Taxation

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Taxation eCommerce

• Chapter 6 Forder Quirk

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• 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

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• 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

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• 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.

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• 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 1999.
• Some people argue to have no taxes on e-commerce.

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• 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.

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• 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.

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• Tax Design
• These principles are
• Neutrality
• Efficiency
• Certainty and Simplicity
• Effectiveness and Fairness
• Flexibility.
• Principles of the ATO
• Neutrality
• The minimisation of compliance and administration
  costs
• Privacy.

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• 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.

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• 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

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• GST on a Domestic Product

Sale by Price GST on Sale GST on inputs GST Paid
Raw Material Suppliers 50 5 5
Manufacturer 100 10 5 5
Wholesaler 200 20 10 10
Retailer 300 30 20 10
Total 30
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• GST on an Import by a Retailer

Sale by Price GST on Sale GST on inputs GST Paid
Overseas Manufacturer 100
Overseas Wholesaler 200
Retailer 300 30 Nil 30
Total 30
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• GST on an Import by a Consumer

Sale by Price GST on Import GST on inputs GST Paid
Overseas Manufacturer 100
Overseas Wholesaler 200
Overseas Retailer 300
Consumer 30 30
Total 30
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• 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

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• 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

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• Tax Rates 2002 2003

Taxable Income Tax on this income
0 - 6,000 Nil
6,001 - 20,000 17c 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
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• 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

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• ATO Strategies
• Revenue impacts
• Monitoring
• Service
• Integration
• Improved information
• Interactive self help
• Software

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• ATO Strategies (cont.)
• Jurisdiction
• International agreements
• Administration
• Automation
• Detection
• Move to Consumption Tax (GST)
• International cooperation
• Research Development

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• 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

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• 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

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• 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.

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• 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.

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• 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.

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• 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

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• 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

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• 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.

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• 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

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• The International Tax Environment
• The OECD response to e-commerce
• Informal round table discussion between business
  and government.
• The formation of technical advisory groups
  (TAGs).
• Areas the TAGs deal with
• Technology
• Professional data access
• Consumption taxes
• Business profits
• Income characterisation.

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• 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.

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• The ATOs 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

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• 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