1. ITU Regional Seminar on E-commerce Bucharest, Romania 14-17 May 2002 Fiscal Implications of Electronic Commerce Dr. Susanne Teltscher United Nations Conference on Trade and Development www.unctad.org/ecommerce susan.teltscher@unctad.org

2. Presentation Outline Government revenue sources Taxation and e-commerce Multilateral trade rules (WTO moratorium) Classification of digitized products Tariff revenues from digitized products Other fiscal implications Conclusions

3. Government revenue shares

4. Cybertaxation Increase in cross-border trade Digitization of information Tax administration issues Two main areas: Direct taxes (income tax) Indirect taxes (consumption/VAT/sales tax)

5. Income tax Permanent establishment in cyber space? Web site Web server Abolish concept? Characterization: business profits or royalties?

6. Consumption tax Tax jurisdiction: OECD - Ottawa framework conditions (place of consumption) EU: new rules for B2C ? (services are tax exempted) Identification: who verifies customer’s location?

7. Multilateral trade rules WTO: Moratorium on customs duties on electronic transmissions since 1998 E-commerce work programme: need to define electronic “products” - as goods or services (different rules apply)

8. Customs moratorium on electronic transmissions Ministers “also declare that Members will continue their current practice of not imposing customs duties on electronic transmissions”. (Geneva Ministerial Declaration, 1998)

9. Classification of electronic transmissions Traditional goods or services: easy Problem: digitized products books, music, software, film, video games Goods or services? Implications: different rules apply GATT (goods) GATS (services)

10. Classification of digitized products Classification as goods (GATT): MFN National treatment No quotas Customs duties

11. Classification of digitized products Classification as services (GATS): Commitments in national schedules only Quantitative restrictions possible Tariff-free - customs duties on services? Wider scope (modes of supply)

12. Classification of digitized products Current discussions in WTO: GATT-level treatment Same market access and national treatment as goods if treated as a service No agreement as yet (tendency towards services) Potential customs revenue losses on digitized products

13. Digitized products - definition Can be delivered physically or digitally Can be identified by HS code Can be transformed into digital format Physical delivery: via carrier medium Digital delivery: via networks Books, software, music, film, video games

14. World Trade in DP, 1999 World Developed c. Developing c. Total imports, US$ bill. 48.2 40.5 7.7 Total exports, US$ bill. 46.4 41.0 7.7 DP imports, % share 0.9 1.0 0.4 DP exports, % share 0.9 1.1 0.4 % share world DP imports 100 81.5 18.5 % share world DP exports 100 88.5 11.5

15. Annual growth rates of DP imports

16. Annual growth rates of DP exports

17. DP exports by commodity group

18. Applied MFN rates on DP imports, 1999

19. Which countries levy the highest tariff rates on DP? All countries: Burkina Faso, Morocco, Pakistan, India, Nigeria, Zimbabwe Developed c. and transition economies: Latvia, Israel, Russia, Romania, Hungary, Czech Republic, Iceland

20. DP Tariff Revenues, 1999

21. What other duties are levied on DP imports? Customs surcharges fees, uplifts, statistical taxes, port taxes add 7 % Internal taxes VAT, sales taxes, consumption taxes add 15 %

22. DP Import Revenues, 1999

23. Shares of DP Import Revenues in Total Gov. Revenue (%)

24. Evidence of substitution Potential vs. actual impact: Is digital delivery already replacing physical delivery? Examples and trends (Forrester): digital CD sales will overtake physical sales by 2004 publishing industry: 17.5% of revenues will result from digital delivery by 2005 22% of online sales of DP will be delivered digitally in 2004 (software 40%, music 25%, video games 14%, books 14%, film 1.5%)

25. Conclusions - Challenges Potential tariff revenue losses are higher in developing countries (but are small in relative terms) Potential tax revenue losses (VAT) are significant in developed countries Developing countries will be net e-commerce importers (in the short-medium run) Enforcement of tax and tariff payments related to digital delivery

26. Conclusions - Opportunities Cheaper imports will benefit consumers and businesses E-commerce will spur cross-border trade (highest growth rates in developing countries) Developing countries and economies in transition are diversifying into exports of ICT- related products and services and gaining market share

27. ITU Regional Seminar on E-commerce Bucharest, Romania 14-17 May 2002 Thank you www.unctad.org/ecommerce susan.teltscher@unctad.org