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This article review will summarize the work of Jinyan Li and Jonathan See entitled Electronic
Commerce and International Taxation.
The article begins by outlining the differences inherent in the new economy, which is dominated by
electronic commerce (e-commerce), from the features of an industrial based economy. Included in their
analysis is an examination of the increased role of fluidity in the movement of capital and fiscal goods.
Second, the authors discuss how the evolution of the new economy has changed the relationship between
“geo-economic space upon which international tax law and conventional commerce are grounded.” Third, Li
and See conclude that Canadian tax authorities, working within the international framework, should revamp
their tax structure in order to maintain their respective tax base in the new economy.
The major difference between the two types of economies, old versus new, is the transfer from an
industrial-based to a knowledge-based economy. E-commerce is merely the conducting of commercial
activities through electronic means. The defining characteristics as stated by the authors of the new economy
include:

the blurring of national boundaries and the elimination of distance

no or minimal physical presence along with the reduction of intermediaries

the lack of physical regulatory control

the potential for increased intra-firm integration
Since most states collect their taxes based on residency requirements, the new-economy poses a
challenge to countries in determining their respective tax jurisdiction. For example, the issue of income
earned from cross-border transactions between various jurisdictions is a barrier to the efficient collection of
taxes.
The proliferation of telecommunication technologies has enabled corporations to relocate their
operations anywhere in the world, which raise additional tax collection problems for governments. Since
companies are taxed based on their “place of incorporation” they can employ e-commerce to manipulate their
proper tax jurisdiction. For example, the features of the new economy allow corporations to abandon hightax zones and relocate to states considered tax havens. Since e-commerce “blurs income categories and
defies income characterization” Canada faces the risk of loosing its effectiveness to tax foreign corporations
who interact with Canadian consumers.
When examining the issue of source taxation, “permanent establishment” is a very important
principle. In its absence, a country has no authority to tax profits of goods and services which are sold within
its recognized national boundaries. Because permanent establishment is a “fixed [IE. geographic location]
place of business”, e-commerce is used since it does not have a brick and mortar existence, and allows for
companies to avoid these traditional tax arrangements.
Given that the OECD Model Convention is the basis for Canadian tax treaties, Canada is vulnerable to the
interpretations of the Convention, including the guidelines surrounding issues such as permanent
establishments.
Along with source taxation, the character of income is an important tax feature and affects how
income is both sourced and taxed. The categorization of income in the new economy is difficult because
many products are combinations of “tangible goods, services, copyright and know-how.”
Another challenge that governments face is the allocation of income earned from intra-firm
transactions of multi-national enterprises or MNE’s. Since the majority of trade is done within related parties
of an MNE, many involving intangible products, Li and See discuss the difficulties in properly allocating
income for taxation reasons from these types of transactions. Since many e-commerce transactions are not
comparable, the arm’s length principle - the principle presuming separate accounting units that deal with one
another on an arm’s length basis – although relevant in traditional intra-firm transactions, it is not applicable
in many new economy dealings.
The existing tax legislation presents difficulties in collecting proper taxes from e-commerce
transactions. This problem is exacerbated by the notion that conventional commerce and e-commerce should
be treated similarly for tax purposes. Although it is important for the Canadian government to protect its tax
base from corporations locating in tax havens, at the same time an effort must be made to develop a “fiscal
climate within which e-commerce can flourish.” E-commerce also presents audit challenges since these
transactions include difficulties in locating records which are kept electronically and the inability to properly
verify the authenticity, integrity and reliability of electronic records. Assessing the proper financial figures
of a corporation located in a tax haven is also difficult because tax havens usually have bank secrecy laws
and have no tax treaties. Also, because intermediaries such as brokers and financial institutions are being
removed from trade activities, tax administrators are loosing one of their traditional taxing points.
A further issue examined by Li and See is that of international consumption taxation. Since Canada
is an e-commerce importing country, they have seen their tax base depleted because of online purchases by
their residents from U.S. based suppliers. This occurs because the purchasers do not always self-assess the
tax payable and remit those funds to the government. The authors point out that this phenomenon will
increase as business-to-consumer transactions become more popular. They put forward the idea to have
businesses determine the amount of consumption tax chargeable and remit the taxes directly to authorities in
order to alleviate this taxation problem.
Despite the many advantages from e-commerce for both producers and consumers, these activities
also present many challenges for international tax rules and tax administration. Canada, working with other
OECD countries should “consider actively searching for new measures to ensure its fair share of tax base in
the new economy,” so that its source and residence-based taxation is not eroded with the continued
expansion of e-commerce transactions.
By Evan Sotiropoulos