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Inland Revenue

Tax Policy

PUBLISHED 9 March 2001

Tax challenges of e-commerce

Meeting the tax challenges posed by electronic-commerce was the subject of a speech delivered by Policy Advice Division GM Robin Oliver to an international workshop on globalisation held in Tokyo last month. Attended by delegates from over 20 countries, the workshop was hosted by the OECD, Pacific Islands Forum and government of Japan. Robin Oliver, who is a member of the OECD's Committee on Fiscal Affairs, outlined the work being done to develop an international consensus on the taxation of electronic commerce, and e-commerce issues faced by revenue authorities around the world. For the speech see Electronic Commerce: Answering The Taxation Challenges (Word version 92KB).

Electronic Commerce:

Answering The Taxation Challenges

Speech to OECD Pacific Island Forum

15 February 2001

The E-Commerce Context

I know that there is always a lot of argument about numbers and especially in relation to the Internet, but figures point toward something like $650 billion in trade through e-commerce in 2000, with maybe 370 million internet users and 35 million domain names. More interesting is the forecast growth, which shows that e-commerce has a very strong economic potential: $6000 billion in trade in 2004-05; 640 million users in 2003 and 75 million domain names by end of 2002.

Fiscal Dimension of E-Commerce

Governments are very keen to realise the potential of e-commerce.

For tax administrations, there are twin objectives:

  • to foster the growth of e-commerce by a positive fiscal environment providing a level playing field avoiding any distortion of competition;
  • and to safeguard revenue yields from taxation.

The question of how to achieve a reasonable and successful balance between these two objectives is what the OECD-led work on e-commerce taxation is all about.

But first, I will reinstate a couple of basic principles which are largely accepted internationally and so form a foundation to our work.

  • First, e-commerce should not receive special tax treatment. By this I mean that e-commerce should be treated neither more favourably nor less favourably than other forms of commerce. It is the neutrality of treatment principle.
  • Second, there is a need to achieve an international consensus on the application of tax rules, with the aim to adapt the current principles, without changing the core rules.

Ottawa Framework Conditions

The so-called Ottawa Framework Conditions on taxation and e-commerce are the foundation of the OECD's work. Key principles of the framework are:

  • that the technologies underlying electronic commerce offer governments significant new opportunities to improve taxpayer service;
  • that the taxation principles that guide governments in relation to conventional commerce should guide governments in relation to e-commerce, those well known principles being neutrality; efficiency; certainty and simplicity; effectiveness and fairness and flexibility.


  • those principles can be implemented for e-commerce through existing tax rules, with of course some adaptation;
  • there should be no discriminatory tax treatment of e-commerce;
  • application of these principles should do three things:
    • maintain fiscal sovereignty of countries;
    • ensure a fair sharing of the tax base between countries;
    • avoid double and unintentional non-taxation.

Global Dialogue

The process of putting flesh on these principles involves - and I would like to insist on this point - a wide co-operation and consultation with economies outside of the OECD area, but also with business.

This process is largely undertaken by the Tax Advisory Groups called in OECD language "The TAGs". These small groups of about 25 people have a broad membership, with involvement of non-OECD economies and business members to ensure that the solutions are well considered and globally applicable. All the participants in TAGs have an equal status. Given the success of this TAG approach, the process should continue and be based around a streamlined structure of three TAGs as follows:

  • Business profit TAG.
  • Consumption Tax TAG.
  • Compliance, Information and Documentation TAG.


Against that background, the OECD's work is centred on three main areas, namely:

  • Consumption taxes, perhaps the most challenging area in the shorter term.
  • International direct taxation issues.
  • Tax administration.
  • This work which was undertaken two years ago, gave rise to a number of important conclusions agreed by the Representatives of OECD Governments at the last meeting of its Committee on Fiscal Affairs held in January in Paris. The Committee will shortly be publishing a comprehensive progress report covering all aspects of his work on e-commerce taxation. In the interim, reports and technical papers are available on the OECD's website (

Nevertheless, much further work remains to be done in several fields.

Consumption Taxes

The challenge we are facing here is to adapt the existing rules to be sure that the taxation of e-commerce transactions occurs in the country of consumption, without placing heavy compliance burdens on the businesses.

The CFA endorsed emerging conclusions in a report from its Working Party on Consumption taxes, and approved its release for public comments. The report proposed guidelines to define the place of consumption and recommended approaches on tax collection mechanisms.

Emerging conclusions

The proposed guidelines define the place of consumption for the cross-border supplies of services and intangible property that are capable of delivery from a remote location. This includes digitised products like software, music and images, while tangible goods, such as books or videocassettes are excluded (and can be subject to customs procedures, as appropriate). Also excluded are "tangible" services such as hairdressing or car rental.

  • For business to business transactions the place of consumption - and therefore the place of taxation - would be jurisdiction in which the business recipient has established its business presence - that's to say, in principle, the establishment (headquarters, registered office or branch of the business) of the recipient that utilises the supply.
  • For business to consumer transactions the place of consumption - and therefore the place of taxation - would be the jurisdiction in which the consumer has their usual place of residence.

On tax collection mechanisms, the report identifies the following recommended approaches:

  • For business to business transactions, a self-assessment or reverse charge mechanism has been identified as the most viable option.
  • For business to consumer transactions, effective tax collection presents particular challenges. The report points toward the potential in the medium term for technology-facilitated options, while accepting that, in the interim, simplified registration-based mechanisms may be required.

Areas For Further Work

For business to customer transactions, the tax collection mechanism based on the registration of the vendor in the jurisdiction of the consumer is a short or medium term solution. Other tax collection mechanism should therefore be explored, such as automated tax collection mechanisms, with technology-based solutions, combined, as appropriate, with the use of trusted third parties.

For the vendor there is a need to define practical means of verification of the declared place of residence and the status (business or private customer) of the recipient.

Simplification has emerged as an important theme and was identified by business as a priority concern. With simplification come increased levels of voluntary compliance and reduced administrative costs for governments.

A key point for governments will be administrative co-operation. Whatever the tax collection mechanism, it becomes obvious that there is a close relationship between efficient and effective co-operation among tax authorities and the implementation of the proposed tax collection mechanisms.

Direct Taxation

Turning to the international direct taxation field, e-commerce certainly presents challenges here too. Can existing concepts such as that of permanent establishment and characterisation of some payments be adapted to cover activities on the internet, or should tax authorities be undertaking a more fundamental review?

Permanent Establishment

The current "permanent establishment" concept inspires a couple of questions when one has to decide whether or not it is possible that commercial activities carried on electronically could constitute a permanent establishment for the enterprise - in particular, when the enterprise's presence in a country is restricted to the mere use of a web site located on a piece of computer equipment.

At its January meeting, the Committee on Fiscal Affairs welcomed the broad consensus recently achieved on clarification in the Commentary on the OECD Model Tax Convention in respect of the application of the current definition of permanent establishment. At this stage, the clarification does not deal with whether the existing treaty rules should be changed, nor does it deals with allocation of income issues.

A clear distinction can be made between computer equipment (server) and data/software (web site) which is used by or stored on that equipment:

A web site cannot in itself constitute a place of business; virtual is not real.

On the contrary, the server, qualified as a piece of equipment having a physical location, could constitute a fixed place of business, but when a business uses an internet service provider - or when the server is not at the disposal of the enterprise running a web site on it, this server does not constitute a permanent establishment.

Only in very unusual circumstances can an internet service provider constitute a dependant agent, and therefore a permanent establishment, because internet service providers do not have authority to conclude contracts and are independent agents acting in the ordinary course of their business.

Could a server be qualified as automatic equipment through which an enterprise wholly or partly carries on its business? In other terms, is human intervention necessary? The clarification clearly rejects the suggestion that there is a requirement of human intervention for a permanent establishment to exist.

The server as a permanent establishment

In conclusion, three conditions should be met to consider a server as a permanent establishment:

  • The server should be at the disposal (owned or leased) of the enterprise carrying on business through a web site.
  • It is only if a server is located for a sufficient period of time in a jurisdiction that it becomes "fixed".
  • Functions performed by the equipment should form an essential and significant part of the business carried on through the web site. Determining whether operations conducted by computer equipment are preparatory and auxiliary activities (such as advertising or information collection) has to take place on a case-by-case basis.

Treaty Characterisation

The question of the treaty characterisation involves primarily a consideration of the application of the definition of royalties in the context of electronic commerce and the characterisation of various types of e-commerce payments under tax conventions.

It is important to note that the question is not restricted to characterisation issues arising under the existing OECD Model Tax Convention but concerns also commonly used provisions in many bilateral tax treaties. The draft here equally deals with existing treaty rules, even if they are not in the OECD model.

For instance, while the treatment of royalties and business profits is similar under the model, there are many bilateral provisions that provide a limited right for the source state to tax royalties even if the recipient does not have, in that state, a permanent establishment.

Equally, it examines treaty provisions that allow for source taxation of technical fees and on payments for the use, or the right to use, industrial, commercial or scientific equipment. Of course this list is not exhaustive.

On this subject, the Technical Advisory Group on Treaty Characterisation its final report released on 1st February 2001 (Tax treaty characterisation issues arising from e-commerce PDF 152KB).

The report, which was unanimously approved by TAG members, clarifies which provisions apply to various types of e-commerce payments, thereby ultimately determining which country may tax these payments and under what conditions. It includes recommendations concerning which treaty provisions apply in particular cases, as well as on how such recommendations would apply in 28 typical categories of e-commerce transactions.

Principal Conclusions Of The Technical Advisory Group

Some of the Technical Advisory Group's principal conclusions and recommendations are:

In the case of transactions that permit the customer to download digital products electronically for that customer's own use or enjoyment (for instance, where a customer, which could be an enterprise, orders software or music from an Internet web site and that digital product is downloaded from that site), the payment should be characterised as business profits rather than as a royalty. As a matter of fact, the right to make the copy on a disk or other non-temporary medium is an incidental part of the transaction.

By contrast, transactions where the essential consideration for the payment is the granting of the right to use a copyright in a digital product that is electronically downloaded for that purpose will give rise to royalties. This would be the case, for example, for a book publisher, who would pay to acquire the right to reproduce a copyrighted picture for the purposes of including it on the cover of a book that it is producing.

Whilst e-commerce transactions resulting in know-how payments which constitute royalties are relatively rare, the report provides a number of criteria and examples to help distinguish the provision of services from the provision of know-how.

Payments for time-limited use of digital products or for transactions such as data warehousing cannot be considered as payments for the use of, or the right to use, an industrial, commercial or scientific equipment so as to constitute royalties under some conventions.

Finally, where the consideration for the payment covers various elements but one element is predominant and the others are only of an ancillary and unimportant character, it would be more practical to apply the treatment applicable to the principal part to the whole consideration.

Tax Administration Global Dialogue

The challenge facing tax authorities in this new global environment is how to reconcile national fiscal boundaries with the borderless world of e-commerce. To meet this challenge, a truly global dialogue must develop among revenue authorities to build a future co-operative environment together.

Many other e-commerce participants are themselves developing actual or de facto standards and protocols (in areas such as identity, trust, information integrity, payments and trade). Revenue authorities have to ensure, wherever possible, that their expectations are integrated into, and not imposed on top of, these private sector initiatives. A global dialogue is required with active, balanced revenue authority input that can inform and assist private sector developments.

Taxpayer Service Opportunities

E-commerce technologies open up new ways for tax authorities to undertake the business of administering tax laws and collecting tax revenues and new ways to interact with a wider community. For example:

  • Communications between tax authorities and taxpayers can be revolutionised and access to information can be enhanced to help taxpayers in complying with their tax obligations.
  • Tax registration and filing requirements can be simplified.
  • Electronic assessment and collection of tax can become the norm rather than the exception.
  • Easier, quicker and more secure ways of paying taxes and of obtaining tax refunds can be facilitated.

Governments must seize the opportunities offered by the new communication technologies to improve the service they provide to taxpayers, to reduce the cost of complying with tax rules and to use more effectively the resources devoted to the collection of taxes. Revenue authorities have seized many of these opportunities already and there are many experiences that can be shared with other countries:

  • Developing internet web sites where information, such as tax legislation, rulings, case law, revenue statistics and forms can be viewed and down loaded.
  • Developing interactive telephone answering systems for many standard inquiries.
  • Examining the feasibility of a single e-mail access point for highly mobile taxpayers.
  • Examining the feasibility of receiving and responding to taxpayers' service enquiries by e-mail.
  • Exploring the use of direct deposit programs for tax payments and refunds.
  • Developing systems for accepting tax return data and other information by use of the new technologies.
  • Developing systems for automated payments of social security, payroll taxes and other similar deductions.
  • Working with other arms of government to investigate the benefits of single government registration points on the internet.

Revenue authorities of countries large and small face many of the same challenges in administering their tax laws effectively. The new technologies are available at greatly reduced costs than those of the older technologies. In fact, those tax administrations that have lagged behind in modernisation efforts may be able to make a quantum leap into the 21st Century by employing new wireless technologies that do not require the same investment in infrastructure.

Tax Administration Issues

Some commentators have suggested that e-commerce will make governments change the composition of their tax base. They cite the mobility of web sites and the lack of readily apparent knowledge about where and who the parties to a transaction are, as reasons for shifting the tax burden onto less mobile items such as property. However, these arguments will only have merit if governments do nothing to adapt their identification, information and collection approaches to the e-commerce environment.

The premise of the Ottawa Taxation Framework Conditions is that the revenue authorities, co-operating together and working with business, can adapt their tax assessment and collection approaches to work effectively in the new environment. We have been doing this and have found that we have much in common with business and consumer protection view points.

Revenue authorities, consumer groups and businesses all have similar interests in improving the identification information on commercial web sites.

In the conventional commercial environment, taxpayers keep books and records and provide information to tax authorities to support the assessment of tax. Where tax authorities need to verify information provided by the taxpayer, they can often rely upon third party information from financial institutions or other intermediaries within their jurisdiction.

In an e-commerce environment, electronic books and records can be more ephemeral and may be more often stored in a foreign jurisdiction. Revenue authorities have already encountered cases where client lists and payment records have been allegedly stored in tax havens, making access very difficult.

Some electronic payment systems used in e-commerce are fully unaccounted - allowing for the transfer of wealth from consumer to business and from the business to another party without being brought into the normal banking system. This is of concern because of the global reach of electronic payment systems.

Revenue authorities, other regulatory agencies, internal and external auditors and businesses all have similar interests in improving the information integrity measures available in an e-commerce environment. If consistent requirements are adopted globally many of the mechanisms to provide enhanced record integrity, reliability and authenticity can be built into business software and transaction protocols at low cost.

The work of the Technical Advisory Group on audit standards and desirable data elements lays an initial foundation for further work with business and governments in these areas. Similarly progress has been made in creating a generic guide on the Internet and its role in compliance work.


Efficient and effective collection systems are fundamental to the operation of any successful taxation system. Achieving these administrative aims in an e-commerce environment presents some new challenges  primarily in the field of consumption taxes. Business intermediaries traditionally collect a very large part of tax revenue. Employers are responsible for the collection of wage tax; businesses collect and remit consumption taxes; and financial institutions collect taxes on interest and royalties.

In some cases, e-commerce may remove these intermediaries. For example, a consumer may deal directly with a producer in another jurisdiction rather than via a retailer in the consumer's jurisdiction. The result is that revenue authorities will be required to collect small amounts from a large number of taxpayers, which may place an unacceptably high compliance cost on taxpayers and high administrative costs on revenue authorities. In other cases, new intermediaries may be created (for example the online market place).

These collection issues are being actively examined in different international fora and by national governments. Different models have been proposed, from the business registering in all jurisdictions to a tax and transfer model. It is clear that, regardless of whatever cross-border tax collection system evolves, revenue authorities will need to co-operate and co-ordinate more than has been necessary in the past if tax systems are to have integrity. This again raises the issue of an appropriate global response to threats to the tax base and practices that undermine the ability of co-operative countries to successfully manage their revenue systems in a way that does not damage another country's tax system integrity.

Collection of taxes in an e-commerce environment is likely to require new approaches to implementing existing policy effectively. Revenue authorities will need to co-ordinate and co-operate much more than has been necessary in the past. The technologies that underlie e-commerce offer exciting prospects for streamlined cross-border trade and tax collection. A number of businesses are already experimenting with tax calculation software that calculates consumption and sales taxes across many countries. Working together with these businesses, governments have an opportunity to streamline existing collection systems, and facilitate greater trade and investment.


With the Progress Report endorsed by the Committee on Fiscal Affairs in January, Representatives of OECD governments have agreed on a number of important conclusions and recommendations that pave the way for greater certainty among businesses and consumers in relation to the taxation of electronic commerce.

These conclusions reflect a significant step forward in the international work - which the OECD is co-ordinating - to address the taxation questions associated with e-commerce. Working closely with business and non-members, we're making good progress toward the effective implementation of the Ottawa Taxation Framework Conditions

I particularly welcome the very constructive input we've had from the business community and from non-member economies (through our Technical Advisory TAGs) and I'm pleased that the Committee on Fiscal Affairs has endorsed proposals to continue with that dialogue. It's important that we maintain our efforts to strengthen the emerging international consensus, so as to provide governments and business with the certainty that they need about how taxation rules should apply to e-commerce.