The challenges that e-trade poses to tax systems world-wide are real. Numerous governments and fiscal organizations are looking at how to address these challenges. In addition to the need for consensus among governments, co-operation between the public and private sectors will be essential. Export strategy-makers must be aware of this trade and taxation relationship and the options being reviewed, because any decisions taken will have an impact on the development of e-trade activity within the business community and ultimately on export performance and competitiveness.

The development of e-commerce is changing the way in which international business and commerce is conducted. Understandably therefore, a fundamental review of tax policies and laws is required as these have their origins in traditional, offline commerce.

E-commerce is, in fact, challenging the adequacy and fundamental validity of principles of international taxation such as physical presence, place of establishment and valuation.

The taxation and e-commerce relationship is both complex and controversial. On the one hand, the "digital economy" has the potential for significant growth and the hope of a significant contribution to fiscal revenues. On the other hand, there is apprehension that a shift to digital commerce may shrink the tax base.

Several organizations such as the OECD and developed countries such as the United States are warning that attempts to levy taxes and duties on Internet transactions will cripple the growth of e-commerce. Today, therefore, tax administrations throughout the world face the formidable task of protecting their revenue base without hindering either the development of new technologies or the involvement of the business community in the evolving and growing e-market place.

For the national export strategy-maker, the creation and maintenance of a legal and tax environment that is conducive to the growth and development of e-commerce technologies and e-trade competencies within the private sector is critical. Ensuring that e-trade competes with traditional commerce on a level playing field is, therefore, a key objective.

There are three aspects from which e-trade taxation issues should be analyzed by the national export strategy-making team:

• Does e-trade have an impact on existing tax laws (including those for exporters)?
• Are new tax arrangements required to address e-trade?
• If so, how will they be implemented?

For existing tax laws, e-trade (and e-commerce in general) may not raise new or unique issues. The mode of doing business through electronic commerce does, however, create certain difficulties for national tax administrators. Take, for example, a developing country (case in point, Brazil and India) which has tax incentive schemes that are location-specific and designed to promote under-developed regions in the country. E-commerce raises the possibility of establishing business addresses (even Web sites) based in such locations without actually having to set up any major facilities or opportunities there. Exporters could do the same for example to access least-developed country export quotas or double taxation treaty benefits.

Transactions across borders create additional complexities. Taxation principles are intrinsically linked to jurisdiction. In the case of digital transactions, such as downloading of software or music from a Web site in another country, it is unclear where the jurisdiction of the transaction should be fixed. Even for transactions within the country, several other provisions of taxation are dependent on the location of the company or person, the status of the goods in question at the time of making the contract and the definition of the services that may have been involved in a transaction.

It is the role of the export strategy-maker to ensure that such issues are ultimately clarified satisfactorily within the taxation system, without prejudicing the development of e-trade and the export community’s capacity to engage in e-commerce.

For the developing country's export strategy-maker, it is also important to take a view on the present ‘standstill’ agreed to in WTO for non-levying of custom tariffs on digital transactions. Several developing countries are of the view that they would not like to permanently agree to a zero duty regime in this regard.

A guiding principle being propagated in the matter of fresh arrangements for taxation is that any legal obligation should not be restricted to electronic commerce but should apply equally to conventional commerce as well. In other words, that electronic commerce (including e-trade) should not be the target of new and discriminatory taxes and that the application of existing taxation on electronic commerce should be governed by the principles of tax neutrality and fairness. Similar income should be treated equally in terms of direct and indirect tax requirements, regardless whether this is earned through electronic means or through traditional channels of commerce.

The OECD has completed a large amount of work on this issue and, on the basis of consultation with the business sector, suggests that future tax policy on electronic commerce should:

• be consistent with the principles of international taxation
• be neutral with regard to other forms of commerce
• be consistent across tax jurisdictions
• avoid double taxation
• minimize compliance costs
• be transparent, predictable and with simple rules to follow.

OECD advocates that the application of existing taxation principles to electronically-based transactions should be built upon tools that the business sector already uses (for example, existing forms and valuation norms) or is asked to develop to meet its market needs. Only in this way can high tax compliance be sustained with the least burden and the fewest economic distortions.

The question of enforcement arises for both existing tax arrangements and possible new laws.

Essentially the enforcement problem arises when commerce has taken place purely in a digitized format, i.e. where all parts of the transaction have been completed ‘online’ in digital or computerized format and no goods have directly passed through a recognized customs or domestic tax point. Where e-trade operations have only been used to communicate and set up a transaction and the actual delivery is by regular means, the existing customs duty and tax regulations and procedures continue to apply and can be monitored.

For digital transactions, the issue for the authorities is how to monitor or even be aware that a transaction has taken place. One solution, proposed in April 1998 by an independent committee appointed by the European Commission, involves the now infamous "bit tax" (i.e. a tax on the "bit-size" of the data involved in a transfer). The basic problem with a ‘bit tax’ is that it is indiscriminate: it would tax not just online transactions but all digital communications including e-mail. Also the question of valuation would be difficult to determine. Though this proposal was quickly dismissed as being highly impractical and crippling for the growth of the Internet, some organizations¹ have in fact suggested utilization of the ‘bit tax’ concept or a similar means to tax e-commerce as a means for creating a global development fund.

The European Commission is planning to pass on to suppliers of digital products, such as music and videos, the responsibility for collecting the applicable VAT (based on the rate prevailing in the consumer’s country). In the United States, which does not have a federal sales tax, the idea has not found much favour and the present US administration rejects the idea of any new taxes on the Net. The US Treasury opposes any new taxes on Internet transactions and takes the position that existing tax rules should be applied to Internet business exactly as for other forms of commerce.

No matter what the final decision on taxing e-commerce, the basic problem of enforcement will remain. It is essentially dependant on the co-operation of the taxable party. Also, if taxation, and its strict enforcement, are limited to only some countries, businesses in these countries will simply move offshore and online transactions will take place in a state or country where there is no such tax. And since new businesses focusing on electronic products or the electronic provision of services can be easily moved, any threat of increasing tax liability will just have them resort to methods such as transfer pricing to avoid the location-specific liability.

So what other option is there for governments? If the changes result in significant tax loss, the unpleasant choice for governments would seem to be either shifting the existing tax base or finding ways to monitor and tax e-commerce.

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