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The internet - a tax free shopping mall
While tax-free purchasing powers may be attractive for on-line consumers, they
will cause headaches for the Revenue if legislative action is not taken now,
argues Dympna Donnelly.
Surfing the internet is something we all enjoy. E-commerce is the buzzword of the moment. You can buy everything and anything over the internet - clothes, books, computers. The selection is diverse, far greater than anything in normal retail outlets, from Indonesian jewellery to the latest Californian weight loss book. The internet facilitates cross-border transactions in a way that never happened before. For the customer, trading on the internet has all these advantages plus the luxury of shopping from your own home and in your own leisure time.

Business has not been slow to capitalise on the growth of the world-wide web and to service this increasing demand. Business has been quick to set up websites to market their products and the growth of e-commerce has been exponential. A recent study estimated that over US$600 billion in goods and services will be sold through the internet by the year 2000.

While all this internet trade is an exciting new development for business and customers, it is causing a major headache for tax authorities all over the world. Traditionally, trading in a particular country was subject to tax in that country when one had a physical presence. Effectively once an office or other place of business was opened, the tax authority in that jurisdiction would look for tax on the profits arising out of that place of business.

But the internet has changed the way business can be transacted. No physical presence in a market is required to sell your goods. When goods are sold over the internet where is the profit taxable?

Where the supplier is located? Where the customer is located? Is it wherever the server is located through which the order is placed and accepted or wherever the advertising website is maintained?

Through strategic location of the supplier and server, the potential for such sales to fall outside any tax net is huge. Interestingly, recent European case law would support an argument that location of the server in a jurisdiction constitutes a taxable presence in that jurisdiction.

Where goods are sold over the internet there is generally a subsequent physical flow of goods which could at least enable customs duties and perhaps VAT to be collected when appropriate.

However, when services are supplied over the internet there is no physical flow of goods. Traditionally the tax legislation has provided that services are supplied where the recipient is located. This principle applies not just to income / corporation tax but also to VAT. How does a tax authority know about services provided over the internet to ensure VAT was charged?

The problems for the Revenue Authorities in dealing with e-commerce are being greatly increased by the recent trend of providing products / information which can simply be downloaded off the internet such as videos, CDs and computer software. Why buy a CD in a shop when you can download the music off the internet? How can the Revenue trace such flow of products to charge VAT and excise duty before even considering how to tax the profit from the sale of the information / product?

Trade on the internet is moving and developing so fast that legislation and administration simply cannot keep apace. So, is trading on the internet the start of a new tax free era? Why would anyone purchase something in a retail outlet when the same product is available so much cheaper on the internet?

The European Commission recently established a consultation process to see how VAT legislation can be adapted to deal with e-commerce. Using courier and postal companies as tax collectors is one idea, though how willing will the postal authorities and courier companies be to take on the role of unpaid tax collector. Determining in theory, that a VAT liability arises in the jurisdiction of the customer where services are supplied or where product is downloaded, is fine, but this will cause huge administrative difficulties to implement and could be impossible to track. Recently US Treasury suggested that introducing 'tax toll booths on the information highway' might be a way forward, though clearly to have success such an approach would have to be multi-jurisdictional.

If the current situation continues uncurtailed then the result is a significant erosion of the tax base for economies such as our own. While purchasing a product at a cheaper price seems wonderful to the consumer, if e-commerce is going to become a significant part of Irish economic life then the Irish Revenue will have to act.

Without doubt the Revenue Authorities are going to have to radically adjust to cope with e-commerce. If the tax base is significantly eroded through loss of VAT, excise duties and corporation/income taxes, then the gains in the Government finances of the last few years could be eroded. You can be sure that any shortfall in tax revenues in one area would have to be made up elsewhere and the welcome reductions in taxes seen recently could be reversed. It is also important for a healthy competitive economy that the playing pitch is level for all suppliers and that local suppliers are not trying to sell the same goods at a tax disadvantage.

Therefore while the potentially tax free environment of the internet is welcome to all of us in the short-term, in the longer term it is necessary for the stability of the larger European economies that a solution is found. A radical change in the mindset of the tax authorities is required to cater for the new e-commerce environment. More importantly a consistent multi-jurisdictional approach is required if traders on the internet are not to be faced with a myriad of different rules and different administration depending on the jurisdiction of the customer. The potential for a tax administration nightmare with significant tax anomalies to cause distortion in the marketplace is all too real.

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