Taxation & eCommerce

Taxation & eCommerce Chapter 6 Forder & Quirk

Overview • Developments in the taxation of electronic commerce. • Analysis of the design principles that shape existing and new taxes on electronic transactions. • How Australia taxes and administers eCommerce • ATO response to eCommerce • International response to eCommerce

Initial Responses • eCommerce was too insignificant to have a major effect taxation • Initially Internet was left tax fee • Some wanted the Internet to be a tariff free zone • Concern that countries with normal tax regimes would lose tax revenue to tax havens

Initial Responses • Others argued to have a “bit tax.” • To remove all taxes from Internet transactions would heavily discriminate against non-electronic trading. • To impose a new tax on information also goes against the principles of taxation because it is highly discriminatory. • A bit tax would be almost impossible to implement using current technology.

Initial Responses • How taxpayers could use the Internet and just how widespread e-commerce could grow. • Australia was one of he first countries to look seriously at the impact of e-commerce on the tax system. • Australia released a report in 1997 then a second in December 1999. • Some people argue to have no taxes on e-commerce.

Initial Responses • Developed countries strongly favour not imposing any new taxes on e-commerce. • The USA passed the Internet Tax Freedom Act in 1998 that prohibits new taxes on the Internet. • The World Trade Organisation aims to make the Internet a tariff-free zone. • The existing tax rules need to change to cope with e-commerce.

Tax Design • Basic principles need to be complied with when introducing new or changing existing taxes. • Members of the OECD agreed to try to base any changes to their taxation of e-commerce on international cooperation and agreement. • The OECD agreed that five traditional principles should apply to any tax changes.

Tax Design • These principles are: • Neutrality • Efficiency • Certainty and Simplicity • Effectiveness and Fairness • Flexibility. • Principles of the ATO: • Neutrality • The minimisation of compliance and administration costs • Privacy.

The Australian Tax Environment • The Australian taxes that e-commerce is most likely to affect are: • Income tax • Pay-as-you-go (PAYG) tax • GST • Withholding taxes. • Tax problems arising from e-commerce: • Effectiveness of the GST.

GST • Payable at point of each sale in the supply chain • Vendor collects GST and sends it to ATO • GST not payable on sales that occur outside Australia • Vendor can claim credit for GST on previous sales in supply chain (input tax credit) • Some items are GST free e.g. fresh food, medicine etc. • Input Tax Credits can be claimed by Vendor on a GST free sale (i.e. Vendor gets a refund) • Some sales are Input Taxed Sales e.g. bank account fees, interest, superannuation. life insurance • Input Tax Credits cannot be claimed by Vendor on an Input Taxed Sale

GST on a Domestic Product

GST on an Import by a Retailer

GST on an Import by a Consumer

Income Tax Income $60,000 Less expenditure to earn income $40,000 $20,000 Less tax free threshold $ 6,000 TAXABLE INCOME $14,000 Multiplied by marginal rate (17 cents) $ 2,380 Less rebates $ 1,000 TAX PAYABLE $ 1,380 Less tax paid (PAYG) $ 1,000 TAX DUE \ (REFUND) $ 380

Withholding Tax • Income is taxed at highest marginal rate Income $60,000 Withholding rate (47 cents) $28,200 • Compare with normal tax: Taxable Income $20,000 Less tax free threshold $ 6,000 TAXABLE INCOME $14,000 Multiplied by marginal rate (17 cents) $ 1,380

Tax Rates 2002 – 2003

Tax Challenges for eCommerce • One transaction may consist of many separate transactions • Each separate transaction may be subject to different countries tax regimes • Each separate transaction may be separately taxed • Different taxes can apply to each separate transactions • See hypotheticals on pp 156, 157 & 163 of Forder & Quirk

ATO Strategies • Revenue impacts • Monitoring • Service • Integration • Improved information • Interactive self help • Software

ATO Strategies (cont.) • Jurisdiction • International agreements • Administration • Automation • Detection • Move to Consumption Tax (GST) • International cooperation • Research & Development

ATO Use of Internet • The ATO foresees the that e-commerce is not expected to have a significant impact on tax revenues for the next few years. • The ATO does not want to be caught out unprepared so has developed a comprehensive action plan. • ATO is taking advantage of electronic technologies. • Making paying tax easier • Detecting tax avoidance

Paying Tax Made Easier • ATO sees opportunities for improving its services. • Implementing Tax Reform: • Education • Documentation online • Facilitating payment • Promoting electronic record keeping • Improving ATO efficiency

Improving Taxpayer Service: • The Internet is the major medium being used by the ATO to improve taxpayer service. • Over 75% of income tax returns are lodged electronically. • Using the Internet to help the taxpayer. • Businesses can register and get their Australian Business Number instantly. • Improving ATO efficiency and best practice: • Improvements in efficiency will cut costs for the ATO and for taxpayers.

E-Grant • The Diesel and Alternative Fuels Grants Scheme. • Transport operators currently have to fill in about 70 to 80 pages of forms each year to get their money. • E-Grant is set to end all the paperwork. • Truckies will soon be able to receive their payment directly from the ATO.

Listening to the Community • Make the tax experience better. • Listening to what people need. • The aim is not to change the law. • The aim is to change the way of their business by complying with the law.

Detecting Tax Avoidance • Data collection from taxpayers • ABN • TFN • Data exchange • Government Departments • AUSTRAC • Other governments • Data modelling • Detect transactions which are likely to be associated with tax evasion

The International Tax Environment • Consumption Taxes • Is tax collected in vendor or buyers jurisdiction? • GST will apply if supply connected to Australia • Importation is taxable but GST not collected if: • Arrive by post and value less than $1,000; or • Value less than $250. • If imported by a consumer, the consumer pays the GST • How do you detect intangible supplies? • Negligible impact detected so far

The International Tax Environment • Income Tax: • Based on residence of taxpayer and\or source of income • How to determine when an electronic presence is enough to establish a taxable base in a country? • OECD uses the concept of permanent rental\ownership of a server • Uncertainty is created in the application of traditional source rules, income characterisation, apportionment, the application of traditional residence rules, transfer pricing and avoidance.

The International Tax Environment • Income Tax (cont.) • Double taxation agreements avoid a taxpayer paying income tax twice • One country is given primary taxing rights; or • Taxpayer can rebate tax paid in one country against tax payable in other country • Use of tax havens • Transfer pricing

The International Tax Environment • The OECD response to e-commerce: • Informal round table discussion between business and government. • The formation of technical advisory groups (TAG’s). • Areas the TAG’s deal with: • Technology • Professional data access • Consumption taxes • Business profits • Income characterisation.

The International Tax Environment • International Tax Administration: • There has been a focus on improving the administration of tax at the international level. • The Internet facilitates the automatic exchange of information in a standard format. • The Internet can overcome political, technical and language barriers.

The ATO’s International Involvement • Heavy involvement in International Tax forums especially the OECD. • Development of international guidelines. • International consideration of the impact of growth in e-commerce. • Guidelines for the exchange of data • Privacy and security concerns

Conclusion • Some tax avoidance is possible using eCommerce • No real difference to tax avoidance in traditional commerce • eCommerce improves tax authorities ability to prevent and detect avoidance • eCommerce reduces businesses cost of compliance with tax obligations

Taxation & eCommerce