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I'd like to thank both Michael Hardy of the OECD and Bernhard Schopper of Arthur Andersen who presented the question of "Internet and Taxation" at a recent monthly meeting the Geneva Chapter of the Internet Society and who inspired me to write about the subject. Thanks also to Stephane Koch who organised the meeting and who took us to the Club 58 afterwards so we could continue talking till late in the night. The OECD have published a very interesting Discussion Paper entitled "Electronic Commerce: A Discussion Paper on Taxation Issues" which I refer to in this article.

Taxation and the Internet

We have a very ambiguous relationship to taxation. Who readily pays taxes? Yet, despite hesitations we might have about the quality or the aims of the services provided with tax money, who would honestly argue against the principle that the State collect taxes to provide certain services to all citizens? If taxation came into being to raise armies and is still partly used to destructive ends, it can and is also used amongst other things for education, health and solidarity as well as to partly redistribute wealth.

A belief in the hopes of the Information Society

In the OECD discussion paper on taxation and electronic commerce, mention is made of the belief that electronic commerce "will provide opportunities to improve the global quality of life and economic well being and have the potential to spur growth and employment in industrialised, emerging and developing countries". It adds that the "revenue authorities have a role to play in ensuring that this potential is realised". It is to be expected that tax authorities share the widely held belief of industry captains and politicians that the Information Society will bring prosperity and well being to all. It is not so easy to tax a struggling economy and the perspective of the Information Society breeds hope. Note however the cautious wording of the declaration which talks of the "potential to spur growth". Clearly the wished-for general increase in well being will depend on the capacity to satisfactorily redistribute the wealth created by electronic commerce. And that is a "potential" role of taxation.

Finding the right balance

There is a natural tension between commercial interests as makers of profit and the State as a collector of taxes. Yet in the complex world which is ours, neither can function properly without the other. The OECD discussion paper tacitly recognises the inter-relatedness between traders and tax authorities as it underlines the need to find the right balance between having "electronic commerce achieve its proper place in the global market place" and "the obligation to operate a fair and predictable taxation system that provides the revenue required to meet the legitimate expectations of citizens for publicly provided services".

Rupture of evolution

One question crops up over and over again as society confronts the so-called "Information Society". Does the advent of the wide-scale use of Information and Communication Technologies constitute a significant rupture with respect to prior ways of working and thinking and as such requires a radically new approach? Or is it simply part of a continuous evolution that can best be managed by adapting existing ways of doing things?

In the Geneva meeting, Bernard Schopper of Arthur Andersen put forward a list of what he considered substantial changes brought about by the development of electronic commerce. In my own words here is that list:

  • the emancipation of commercial exchanges from geographical considerations;
  • the decrease in the importance of national boundaries;
  • the "elimination" of time as exchange becomes quasi-instantaneous;
  • the existence of an increasing number of parallel financial and payment systems;
  • the blurring of the distinctions between goods, services and intangible goods.

Time and space

With the exception of the penultimate item, to what extent are these relatively commonly held perceptions amongst the online community really so? Take time and geography, for example. In the global context, differences of time zones make themselves painfully felt to those who have to work with colleagues around the world. As for time, its apparent scarcity is probably one of the major plagues of modern life.

But to return to the question of taxation, the OECD paper opts for the position that electronic commerce can be dealt with, as far as taxation is concerned, by using existing laws and practices. It does however leave the door open to the possibility that new methods may prove necessary. As Michael Hardy of the OECD pointed out, traders (and no doubt tax authorities as well) feel more at ease keeping the system they are used to. They know how it works and can predict the financial consequences of that system on their business.

It is interesting to note that the question of the pertinence of geographical division in a global context is partly answered in practice where the continuation of a model based on national sovereignty in fiscal matters is only possible if there is global harmonisation. Effectively, there are other perspectives than opposing the global and the local.

Let's leave the not-so-final word on evolution to Edward de Bono. In one of his books about lateral thinking he gave an eloquent example how continuous evolution of a system would lead to its total inappropriateness. Sooner or later, the need for a rupture in the way things are done makes itself felt if the system is to continue being adequate in continuously changing circumstances.

The notion of neutrality

As a symbol of their adhesion to the idea that online commerce is not radically different from any other form of commerce, but also, and above all, on the basis of their declared intention that tax authorities should not bias market choices by their action, the OECD discussion paper puts considerable importance on the idea of "neutrality". That is to say that the choice of electronic commerce or another form of commerce in trading should make no difference as far as taxation is concerned.

The information exchanged

For commercial transactions to take place, a certain exchange of information is required. Tax authorities can make use of the information exchanged to determine who, what and how much to tax. Amongst the information required, there is:

  • The type of transaction (the form and rate of taxation depends on the type of transaction)
  • The date (when should the tax be paid?)
  • The value of the transaction (how much should they be taxed?)
  • The identities of the parties involved (who should be taxed?)
  • The location of those parties (who should tax them and who should collect the tax?)

The problem of identification

One of the major problems facing tax authorities in the context of electronic commerce is that of the identity of the parties involved in commercial transactions. In consumer sales over the Internet, the parties may not be known to each other, lest it be via the company handling credit card transactions. In the use of digital money, the ability to trace transactions and identify those involved may be even more difficult. Knowing who you are dealing with is a right if not a necessity of the buyer. It is also necessary for fiscal accountability.

The Internet may ofer a solution to the problem of identifying parties involved in commercial transactions, i.e. when there is an exchange of money. Michael Hardy in his presentation in Geneva talked of the difficulty of using the domain name or the IP number for identification purposes. In the current state of the DNS system, the whois registration of domain name holders is not a reliable guarantee of identity.

The Uniform Business Locator

Drawing a parallel with urls (Uniform Resource Locators), one possibility would be to create a "Uniform Business Locator^" (UBL) that uniquely identifies a business or trader and attributes that entity to a specific country. There would be some difficulties with attributing a company to a given jurisdiction. It remains to be seen if the definition of the domicile of a company is satisfactorily covered by ccurrent tax legislation and how one would deal with multiple domiciles. One might well need a system that catered for multiple mappings of a company to varying jurisdictions.

Unlike domain names, UBLs would not need to be memorised as they are used esentially as handles to call up more detailed and readily understandable information from the database. As a result they could be radomly generated, unique alphanumeric strings except for the part designed to identify the country. The latter might easily be done using the current two letter ISO country codes. Subsidiaries or branches within a company could possibly be treated like subdomains of the UBL of the parent company.

For a moderate fee, registration with an online commercial registry could be done via the web. Companies or traders would be required to provide the necessary information such as the owner's name, his or her physical address, tax domicile, telehone number, fax number, e-mail address, web url and domain name. A UBL would then be attributed and would be required in all business transactions including credit card payments and bank transfers as well as for all dealings with tax authorities.

All UBL's would be contained in a planet-wide distributed database a bit like for the domain name system. Clicking on a UBL on a web page would call up a small window containing the entry for that company. The outstanding question with such a system would be that of the authentication of the company or trader concerned and the verification that the UBL provided by a web page or the trader's electronic caddy was really that of the trader in question. A part guarantee in the latter case could be provided by binding payments to the UBL - putting sombody else's UBL would lead to the money going to that other company.

Alan McCluskey, Vienna.

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Created: November 29th, 1998 - Last up-dated: November 29th, 1998