. e-commerce - payment systems & tax issues Laura Edgar Institute for Computers and Communications Law Centre for Commercial Law Studies Queen Mary, University of London

Outline Methods of payment –credit card –electronic money Regulatory framework –E-Money Directive –Consumer Protection regulations Tax issues –OECD Model Tax Treaty –EU VAT Directive

Online Payments Requirements of online payment systems : secure distance transfers immediate transfer of value low cost payment method peer to peer payments

Methods of Payment Credit cards/Debit cards E-money –Third party payment systems – e.g. Paypal –Mobile phone payments

Credit cards international acceptance consumer protection security concerns -authentication, integrity security measures - encryption, digital signatures - SSL, SET cost

Electronic Money Is it necessary? Peer to peer payments Low value transactions Anonymity?

E-money - Why regulate? to create a level playing field between issuers to ensure the stability and reliability of issuers consumer confidence to prevent fraud

What is electronic money? The EU EMI Directive 2000/46 defines electronic money as monetary value which is: (i) stored on an electronic device; (ii) issued on receipt of funds of an amount not less in value than the monetary value issued: (iii) accepted as means of payment by undertakings other than the issuer.

Provisions of Directive initial capital requirement on-going funds requirement limitation of investments restrictions on other business activities mutual recognition redeemability waiver verification by competent authority

Application to mobile phones Application to mobile phone operators – pre-paid value – purchase of goods or services and not just airtime Restrictions –other business activities –investment of float –redeemability requirement Use of waiver? EU Consultation

Loss or misuse of payment instrument Possible problems loss of payment instrument interception of payment message containing payment data misuse of payment information by retailer or retailer’s employee insecure storage of payment information technological system failure

Who is liable? Customer, retailer or payment issuer? –governed by terms of contract –consumer protection regulations Principle under English law - requires customer authorisation for valid payment –Orr v Union Bank of Scotland (1854) Amending principle through express terms of contract –Unfair Terms in Consumer Contracts Directive –restricts use of unfair terms

Credit cards Who is liable if a credit card is misused? UK Consumer Credit Act 1974, s84 no liability from misuse after notification prior to notification liability limited to £50 This does not apply if the customer has acted with extreme negligence or fraudulently

Electronic Money UK Banking Code 2005 You should treat your electronic purse like cash in a wallet. If you lose your electronic purse or it is stolen, you will lose any money in it in just the same way as if you lost your wallet. However unless we have shown that you have acted fraudulently or without reasonable care your liability for the misuse of your purse will be as follows: If money is transferred to your electronic purse by unauthorised withdrawals from your account before you tell us of its loss, theft or misuse, your loss will be limited to £50 You will not lose anything if money is transferred from your account to your electronic purse after you have told us it has been lost or stolen or that someone else knows your PIN.

Liability in distance sales Distance Selling Directive 97/7/EC and Distance Marketing of Consumer Financial Services 2002/65/EC no liability for fraudulent use in connection with distance sales Commission Recommendation concerning transactions by electronic payment 30/7/97

Credit cards - further protection Connected Lender Liability UK Consumer Credit Act 1974 (as amended), s75 where payment made by credit card the issuer of the credit card is liable in respect of any claim for misrepresentation or breach of contract jointly and severally with the supplier limitations what if an overseas supplier is involved? Office of Fair Trading v Lloyds TSB Bank plc and others [2006] EWCA Civ 268

Conclusions Limited uptake of electronic money so far -Is the regulatory framework too onerous? -Stronger consumer protection regulations for credit cards Mobile phones -prepaid value -How will the Directive be applied?

Why does e-commerce pose a problem for tax authorities? digitised products –classification –increased supply of services to consumers identifying and locating parties –where is the customer? lack of audit trails/records –has a transaction taken place? enforcement & collection

Example ‘I-Music’ is a US incorporated company whose directors live in the UK, Italy and Japan. Board meetings are held by web-conference. Music tracks can be digitally downloaded through I-Music’s website to customers around the world. The company’s website is located on a server in France. There is also a mirror website operated by an ISP in Germany. Customers can pay for the music with digital money and download it directly from the website.

Residence ‘I-Music’ is a US incorporated company whose directors live in the UK, Italy and Japan. Board meetings are held by web-conference. Place of incorporation Place of central management and control OECD Model Tax Convention Article 4 –Tie Breaker Rule A4(3) ‘place of effective management’ Alternatives

Taxable Presence What presence is required to create a tax base in a country? No double taxation treaty –Liable to tax on profits from trade carried on ‘within UK’ –Where are the contracts made? –What functions are carried out through equipment in UK? –Is there an agent? Double taxation treaty –Article 5 MTC - permanent establishment

Permanent Establishment Article 5 of OECD Model Tax Convention “a fixed place of business through which the business of an enterprise is wholly or partly carried on” Excludes “ the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise ” and “preparatory or auxiliary activities”

Permanent Establishment Is there a place of business? –Website, server? –Is there a tangible object? Is it fixed? Is the business carried on wholly or partly through the fixed place of business? –Is business carried on through the server? –Is the activity merely auxiliary or preparatory?

Clarification of Article 5 Permanent establishment –only tangible property –server must be at disposal - owned, rented –location at certain place for sufficient period of time –no requirement for personnel –functions form an essential and integral part of business activity of enterprise –ISPs not usually agents

VAT Until July 2003 non-European retailers selling digitised products or providing services to customers in Europe charged no VAT. However European retailers were generally required to add VAT to the cost of the digitised goods or services when selling to consumers both within and outside of Europe.

Problems with this approach Imbalance between EU and non-EU suppliers of digitised goods and services EU suppliers perceived to be at a competitive disadvantage

Directive 2002/38/EC on application of VAT to services delivered by electronic means –electronically supplied services –services for consumption in EU subject to VAT –services for consumption outside EU no VAT –single point of registration for non-EU businesses –collect VAT at rate in consumer’s member state –clearing house –only b2c

Application and Enforcement Difficulty in determining location and status of the customer –credit card billing address –IP address and self declaration –checking VAT registration numbers Enforceability –practical difficulties –costs –what if companies choose not to comply?

OECD digitised goods should be treated as services taxation at place of consumption Short term –use of reverse charge mechanism –registration by non-resident companies Medium to long term –technology based solutions –trusted third parties –digital certificates

The Future? International consensus on place of consumption –OECD developments Developing standards and technology –location and status of customer –VAT database Ease compliance and reduce costs for taxpayers –single point of registration in the EU –e-invoices –overcome practical obstacles, e-filing and tax representatives