Subject: IOTP and Tax Collection

From: David Burdett <[email-masked]>
Date: Tue, 1 Dec 1998 01:40:10 -0000

This e-mail describes a potential way in which IOTP could be used to
facilitate the recording and collection of tax information associated
with e-commerce.

It is has been produced after review, at the IOTP meeting in Tokyo on
9-11 November, of a discussion paper titled "Electronic Commerce: A
Discussion Paper on Taxation Issues". This paper was produced by the
OECD Committee on Fiscal Affairs and presented at the OECD Ministerial
level meeting, "A Borderless World - Realising the Potential of Global
Electronic Commerce", hosted by the Government of Canada and held in
Ottawa on 7-9 October 1998.

The full document is available from:

http://www.oecd.org/daf/fa/MATERIAL/50DIS-PA.pdf

The purpose of this e-mail is to stimulate discussion of the topic. The
ideas this document contains are NOT completely formed. Therefore input
from Revenue Authorities, representatives from the OECD or anyone else
with an interest in this area will be particularly welcome.

================================
OECD AND ELECTRONIC COMMERCE

The OECD discussion paper "Electronic Commerce: A Discussion Paper on
Taxation Issues" identifies a number of issues associated with taxation
on the Internet that need to be resolved. This paper also presents a
number of "Implementation Options" to resolve these issues in order to
"stimulate discussion with business".

Implementation Option 15 states that:

"Revenue authorities may consider expressing their views on information
requirements to appropriate bodies developing standards or protocols for
electronic commerce:
*	Revenue authorities have, wherever possible, used or adapted
commercial developments for taxation purposes so as to avoid the
creation of a separate and burdensome tax regime. However, modifying
systems after they have been finalised is costly and should be avoided
where possible. Revenue authorities could co-operate with business
initiatives to create protocols for trade that facilitate electronic
offers, delivery, payment and documentation and express their views in a
timely manner to the bodies developing such protocols or standards so
that they can be developed, taking into account the views of Revenue
authorities.
*	Further, private sector groups aiming at the introduction of new
technical standards or protocols for electronic commerce could
co-operate by contacting Revenue authorities, e.g. through the OECD, at
an early stage to enhance a constructive dialogue designed to find
mutually acceptable solutions."

This note is a response to the last point and covers:
*	Some background on Internet taxation
*	Identifying tax paying organisations
*	Tax records
*	Conclusion

BACKGROUND

Currently the vast majority of international cross-border transactions
involving services or electronic products give rise to income tax in
either the "source" or the "residence' country. The rules which apply
depend on the relevant tax treaty or domestic tax legislation between
the country(ies) concerned.

Similarly the vast majority of international cross-border transactions
in services or digital products are legally subject to consumption tax
(usually a "value added" tax or "goods and services" / "sales" tax). In
some cases the tax rate may be set to zero in order to encourage
"exports" resulting in no tax actually being collected.

For some individual countries (e.g. the USA) domestic consumption tax
rates may also be set to zero. For example if you buy goods from a state
different to your place of residence, then no consumption tax is
normally due at the time of the sale.

As electronic commerce makes it easier to do international (or
inter-state) trade it may start to displace more conventional forms of
commerce leading to a decrease in the tax revenues received by revenue
authorities.

Revenue authorities are unlikely to allow this to occur and may start
raising discriminatory new taxes unless a electronic commerce tax
collection process is available that is: practical to implement, cost
efficient and non-discriminatory.

Currently revenue authorities rely on companies to keep financial
accounts which are verified by independent auditors to ensure that tax
records are kept accurately. They also rely on these organisations to
provide tax returns which identify the tax which is due.

Tax calculations are based primarily on where the goods or services are
consumed and/or on the source and residence countries of the parties
involved. It is likely that this principle will continue to apply in
both international as well as domestic e-commerce. This means that it is
necessary for organisations (e.g. the buyer and the seller) to identify
themselves, their location and therefore the legal jurisdiction and tax
regime which will apply.

To sum up organisations will need to:
*	provide a means of identifying themselves,
*	keep tax records for the e-commerce business they carry out, and
*	allow those tax records to be independently audited.

The Internet Open Trading Protocol could help in these areas.

IDENTIFYING TAX PAYING ORGANISATIONS

The IOTP defines an "Organisation" element which can be used to identify
the different parties involved in an e-commerce transaction. This
element could easily contain the information necessary to identify a tax
payer by specifying, for example:
*	name
*	address/place of business
*	tax reference, etc

In addition the information can be digitally signed by an organisation
that is known and trusted by the consumer or other parties, such as
revenue authorities, that are involved in the trade.

If information is kept for both the buyer and the seller, then it should
be possible to use this information to help determine the tax which is
due.

TAX RECORDS

The IOTP defines an "offer" element which could be used to record
information about the tax which is included in the payment which is
being made. This could include information about:
*	the tax jurisdiction which applies
*	the parties (organisations) involved in the transaction
*	the rate(s) used to calculate the tax
*	the amount of tax due.

Several sets of tax information could be kept so that, for example,
local, state, national and international levels of tax could be
separately recorded if necessary.

Through working with revenue authorities, it should be possible to
define a format for the definition of a "tax record' so that it is
generally applicable to many if not all tax jurisdictions.

As with the organisation element, information in a tax record could be
digitally signed by a trusted organisation which means the information
could be relied upon.

If such a form of record were defined and used, then it would mean:
*	financial auditors could more easily check tax records for their
accuracy using automated software tools,
*	it could be used to substantiate tax returns which were made by
companies,
*	tax authorities could more easily rely on the information the tax
returns contained.

Financial auditors could also use the records on behalf of shareholders
for annual reports and other purposes.

CONCLUSION

IOTP could be used to help simplify tax collection on the Internet.
Views and opinions on this idea are actively sought.

>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

-----------------------------------------------------------------------
Message addressed to: [email-masked]
Archive available at: http://www.elistx.com/archives/ietf-trade/
To (un)subscribe send a message with "subscribe" or "unsubscribe" in the
body to: [email-masked]