in electronic commerce and a fair, equitable tax regime for electronic commerce.

 

 

 

The Objectives

1. To develop a Strategy for E-Commerce

2. To provide and adopt guiding principles about E-Commerce

3. To ensure that requirements for electronic commerce figure notably in its policies and programs.

4. To use Web site to advertise to residents and non-residents of Canada the implications of doing business in Canada on the Internet and e-mail information to interested parties.

5. To approach appropriate organizations to arrange electronic links to the Web site to provide users with information on the tax implications of having business on the Internet.

6. To be active in the workings of the OECD to address electronic transactions. Priority should be given to considering and applying existing concepts to electronic commerce before choosing to pursue alternative or new concepts with respect to changes to the model tax treaty are known and the need to address the taxation of electronic commerce.

 

 

 

7. To integrate Electronic Commerce and Process Redesign

There must continue to redesign and re-engineer its business processes in combination with electronic commerce initiatives for program and service delivery. The result may be fundamentally new approaches to delivery in some areas.

8. To have a Strategic Approach to Electronic Delivery Channels

There needs to consider developing program and service delivery design principles that promote the strategic use of electronic deliver channels and should promote the acquisition of skills and competencies in selecting and using electronic delivery channels strategically.

9. To enhance Tax Compliance

The country should continue to explore the strategic use of the Internet and other emerging technologies and techniques to enhance tax compliance and should maintain a current awareness of software available to ease the burden of tax compliance on small businesses.

 

 

 

 

 

VALUE OF RESEARCH

The value of research is surprising arising from electronic commerce of the dot.com economy has not altered the new reality of the tax world. It is critical both from the perspective of growth, innovation and competitiveness and from that of maintaining a viable and effective basis for the state that people do the right thing. The hallmark of a global economy is greater mobility of economic transactions and economic agents in enjoying choice for purchases of goods and services to live in communities that best meet the needs within the outcome of greater choice is efficient economies and better living standards.

 

LITERATURE REVIEW

Approaches to E-Taxation

Tax electronic commerce is a controversial subject as there are many governments and international organizations issued reports on the taxation of electronic commerce and a large academic and popular literature developed. Canada has been no exception in this publishing maelstrom. Canadian feature of waiting for the OECD some more definitive utterances have begun to emerge, the appropriate tax treatment of electronic commerce remains very much in flux in Canada.

 

 

Don't Tax E-commerce

In the United States there argues that the new forms of business being transacted on the Internet should be exempt from taxation in order to facilitate and encourage the spread of the e-economy. Taxes on e-commerce are taxes on innovation and cripple the development of the new economy. Countries that pursue the pernicious policy of taxation, members hamper their ability to compete effectively in the emerging new economy. In reality, it appears that "most arguments regarding externalities are based on politics, not economics." (Goolsbee 2001, p. 19) Nonetheless, even some who recognize both that the case for taxation exemption is at best transitory and that governments are to surrender tax base willingly appear to take solace in the view that, try as governments might, the combination of e-commerce, financial innovation and globalization will provide at least some temporary tax relief for this innovative sector.

 

 

 

 

 

 

Tax It Like Anything Else

In sharp contrast, most governments, led by the OECD, argue that it is critical to develop and enforce effective methods of taxing electronic transactions, both in order to ensure a level playing field for bricks-and-mortar competitors and to be able to finance needed public-sector activities. The OECD has argued that taxation should be neutral and equitable between all forms of commerce, that compliance and administrative costs should be minimized and that the potential for tax evasion and avoidance should be minimized. General criteria for a good tax system are usually easy to state, and even to agree to. Implementing them effectively, however, can be quite another matter. Some have suggested that this aim may be accomplished only by increased co-operation among national and sub-national governments, and perhaps even by the adoption of explicit base-sharing arrangements (Smith 1998).

 

 

 

 

 

 

Really Tax E-commerce

Finally, a few proponents of taxing e-commerce have even taken the view that electronic commerce offers not so much a challenge to the sustained productivity of the existing tax system as an opportunity to exploit a new one--the so-called bit tax (Cordell et al. 1997). Bit-tax supporters recommend levying a small charge on the transmission of information by electronic means as others suggest limiting such taxation only to encrypted information or taxing the capacity to receive such information. Whether the idea is to impose a tax on the flow through the pipeline, the size of the connection, it has little merit. It may be politically attractive to generate a lot of revenue by levying a small charge on a large flow, not least when much of the tax would likely be collected from a few large companies. Indeed, it may even be argued that the incidence of such a tax might be progressive to the extent there is a so-called digital divide, with the better-off in society making much more use of electronic commerce than the less fortunate. Canada need to adjust its tax system to the realities of e-commerce (Repss 2000) within the issued major reports on the subject, as have the European Union and the OECD began requiring that any non-EU business that supplies online services to consumers resident in the EU must collect value-added tax (VAT) at the rate applicable in the resident state (Gnaedinger 2003).

 

 

Revenue Matters

Tanzi and Schuknecht (2000) argue that citizens have, on the whole, received relatively little value for expansions of the state sector much beyond 30 percent of GDP. They may be right unless major changes are made soon in pension and health systems, demography alone seems likely to lead to still further expansion of the state in many countries. Canada is no exception. Robson (2001) recently argued that with unchanged policies, health care alone may sop up another 4 percent of GDP in Canada. An OECD study (Dang, Antolin, and Oxley 2001), taking into account other age-related spending raises the expected increment in spending to almost 9 percent of Canada's GDP as the validity of all such projections may always be questioned and, in reality, increases of this magnitude would imply a large and unsustainable deficit, a major cut in programs, a substantial increase in taxes seems clear is that significant reductions in the size of the tax bill facing Canadians appear unlikely in the near future. Tanzi (2000) believes that the effect of e-commerce on tax revenue, though so far not relatively large, is thus not a small technical point, but rather a potentially critical influence on the development of future public policy. It deserves close attention (Messere, de Kam, and Heady 2003).

 

 

 

The VAT issue has been most discussed in the European Union, as has the retail sales tax in the United States. Since Canada is the only country in the world with both a VAT and retail sales taxes (Doernberg et al. 2001, 117-18). Buyers are thus taxed indirectly, effectively paying the tax on both the value added by these purchases and that added by their sales when they make them. This mechanism requires sellers to have information on the nature of the buyers and their VAT identification, if they have one. Henceforth, such system already exists (Bird and Oldman 2000) when purchases are made from unregistered nonresident vendors, in principle the reverse charge is paid directly by the buyer, as with the "use tax" familiar from U.S. retail sales taxes these levies depend on individual initiative and are hence unlikely to be effective in practice. Canadian Internet access and web hosting services are subject to GST, regardless of whether the persons receiving the services live in Canada or abroad, because CCRA has explicitly characterized servers to be telecommunications facilities and subject to GST because zero-rating is not applicable to telecommunications services, Canadian suppliers are required to charge GST on supplies to nonresidents unless the latter are also in the business of supplying telecommunication services (Vincze and Schwartz 2000) by enforcing VAT even on B2B transactions rests on the efficacy of tax audit, under the EU system, VAT taxpayers are responsible for ensuring that zero-rated sales are made to eligible recipients, a harmonized system of VAT invoices, with specific information requirements (Strauss 2000).

 

PRIOR RESEARCH

Electronic commerce will greatly increase the mobility of goods consumption as shoppers search websites for bargains far away, and as goods are delivered by private shippers such as FedEx and UPS. E-commerce will enhance the mobility of services consumption as households buy education, entertainment, insurance, legal, and accounting services from distant suppliers. Falling airfares will enable households to spend more of their tourist and health dollars in distant locations. Investment income will become highly mobile as pension funds and brokerage firms develop worldwide networks and households seek to diversify their portfolios. The essential point is to emphasize has to do with tax convergence between national systems. If tax systems designed on a blank slate, the most practical way to accommodate e-commerce would entail adoption of the origin principle of border tax adjustments for retail sales, value-added and similar consumption taxes. Under the origin principle, taxes are not imposed on imports of goods and services, but they are imposed on exports. From an administrative standpoint, it is much easier to collect taxes on firms at the location of production than on households at the place of delivery. It is even truer for services arriving by internet at the computers of individual buyers. However, tax systems have inertia because they affect capital values, location decisions and political interests.

 

 

METHODOLOGY

 

Conduct a review of literature on E-commerce and Taxation as to how taxes affect e-commerce in Canada's global economy in order to develop useful principles behind the underlying issues in dealing with e-commerce taxation within a definite structure of its context views per se. The realization of primary and secondary data sources within the desired integration of qualitative and quantitative research methodology. There needs to have a good sense of application and analysis of needed facts and information to achieve the aims and objectives as well as to have a valid support of any research findings and its evidences. There needs to incorporate case studies and comparative surveys with regards to the prevalence of e-commerce and taxation within the principal cities of Canada in order to carry out relevant strategies as well as useful models for the support of e-commerce and taxation in effect to the global economy. The case studies are to base within the significant process situation that will discuss and explain the reality behind Canada's E-commerce taxation as of today's epoch.

 

 

 

 

 

 

The survey will be in a form of questionnaire procedure and will be developed with set of questions that will have to focus on the research objectives as discussed above. The questionnaire will be answered by 100 Canadian e-commerce suppliers and retailers within as this could give realistic data as to how taxes really work in  pursuance of e-commerce within the global economy. The questions in the questionnaire will seek to evaluate the importance and the function of taxes in e-commerce business transactions as the questionnaire will be distributed to the randomized sample of Canadian respondents across the cities of Canada. Moreover, data analysis will use the basic statistics method and usage to ensure that the results and findings are of valid and reliable implication of e-commerce and taxation in effect to the global economy rather than other related matters that could spoil the accuracy and spontaneity of data and information respectively.

 

 

 

 

 

 

 

 

 

 

TIMESCALE

 

May 2006: Draft the Research Proposal document

June 2006: Review of Literature

July 2006: Assessment of Research Methodology and agree the conduction

August 2006: Administration of the research process to support the essential data needed for the completion of the study

September 2006: Do the case study and the survey

October 2006: Compile and Administer the Questionnaire

November 2006: Collection of questionnaire and data analysis

December 2006: Final Writing of the Report Project

 

 

 

 

 

 

 

 

 

 

 

 

 

APPENDICES

It is in the revenue system that has been widened by the expansion of e-commerce and that gives rise both to a range of estimates of potential revenue losses (Goolsbee 2001; Bruce and Fox 2000) and to the need for radical simplification and harmonization of state and local sales taxes if they are to survive (McLure 2000). Canada suffers from some of the same problems in collecting taxes on taxable goods purchased out of province but has to some extent been saved by its geography and its courts. Most Canadians outside of the National Capital Region do not live near a provincial border and courts have been kinder to tax collectors, the provincial sales tax administrators thus start from a considerably stronger position than their U.S. counterparts. As Bird and Gendron (1998, 2001) show, Canada is already in this fortunate position. Even without a good national VAT, various systems may be conceived to make destination-based sales taxes workable. Canada does not have to explore such refinements, nor does it have to worry too much as yet about the problems driving the sales tax discussion in the U.S., largely because not only is there already a well functioning national VAT (the GST), but there are provincial VATs in provinces, as well.

 

 

 

Thus, one way to deal with problems may be to reduce the importance presently attached to the characterization of income in determining its tax burden. Under present conditions, distinguishing a royalty from a service fee from interest from dividends from a management fee is often an exercise in futility, with the best lawyer and accounting firm winning. Nonetheless, considerable attention has been paid, notably in the OECD working groups. The importance of this distinction is that profits are, under existing rules, primarily subject to tax in the country of source, while royalties are taxed in the country of residence, although subject to source withholding. Although some degree of agreement has been reached in principle on some of these matters at the OECD, experience demonstrates that it can be a very long way from principle to practice in international tax matters of how to source income from e-commerce. Some tax authorities have attempted to reformulate source rules to capture cyber income (Li 1999). The new OECD commentary, says that servers constitute a permanent establishment "in some circumstances", but websites do not. (Li 2000) Revenue may not be the main issue for economists, who focus more on the impact of taxes regardless of who they are paid to, but it certainly matters to policymakers that would gain from extending residence concepts to encompass e-commerce income, favor extensions of the concept.

 

 

 

As Doernberg et al. (2001, 388) put it:

E-commerce can be intangible, multi-jurisdictional and easily  located in tax havens. It poses great challenges to tax authorities. Effective administration relies on the tax authorities' power and means to obtain information in order to assess a taxpayer's tax liability by identifying taxpayers, identifying and verifying transactions, and establishing a link between taxpayer and the transactions. E-commerce has the potential to make it difficult or impossible for tax authorities to obtain information or to enforce tax collection. Taxpayers may disappear in cyberspace, reliable records and books may be difficult to obtain and taxing points and audit trails may become obscure. Perhaps, the real danger of e-commerce's effect on taxation may lay not so much in the erosion of the tax base as in the erosion of privacy as governments take defensive action (Cockfield 2002). The creation of an international fiscal leviathan to swallow up the world's tax base and divide it among participating countries carries with it the risk of authoritarian misuse, as do lesser moves in the same direction to harmonize and unify tax systems across jurisdictional boundaries.

 

 

 

 

 

 

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