KEY ISSUES ON CYBERSPACE TAXATION

Dr. Pradeep KODIYATH PATINHARE

BA (Eco.), LL.M & Ph.D (Cochin)

Advocate & Government Pleader (Taxes)

High Court of Kerala, Kochi, Kerala, India
advpradeep@yahoo.com; poduvallegal@gmail.com

KEY ISSUES ON CYBERSPACE TAXATION

Cyberspace for Taxation

Commercial activities conducted through an exchange of information generated, stored or communicated by electronic, optic or analogous means

E-commerce is one of the latest contributions of technological growth Any commercial transaction conducted wholly or partly by using the Internet Buying, Selling and Marketing of products/goods Provides Services over the networks Generates income from the cyber highway Facilitates luxury and entertainment Enables development and creation of software and other applications to generate excise duty

KEY ISSUES ON CYBERSPACE TAXATION

E-commerce Sales

Mail order sales: Tangible Goods

Domestic

Seller to Domestic Customer Domestic Seller to Foreign Customer Foreign Customer to Domestic Customer

Sales of Digital products

Software sales Music, Paintings, movies and other literary works IPRs like Patents, Designs, Trade Marks etc.

KEY ISSUES ON CYBERSPACE TAXATION

E-commerce Services
Passing of Technical Know-how Daily Horoscope, Games etc. Adult Entertainments Online accountancy services Online Banking Services Videoconferencing and chat lines Software repairing and Disk Doctors Online libraries

KEY ISSUES ON CYBERSPACE TAXATION

Income from Cyber highway

Income of Resident or Non-resident sourced from taxing country.

Income

of ISP Internet Service Provider Income from E-Sales and E-Services Income from transfer of know howRoyalties Business profit of Cyber corporate

KEY ISSUES ON CYBERSPACE TAXATION

Issues in Cyberspace Taxation

Tax challenges are unique; globally Jurisdictional Issues Conflicts of law International and Municipal taxation Anonymity Lacking proper supervisory and Administrative checks Deficiency of International Charters

KEY ISSUES ON CYBERSPACE TAXATION

Jurisdictional Issues

Cross border nature of the cyberspace transaction creates unavoidable ambiguity on jurisdiction and tax law applicable Parties to a cyber generated contract may be located in different jurisdictions Which sovereignty has the ultimate control on the cyberspace transaction? Whether the place of website can be corelated to country in which the host server is established?

KEY ISSUES ON CYBERSPACE TAXATION

Traditional View

Jurisdiction of a country extends only to individuals who are within that country or to the transactions and events that occur within the natural and physical boundary of that country

KEY ISSUES ON CYBERSPACE TAXATION

Theory of Minimum Contact

A law has universal application Even if a person is not physically present in a country, is subjected to the law and jurisdiction; as long as his website has minimum contact with that country

KEY ISSUES ON CYBERSPACE TAXATION

Example
www.amazon.com, a UK registered domain and
an E-commerce Service Provider is subjected to Indian law, as long as his website is available in the territory of India

even in the absence of physical presence, one can

be sued in the foreign court as long as his website has minimum contact Calder v. Jones, 465 U.S. 783 (1984)

KEY ISSUES ON CYBERSPACE TAXATION

Source & Residence Principles

Regardless of taxable event, the criteria is where from income or goods or service are sourced. Where is the residence of Seller/ Service Provider?

JUSTIFICATION
source country has contributed infrastructure and

other facilities in the production process.

KEY ISSUES ON CYBERSPACE TAXATION

Source & Residence Principles

Merits

Demerits

Subject of taxation is definite or certain and prompt supervision is possible Convenient to taxman to target a taxpayer Regional imbalance Not benefited to countries in which end-users reside Possibilities of complicated Double Taxation levies Inapplicable when the presence of service provider is available only in cyberspace. Cloud computers

KEY ISSUES ON CYBERSPACE TAXATION

Concept of Permanent Establishment

when an activity passes the permanent establishment in a country, that country would have the primary right to tax the activity

KEY ISSUES ON CYBERSPACE TAXATION

OECD Article 5 defines a PE

A fixed place of business through which the business of an enterprises is wholly or partly carried on PERMANENT ESTABLISHMENT includes Place of Management Branch Office Factory Workshop A place of extraction of natural resources Mine, Oil or Gas Well, Quarry etc.

KEY ISSUES ON CYBERSPACE TAXATION

OECD Article 5

PERMANENT ESTABLISHMENT

not includes

Place: solely for storage or display Procuring centre: for purchase of goods or collection of information Places: having activity of a preparatory or auxiliary nature Broker, commission agent or any other agent: having independent status

KEY ISSUES ON CYBERSPACE TAXATION

Website: Does it a PE
ONE VIEW website hosted on a server owned by an Internet Service Provider (ISP) would not constitute a PE ANOTHER VIEW Website is likely to constitute a PE in the country where the host computer resides

KEY ISSUES ON CYBERSPACE TAXATION

Theory of Physical Presence

Deciding factor is whether seller or service provider has physical presence in the customers state Tests

may be owning or renting property or having a warehouse or a fulfilment house that maintains inventory for seller or having employees or promoting his business through something like a trade show etc.

KEY ISSUES ON CYBERSPACE TAXATION

Anonymity
In e-commerce, parties and details in the transaction are, fully, or at least, partially anonymous The level of anonymity depends on the available locations technologies As the level of anonymity increases, the tax challenges become harder

KEY ISSUES ON CYBERSPACE TAXATION

Administration of Tax

Hit the principles of neutrality Taxing E-commerce and Taxing conventional Business on different footing Proper supervision is impossible- Cyberspace is not a constant place Conventional classification of business, impossible- What is trade or what is service Choice of law - makes imbalance among the nations Tax competition Higher & Lower Tax Jurisdictions

KEY ISSUES ON CYBERSPACE TAXATION

International Charters

International consensus is a must in any international tax regime. An international treaty is one leading tool to frame international consensus and law Current conventional tax regime cannot tax e-commerce and the suggestion is a Global Electronic Commerce Tax Model Double Taxation Avoidance Agreements to minimize the conflicts It enables exchange of information among tax regimes

KEY ISSUES ON CYBERSPACE TAXATION

BIT tax Multi purpose tax formula

Taxing Internet usage by volume and a turnover tax on interactive digital traffic Each digital bit of information will be taxed Collection is more convenient to the taxman, through ISPs More logical and straightforward method No more conventional classifications in trade and service

KEY ISSUES ON CYBERSPACE TAXATION

BIT tax

Levy of tax Two Options

Advance tax credit will be given to web-surfer and when the user has exhausted the quota of bits, ISP will block further access.

ISP will collect the Tax from each users on usage basis, after service.

KEY ISSUES ON CYBERSPACE TAXATION

BIT tax Against Views

Difficult to measure the actual amount of data flow Equal treatment for high and low value products amounts to tax injustice Essential services may be subjected to tax, illogically Hit the neutrality principles Tax discrimination among conventional trade and e-commerce trade Higher bit tax may lessen the more efficient method of transmitting data and information electronically

KEY ISSUES ON CYBERSPACE TAXATION

BIT tax Against Views

No differentiation of private or own user and commercial user May discourage IT development and usage of cyberspace Not easy to count the bits within statistically shared networks and could easily encrypted In absence of its universal application, competition between tax regimes may hit the international trade

KEY ISSUES ON CYBERSPACE TAXATION

Use of Technology Source for Solving Challenges

to make borders in the Internet for tax purposes only specify the geographical location of the parties to an e-commerce transaction IP address can track the existence and details of an e-commerce transaction and reveal these details to the tax authorities Forensic Regulations can mandate the inclusion in all ecommerce of tax-revealing technologies in the navigating software and tools use of technology that reveals the details of the parties, such as location, name, credit card or bank information, and so on Laws can require the use of these technologies to facilitate the taxation of e-commerce.

KEY ISSUES ON CYBERSPACE TAXATION

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