MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE Taxation & eCommerce Chapter 6 Forder & Quirk

MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE 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

MANAGEMENT & LEGAL IMPLICATIONS OF 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

MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE 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.

MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE 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  Some people argue to have no taxes on e- commerce.

MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE 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.

MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE 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.

MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE Tax Design  These principles are: 1.Neutrality 2.Efficiency 3.Certainty and Simplicity 4.Effectiveness and Fairness 5.Flexibility.  Principles of the ATO: 1.Neutrality 2.The minimisation of compliance and administration costs 3.Privacy.

MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE 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.

MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE 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

MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE GST on a Domestic Product Sale byPriceGST on Sale GST on inputs GST Paid Raw Material Suppliers $50$5 Manufacturer$100$10$5 Wholesaler$200$20$10 Retailer$300$30$20$10 Total$30

MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE GST on an Import by a Retailer Sale byPriceGST on Sale GST on inputs GST Paid Overseas Manufacturer $100 Overseas Wholesaler $200 Retailer$300$30Nil$30 Total$30

MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE GST on an Import by a Consumer Sale byPriceGST on Import GST on inputs GST Paid Overseas Manufacturer $100 Overseas Wholesaler $200 Overseas Retailer $300 Consumer$30 Total$30

MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE 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

MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE 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

MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE Tax Rates 2002 – 2003 Taxable IncomeTax on this income $0 - $6,000Nil $6,001 - $20,00017c for each $1 over $6,000 $20,001 - $50,000$2,380 plus 30c for each $1 over $20,000 $50,001 - $60,000$11,380 plus 42c for each $1 over $50,000 Over $60,000$15,580 plus 47c for each $1 over $60,000

MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE 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

MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE ATO Strategies  Revenue impacts  Monitoring  Service  Integration  Improved information  Interactive self help  Software

MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE ATO Strategies (cont.)  Jurisdiction  International agreements  Administration  Automation  Detection  Move to Consumption Tax (GST)  International cooperation  Research & Development

MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE 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

MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE 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

MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE  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.

MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE 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.

MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE 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.

MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE 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

MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE 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

MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE 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.

MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE 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

MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE 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.

MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE 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.

MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE 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

MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE 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