MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE Overview Developments in the taxation of electronic commerce. Analysis of the design principles that shape existing and new taxes on electronic transactions. How Australia taxes and administers eCommerce ATO response to eCommerce International response to eCommerce
MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE Initial Responses eCommerce was too insignificant to have a major effect taxation Initially Internet was left tax fee Some wanted the Internet to be a tariff free zone Concern that countries with normal tax regimes would lose tax revenue to tax havens
MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE Initial Responses Others argued to have a “bit tax.” To remove all taxes from Internet transactions would heavily discriminate against non- electronic trading. To impose a new tax on information also goes against the principles of taxation because it is highly discriminatory. A bit tax would be almost impossible to implement using current technology.
MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE Initial Responses How taxpayers could use the Internet and just how widespread e-commerce could grow. Australia was one of he first countries to look seriously at the impact of e-commerce on the tax system. Australia released a report in 1997 then a second in December 1999. Some people argue to have no taxes on e- commerce.
MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE Initial Responses Developed countries strongly favour not imposing any new taxes on e-commerce. The USA passed the Internet Tax Freedom Act in 1998 that prohibits new taxes on the Internet. The World Trade Organisation aims to make the Internet a tariff-free zone. The existing tax rules need to change to cope with e-commerce.
MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE Tax Design Basic principles need to be complied with when introducing new or changing existing taxes. Members of the OECD agreed to try to base any changes to their taxation of e-commerce on international cooperation and agreement. The OECD agreed that five traditional principles should apply to any tax changes.
MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE Tax Design These principles are: 1.Neutrality 2.Efficiency 3.Certainty and Simplicity 4.Effectiveness and Fairness 5.Flexibility. Principles of the ATO: 1.Neutrality 2.The minimisation of compliance and administration costs 3.Privacy.
MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE The Australian Tax Environment The Australian taxes that e-commerce is most likely to affect are: Income tax Pay-as-you-go (PAYG) tax GST Withholding taxes. Tax problems arising from e-commerce: Effectiveness of the GST.
MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE GST Payable at point of each sale in the supply chain Vendor collects GST and sends it to ATO GST not payable on sales that occur outside Australia Vendor can claim credit for GST on previous sales in supply chain (input tax credit) Some items are GST free e.g. fresh food, medicine etc. Input Tax Credits can be claimed by Vendor on a GST free sale (i.e. Vendor gets a refund) Some sales are Input Taxed Sales e.g. bank account fees, interest, superannuation. life insurance Input Tax Credits cannot be claimed by Vendor on an Input Taxed Sale
MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE GST on a Domestic Product Sale byPriceGST on Sale GST on inputs GST Paid Raw Material Suppliers $50$5 Manufacturer$100$10$5 Wholesaler$200$20$10 Retailer$300$30$20$10 Total$30
MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE GST on an Import by a Retailer Sale byPriceGST on Sale GST on inputs GST Paid Overseas Manufacturer $100 Overseas Wholesaler $200 Retailer$300$30Nil$30 Total$30
MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE GST on an Import by a Consumer Sale byPriceGST on Import GST on inputs GST Paid Overseas Manufacturer $100 Overseas Wholesaler $200 Overseas Retailer $300 Consumer$30 Total$30
MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE Income Tax Income$60,000 Less expenditure to earn income$40,000 $20,000 Less tax free threshold$ 6,000 TAXABLE INCOME$14,000 Multiplied by marginal rate (17 cents)$ 2,380 Less rebates$ 1,000 TAX PAYABLE$ 1,380 Less tax paid (PAYG)$ 1,000 TAX DUE \ (REFUND)$ 380
MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE Withholding Tax Income is taxed at highest marginal rate Income$60,000 Withholding rate (47 cents)$28,200 Compare with normal tax: Taxable Income$20,000 Less tax free threshold$ 6,000 TAXABLE INCOME$14,000 Multiplied by marginal rate (17 cents)$ 1,380
MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE Tax Rates 2002 – 2003 Taxable IncomeTax on this income $0 - $6,000Nil $6,001 - $20,00017c for each $1 over $6,000 $20,001 - $50,000$2,380 plus 30c for each $1 over $20,000 $50,001 - $60,000$11,380 plus 42c for each $1 over $50,000 Over $60,000$15,580 plus 47c for each $1 over $60,000
MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE Tax Challenges for eCommerce One transaction may consist of many separate transactions Each separate transaction may be subject to different countries tax regimes Each separate transaction may be separately taxed Different taxes can apply to each separate transactions See hypotheticals on pp 156, 157 & 163 of Forder & Quirk
MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE ATO Strategies Revenue impacts Monitoring Service Integration Improved information Interactive self help Software
MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE ATO Strategies (cont.) Jurisdiction International agreements Administration Automation Detection Move to Consumption Tax (GST) International cooperation Research & Development
MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE ATO Use of Internet The ATO foresees the that e-commerce is not expected to have a significant impact on tax revenues for the next few years. The ATO does not want to be caught out unprepared so has developed a comprehensive action plan. ATO is taking advantage of electronic technologies. Making paying tax easier Detecting tax avoidance
MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE Paying Tax Made Easier ATO sees opportunities for improving its services. Implementing Tax Reform: Education Documentation online Facilitating payment Promoting electronic record keeping Improving ATO efficiency
MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE Improving Taxpayer Service: The Internet is the major medium being used by the ATO to improve taxpayer service. Over 75% of income tax returns are lodged electronically. Using the Internet to help the taxpayer. Businesses can register and get their Australian Business Number instantly. Improving ATO efficiency and best practice: Improvements in efficiency will cut costs for the ATO and for taxpayers.
MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE E-Grant The Diesel and Alternative Fuels Grants Scheme. Transport operators currently have to fill in about 70 to 80 pages of forms each year to get their money. E-Grant is set to end all the paperwork. Truckies will soon be able to receive their payment directly from the ATO.
MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE Listening to the Community Make the tax experience better. Listening to what people need. The aim is not to change the law. The aim is to change the way of their business by complying with the law.
MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE Detecting Tax Avoidance Data collection from taxpayers ABN TFN Data exchange Government Departments AUSTRAC Other governments Data modelling Detect transactions which are likely to be associated with tax evasion
MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE The International Tax Environment Consumption Taxes Is tax collected in vendor or buyers jurisdiction? GST will apply if supply connected to Australia Importation is taxable but GST not collected if: Arrive by post and value less than $1,000; or Value less than $250. If imported by a consumer, the consumer pays the GST How do you detect intangible supplies? Negligible impact detected so far
MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE The International Tax Environment Income Tax: Based on residence of taxpayer and\or source of income How to determine when an electronic presence is enough to establish a taxable base in a country? OECD uses the concept of permanent rental\ownership of a server Uncertainty is created in the application of traditional source rules, income characterisation, apportionment, the application of traditional residence rules, transfer pricing and avoidance.
MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE The International Tax Environment Income Tax (cont.) Double taxation agreements avoid a taxpayer paying income tax twice One country is given primary taxing rights; or Taxpayer can rebate tax paid in one country against tax payable in other country Use of tax havens Transfer pricing
MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE The International Tax Environment The OECD response to e-commerce: Informal round table discussion between business and government. The formation of technical advisory groups (TAG’s). Areas the TAG’s deal with: Technology Professional data access Consumption taxes Business profits Income characterisation.
MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE The International Tax Environment International Tax Administration: There has been a focus on improving the administration of tax at the international level. The Internet facilitates the automatic exchange of information in a standard format. The Internet can overcome political, technical and language barriers.
MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE The ATO’s International Involvement Heavy involvement in International Tax forums especially the OECD. Development of international guidelines. International consideration of the impact of growth in e-commerce. Guidelines for the exchange of data Privacy and security concerns
MANAGEMENT & LEGAL IMPLICATIONS OF eCOMMERCE Conclusion Some tax avoidance is possible using eCommerce No real difference to tax avoidance in traditional commerce eCommerce improves tax authorities ability to prevent and detect avoidance eCommerce reduces businesses cost of compliance with tax obligations