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E-Commerce Back  
A broad consensus emerged at Government level at the Ottawa Conference that new tax measures were not required as a result of the growth of E-Commerce.
With speed appropriate to the Internet itself, more cautious feelings are now surfacing.

The Revenue Commissioners have published their ‚€úElectronic Commerce And The Irish Tax System‚€Ě Report. It is a massive almost 100 page document. One aspect on which the Revenue Commissioners are to be congratulated is Appendix E. This is two pages which in simple terms give the meaning of the principal buzz words you will come across in relation to the Internet. The explanations given are admirably clear. However that is not what the Revenue report is all about.

The Revenue report analyses the likely impact of e-commerce on each of the separate taxes in Ireland, from corporation tax through to customs duties. Even stamp duty is considered. It also seeks to identify how the State should react where a loss of revenue seems in prospect.

The tax implications of e-commerce are not new. E-commerce is merely the 1990‚€ôs version of a very old concept called mail order. Mail order commerce has been around since at least the 19th Century. It involves inspecting a catalogue of goods in the home or office rather than in the supplier‚€ôs premises, the placing of an order remotely (whether it be over the Internet or by letter), and direct delivery of the goods ordered. The Internet raises two new aspects over traditional mail order. It enables some goods and services to be actually delivered directly over the Internet, rather than by the post or a deliveryman. Typically this will involve music, films, books, or software. Secondly, it can permit payment to be made directly over the Internet, without having to send off a cheque, bank order, or cash in physical form. Although these two aspects are specific to the Internet and new, the basic implications of e-commerce are similar to mail order.

Mail order never presented a problem for tax authorities. The reason tax authorities are now getting a bit worried about e-commerce is not necessarily something new in principle, but rather the fact that e-commerce is expected to be a major method of doing business, whereas mail order has not made significant impacts on traditional forms of shopping. The Revenue concerns are driven by the scale of the potential problem, more than by any new features that the Internet has brought to bear on the matter. The report notes that the EU Commission estimates e-commerce will be worth $160bn by the year 2000. Eight per cent of US music sales are expected to be made over the Internet by the year 2002. This is a range of penetration never achieved by mail order.

The Ottawa conference, organised by the OECD, concluded that no new tax measures were required to cope with the Internet. Traditional rules could be applied. It was conscious of the need not to stifle e-commerce by over-reaction at the outset. There is a note of caution in the Revenue report that suggests that thinking is moving on both in Ireland and in the EU, on the need for change in tax systems. The ‚€úhands off the Internet‚€Ě approach of the Ottawa conference may have been largely driven by official American attitudes. But within the United States individual States and Municipalities (which have their own tax raising powers) are becoming concerned that e-commerce will enable people doing business to avoid State and Municipal taxes, or ensure that they pay those taxes only in the jurisdiction charging the lowest rate. This fear at local level in the USA is already beginning to feed through into thinking in Washington. No specific proposals to amend tax laws have yet emerged but the Revenue Authorities are becoming more cautious than they were several months ago.

The Irish Revenue Commissioners report rightly concludes that e-commerce will lead to an upsurge in delivery of goods by post or courier firm. This poses the Revenue with the challenge of collecting customs duty and excise duty on thousands of small parcels, rather than from the equivalent of a single container load. The administrative cost of tax collection when containers are replaced by numerous small parcels, presents a practical problem. The Revenue have not spelt out their favourite solution, but by reading between their lines, one may suspect that it will be to levy a flat rate of duty on the value of all small parcels entering the EU, and leave it to the carrier to collect the duty. Customs duties however are essentially an EU matter and not an Irish domestic matter. Customs duties are not relevant to goods delivered within the EU, as opposed to imports into the EU.

The Revenue report states ‚€úVAT is the one tax where action will be required to protect the tax yield.‚€Ě The worry here is that digitised products - music, films, books, software principally - will be supplied over the Internet from outside the EU to retail customers within the EU, thus entirely avoiding the VAT net. The Revenue approach is to leave this problem with the EU to sort out. It is an EU-wide problem and VAT is a harmonised tax, so any corrective action must be taken centrally. The Revenue note the threat is not only in relation to supplies from outside the EU. Even where the supply is made between a supplier in one EU State and a customer in another, the EU supplier will have a choice of picking the territory with the lowest applicable VAT rate. This may increase pressure towards harmonising tax rates. That in turn raises the issue of why VAT rates have to be harmonised due to tax competition, while corporation tax rates don‚€ôt.

Ominously, in relation to corporation tax, the Revenue warn that they will consider what appropriate steps should be taken, should Irish businesses migrate to low tax jurisdictions, and supply their products back into the EU from a tax haven. One can see ominous hints here that controlled foreign company (CFC) legislation is contemplated. This is legislation that can tax in Ireland profits of a company resident outside of Ireland, where the company is controlled by Irish persons. Ireland does not have such legislation. The effectiveness of Ireland‚€ôs low corporate tax rates in attracting inward investment has been reduced by the existence of such legislation in other countries, so it is not something we would normally view with enthusiasm.

There is also some hint that the rules by which a company is regarded as resident in Ireland may be reviewed. The spectre of a board meeting in cyberspace has come to haunt the Revenue. Where one cannot pinpoint the location of board meetings, it becomes more difficult to determine corporate residence. But the possibility that board meetings could be held by persons each located in several different countries at the time of the meeting, has existed for as long as the telephone. The fears here are probably unfounded.

The Revenue have indicated that they will remove the present requirement that people wishing to hold records in electronic form need to get permission from the Revenue. They recognise that it is impractical (as well as very few people being aware of it). Intriguingly, the Revenue foresee their ability to access taxpayer records over the Internet. They say that where records are held overseas at present, the Revenue auditors go overseas to inspect the records. This may no longer be necessary if the records are on the web.

The Revenue report is a well researched, thoughtful, high quality document. Its analysis of e-commerce, and of the Internet in a wider sense, would be valuable to persons not at all concerned with the taxation implications. In fact, for anyone dealing with the Internet and e-commerce, it is a ‚€úmust read‚€Ě.

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