Benjamin M Musau, Lawyer, Nairobi, Kenya
This article discusses the consequences of a concept of shifting to a residence-based taxation for E-Commerce Transactions.
Arthur Cockfield, appears to be the leading person who has discussed this issue in his article “Balancing National Interests in the Taxation of Electronic Commerce Business Profits” (1999) 74 Tul. L. Rev. 133-217.
The consequences of a concept of shifting to a residence-based taxation for e-commerce transactions may also be considered by discussing the challenges posed by the shift to a residence-based system:
It is difficult to identify where the taxpayer is a resident presenting two challenges:
1) Many countries, including the United States, use the “place-of-incorporation” test: a corporation is considered a resident if it is incorporated within the country in question. Corporations incorporated outside of the country are considered to be nonresidents. As such, residency can change by simply changing the country of incorporation. Further, the place-of-incorporation test does not require a business to maintain an economic presence within the country; the simple act of filing articles of incorporation will suffice to fulfill the residency requirement.
2) Other countries use the “place of central management and control” test to determine whether a company is a resident. This test normally involves looking to the location of a company’s head office or the board of directors’ regular meetings. The Australian Taxation Office suggests that the development of new technologies presents a number of challenges to this test because it is often difficult to establish the place of management and control. Commentators have also noted that the development of videoconferencing, which allows directors or upper-level corporate officers to maintain residences in different jurisdictions, poses a challenge to the place of central management and control test. At times, two or more countries may assert the right to tax earnings on the basis of residency. Accordingly, tax treaties include “tie-breaking” provisions to determine which country has the right to tax. Many treaties indicate that, in the case of competing residency claims, a company is resident where its place of effective management is located. Under this rule, the same problems associated with discovering the place of central management and control for e-commerce transactions will continue to persist.
3) If a purely residence-based system were implemented, companies would be given an incentive to relocate their e-commerce base of operations to low or nil tax jurisdictions like tax havens. In general, profits from these e-commerce transactions would not be taxed by the residence country until they were distributed back to the parent company. Taxes would thus be deferred or possibly avoided altogether.
4) Movement toward a residence-based system would invariably favor countries that are net exporters of e-commerce goods and services. The greatest beneficiary of this system would likely be the United States since it currently leads the world in the production and export of these goods and services.
5) Since commerce in cyberspace transcends national borders and the fixed physical location of transactions, the U.S. Treasury has observed that source-based taxing schemes could be obsolete with respect to e-commerce. The Treasury has also indicated that residence-based taxing schemes should apply when the traditional concepts of permanent establishment and source-based taxation do not apply. The issue, of course, is whether there can be international coordination of such a regime, given that the great majority of companies conducting business over the Internet are American. Creating a regime may be difficult given that application of residence-based principles would mean that the United States would get to keep a large portion of e-commerce derived tax revenue
6) International coordination of tax matters may be problematic, because no area of the law is closer to the subject of sovereignty than taxation, and countries are generally very reluctant to surrender their autonomy in this area.
7) An advantage of the e-card plan is that it does not call for a source-based approach to taxing e-commerce tax revenues. This should ease the concerns of developing countries, since the e-card plan is a residence-based plan and rewards developing countries when its residents conduct business with residents of other countries.
8) The Treasury Department argues that the growth of new communications technologies will likely require that principles of residence-based taxation assume even greater importance. This is because it is difficult to apply source of income principles to the world of cyberspace.
References:
- Arthur Cockfield, “Balancing National Interests in the Taxation of Electronic Commerce Business Profits” (1999) 74 Tul. L. Rev. 133-217.
- James D. Cigler and Susan E. Stinnett, Treasury Seeks Cybertax Answers With Electronic Commerce Discussion Paper, 8 J. Intl Tax 56, 59 (1997).
- Department of the Treasury, Selected Tax Policy Implications of Global Electronic Commerce (1996).
Benjamin M Musau
May 4, 2011
I am a Kenyan Advocate and the Managing Partner of B M Musau & Co., Advocates, a position I have held since 1999. My work encompasses regulatory reforms, reduction of administrative burdens, the structure of business entities, joint ventures, acquisitions, banking, foreign investment and other general corporate areas
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