Article, The newest legal issues regarding income tax characterization with respect to international taxation of digital products and services

Global E-commerce Taxation
Benjamin M Musau, Lawyer, Nairobi, Kenya
This article discusses the newest legal issues regarding income tax characterization with respect to international taxation of digital products and services.
 The newest legal issues regarding income tax characterization with respect to international taxation of digital products and services are as follows:
 

1. The laws including income tax laws that were developed pre-digital commerce were based on concepts and principles that are clearly not applicable in Internet based commerce.  The World was dominated by transactions that were “physical” in nature.
2. E-commerce eliminates geographical or physical boundaries, and this tends to hide, blur or confuse in a way the character of the income arising from the e-commerce as well as the actual source of that income.
3. It is arguable that in the context of e-commerce source-based taxation can be justified in theory for the income which would arise from digital commerce for transactions spanning across taxing jurisdictions if such are conducted in the environment of digital commerce.
4. The traditional concept and principle on which the source of income is currently defined should be reconsidered with a view to coming up with a new conceptual framework for the definition of source of income because taxation that is source-based under the traditional principles or concepts for “physical” transactions is made inapplicable due to the peculiar characteristics of digital commerce.  These characteristics which differ from “physical” transactions are quite significant from a tax perspective.  It is, therefore, arguable that we have to go back to the drawing board, think outside the box, and come up with new concepts and principles that are in tandem with electronic commerce.
5. The increase in the size or volume of the digital business is a serious challenge to traditional source of tax revenues for governments.  Governments are now busy designing tax systems to circumnvent the possibility of tax revenues decreasing substantial as digital commerce increases.
6. One of the biggest questions in discussions in Government boardrooms is the manner in which Government is to levy income tax.
7. There is a major expansion or increase in the number of people using the Internet in the World.  This also implies that the number of people getting into electronic commerce is increasing by the day – with substantial increase in the number of digital business.
8. As the number of Internet users increase together with the number of digital business dealers, there are fewer transactions that comply with traditional ways of transacting commerce.  Some scholars argue that cyberspace or Internet requires to have laws of its own.

 
 
 
References:
 

1. John K. Sweet, Formulating International Tax Laws in the Age of Electronic Commerce: The Possible Ascendancy of Residence-Based Taxation in an Era of Eroding Traditional Income Tax Principles, 146. U. PA. L. REV. 1949 (1998) (outlining the facts of the case). https://litigation-essentials.lexisnexis.com/webcd/app?action=DocumentDisplay&crawlid=1&doctype=cite&docid=146+U.+Pa.+L.+Rev.+1949&srctype=smi&srcid=3B15&key=0cad35d52a1ebd965258f88bf04868ad.  Retrieved from the Internet on May 18, 2011.
2. ISBN, E-Commerce and Source-Based Income Taxation.  http://www.ibfd.org/IBFDProducts/E-Commerce-and-Source-Based-Income-Taxation.  Retrieved from the Internet on May 18, 2011.

 
 
Benjamin M Musau
 
May 18, 2011

Dr. Benjamin Musau

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