Subject: OTP, OECD and tax collection

From: David Burdett <[email-masked]>
Date: Mon, 14 Sep 1998 22:41:58 +0100

The attached PDF file describes how the German government is proposing to 
the OECD that OTP is used to facilitate the collection of sales taxes (e.g. 
VAT or some other sales tax) for purchases made on the Internet.

The proposal is due to be disccussed at the OECD Electronic Commerce 
conference in early October in Ottawa. If it is successful, then there 
should be a strong government led push to implement OTP.

The PDF file contains a diagram which describes the process. The text of 
the document is also contained below (minus the diagram).

Regards

David Burdett

[[ OTP_OE~1.PDF : 5377 in WINMAIL.DAT ]]

Text of document follows ...

OTP, OECD AND TAX COLLECTION
This note describes how the German government is proposing to the OECD that 
OTP is used to facilitate the collection of sales taxes (e.g. VAT or some 
other sales tax) for purchases made on the Internet. It is a record of an 
explanation provided by Hans Bernhard Beykirch of SIZ (the IT Development 
and Coordination Centre of the German Savings Banks Organisation) during 
the IETF Trade Working Group workshop held at CyberCash, Reston, VA, USA on 
10-11 September 1998.

This proposal will be discussed at the OECD conference on Electronic 
Commerce in Ottawa on 7-9 October 1998 (see 
http://www.oecd.org/news_and_events/release/nw98-78a.htm).

This note contains:
*	an explanation of the current problems with collecting tax for sales on 
the Internet
*	the solution proposed by the German government
*	alternative solutions being proposed
*	an analysis of the likely impact.

The explanation below is believed to be accurate although the author 
accepts no responsibility for any inconsistencies or inaccuracies which 
this note may contain.

Also please note that any views described here represent the views of the 
Author rather than Mondex International.

CURRENT SITUATION
Currently sales taxes are normally charged based on the location of the 
Merchant on the assumption that the purchaser is also in the same location 
at the time of purchase. However if a Merchant is "exporting" goods or 
services then no sales tax is imposed at the point of sale and, instead, 
taxes are (or should be) imposed at the point of importation based on the 
eventual destination of the goods or services which is typically the 
location or residence of the purchaser.

This presents a problem for tax collection authorities since it is easy 
(and commercially advantageous) for a Merchant to not impose a sales tax, 
but subsequently very difficult for the tax to be collected at the point of 
importation especially when the goods or services are being "imported" 
electronically over the Internet.

As a result governments are currently suffering decreases in sales tax 
revenue from purchases made over the Internet. This problem will only get 
worse if, as anticipated, Internet purchases begin to represent larger 
proportions of the total sales of goods or services within a country.

It is the author's understanding that the intention of the OECD is that 
sales taxes continue to be based on the location of the purchaser rather 
than the location of the Merchant. The problem is how to collect it 
efficiently, fairly and effectively.

GERMAN GOVERNMENT PROPOSAL
After discussions with and at the suggestion of SIZ the German government 
has now proposed the following solution to the problem as illustrated in 
the diagram below.

<<<< Diagram here >>>

The first step is that the Merchant obtains information on proof of 
residence of the purchaser. This could potentially take a number of forms 
including:
*	the Consumer entering location information on an HTML form
*	the use of a software digital certificate, or
*	a hardware token such as a smart card.

This information is then used to look up tax rate information which applies 
to that location. provided by the Government Financial Administration (or 
tax collecting authority) of the country where the Merchant is located. So 
for example if a US merchant was making a sale to a UK consumer then the 
tax rate which was provided would be 17.5% (the UK VAT rate). If the 
consumer was based in the US, then the State as well as the Country would 
be taken into account. This "looking up" of data could occur either in real 
time or more likely as a regular download of information.

The merchant would then calculate the tax due using this rate and include 
this amount in the amount which the consumer is due to pay. So for example 
if a UK Consumer was buying goods for $100 from a US merchant, then they 
would be charged a total of $117.50.

The Merchant would also keep records of their transactions so that, at 
intervals agreed with the tax authority they make a payment either directly 
to their Financial Administration or via their Financial Institution (e.g. 
a bank).

They would also submit tax returns for a period to their financial 
administration likely to be along the lines of:

Loc	Rate	No Tx	Tax due	
UK	17.5	357	4783.23 USD	
DE	16.5	2403	5783.49 USD	

The financial administration for each country would then use the 
information in the tax returns to settle the taxes due between them.

For the Merchant this is, in many ways, "business as usual" since Merchants 
need to keep records of the transactions they have made under current 
accounting practices. These records will be subject to audit by their 
accountants and possibly their Government's Financial Administration Tax 
Inspectors.

OTP's role in this approach is to provide the means by which the Merchant 
can provide information to the Consumer about the taxes being paid in a way 
which is globally interoperable, non-refutable and should stand up in law. 
The messaging structure of OTP could also be used to provide a standardised 
way by which Merchants obtain information on tax rates from their 
Government's Financial Administration and a way by which they submit their 
tax returns.

ALTERNATIVE SOLUTIONS PROPOSED
Hans Bernhard Beykirch knows of one alternative proposal being put forward 
which suggests that payment brands would be required to collect taxes for 
Internet transactions. In outline this would mean that when a payment is 
being captured it would have to be identified as being an Internet 
transaction and taxes at the appropriate rate captured and returned to the 
central government by the Payment gateway which accepts the payment.

ANALYSIS
In the Author's view, if governments are losing tax revenue (as on the 
Internet) it is inevitable that they will eventually take steps to reverse 
the situation. Otherwise additional tax revenues would have to be collected 
using other more direct forms of taxation which would probably be unfair. 
Basically it is unrealistic to expect the Internet to be a "tax free zone" 
for commerce in the medium to long term.

Collecting taxes from the Merchants using OTP closely follows current 
models of sales tax collection, whereas collecting taxes using the Payment 
Gateway is a radical departure. It is also likely that using a payment 
method for tax collection will only work for payment methods which involve 
capture and settlement of individual payments. This would make payment 
methods which don't require settlement of each payment more attractive as a 
means of evading tax.

Finally, if OTP is used as the means by which Tax is collected for Internet 
purchases, it should provide a strong "top down" government led pressure 
for OTP's adoption.

David Burdett
Mondex International Ltd
14 September 1998

Mondex International Limited
mailto:<[email-masked]>
US Advanced Technology Office: 111 Pine St, 6th Floor, San Francisco, CA 
94111
Tel/Voicemail: +1 415 645 6973	Fax: +1 415 956 9370

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Mondex International Limited
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From: Dave Birch <[email-masked]>
Date: Tue, 15 Sep 1998 07:20:12 +0100

David Burdett said

>If it is successful, then there 

and a strong consumer-led push not to use it?

Cheers :)
Dave Birch.

=== mailto:[email-masked] ===== http://www.hyperion.co.uk/ ===

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From: David Burdett <[email-masked]>
Date: Tue, 15 Sep 1998 23:42:52 +0100

Tax evasion is as old as the centuries. I doubt that OTP if its used for
tax collection by the governments will change peoples inclination to pay
(or not pay) one bit. The point is, if governments want to collect taxes
then they will find a way to do it and most merchants who have a
reputation to protect will follow it. 

It would be a bit sad though if tax collection is what people remembered
OTP for ...

But I really I though people working on OTP would like to know about
what the German government is doing.

David Burdett

>----------
>From: 	David Birch
>Sent: 	15 September 1998 07:20
>To: 	David Burdett; 'IETF Trade'
>Subject: 	Re: OTP, OECD and tax collection
>
>David Burdett said
>