World Trade Organization Revenue Implications of E-Commerce for Development Geneva, Switzerland 22 April 2002 Electronic Commerce and the Challenge for Tax Administration Walter Hellerstein Francis Shackelford Professor of Taxation University of Georgia Law School

Key Attributes of E-Commerce with Tax Implications Ability to Establish Public and Private Global Communications Systems Disintermediation Development of Encrypted Information Increased Integration of Business Functions Greater Flexibility in Business Organization Fragmentation of Economic Activity

Technical Features of Internet with Tax Implications Lack of Central Control Lack of Central Registration Difficulty of Tracing Transactions Weak Correspondence Between Domain Name (Internet Address) and Reality

Dangers E-Commerce Poses for Territorial Tax Regimes Magnitude of Increase in Cross-Border Transactions Digitization of Information –difficulty of identifying source, origin, and destination of transactions Tax Administration Issues –audit trails –verification of parties to transactions

Opportunities E-Commerce Creates for Tax Administration Streamlining of Tax Administration –replacing paper with electronic data interchange (EDI) –electronic filing of tax returns –automation of tax collection process OECD Working Party 9 Subgroup on E-Commerce Streamlined Sales Tax Project (US)

Overview of Concerns Direct Taxes –Jurisdictional Issues PE definition as applied to electronic commerce –Characterization/Sourcing Issues –Transfer Pricing Issues

Direct Tax Issues Jurisdiction to Tax –Residence-based taxation –Source-based taxation income effectively connected with trade or business within the United States permanent establishment –OECD Working Partys proposed changes to treaty commentary

Direct Taxes Characterization and Sourcing Issues –Treaty Issues –OECD Treaty Characterization TAG Ordering and downloading of digital products Website hosting Software maintenance and other customer support Data warehouse and retrieval

Direct Taxes Transfer Pricing Issues –use of intranets –fewer paper trails –identification of transactions with related parties –difficulty of valuing contributions of related parties

Overview of Concerns Indirect Taxes (VAT, Retail Sales Tax) –Where consumption of electronic supplies occurs –Administrative collection concerns with cross- border digital transactions –Collection by remote sellers (US)

KEY ISSUES UNDER VAT/RST B2B TANGIBLEB2C TANGIBLE B2B DIGITALB2C DIGITAL

Indirect Versus Direct Tax Issues Jacques Sasseville (OECD): –Consumption tax issues are urgent, but not fundamental –Income tax issues are fundamental, but not urgent

Conclusion Extraordinary Problems and Opportunities –Possibilities versus probabilities Stay Tuned