The term electronic commerce is not easily defined. However , it is broadly defined as “ the delivery of information ,products, services or payments by telephone , computer or other automated media”.

The definition recognizes that e-commerce can take place through many electronic means. These include telephone, fax, automated banking machine, credit and debit cards, Internet, etc.

The e-commerce has grown tremendously and continues to grow at a phenomenal rate. The WTO estimated ,in December 1999 ministerial conference in Seattle USA , that by the year 2001 there will be 300 million Internet users. Today the figure can be estimated to have crossed the figure of 400 million Internet users world wide.

The value of e-commerce transactions in 2001 stood at $ 300 billion , according to WTO. The main beneficiary of this growth is the USA. According to a survey by NUA, an Internet consulting and development firm ,24 per cent of US companies were selling goods and services online in 1998.

The same has grown to 56 per cent in the year 2001. Therefore it could safely be concluded that in the future E-WORLD the push of e-commerce would continue to grow at the cost of ordinary off-line business and middlemen especially of the poor countries.

Implications: This greater global economic interdependence has profound implications for tax systems. For example, the base for taxes on income has become more geographically mobile and therefore more sensitive to tax differentials. This has to be recognized that the mobility of e-commerce and its geographic sensitivity to tax differentials may exacerbate harmful tax competition, between countries, with each country trying to attract a larger share of the global tax base. Different world bodies are alive to such emerging scenario. The most important amongst them are OECD and WTO.

The OECD approach is coordination or “peaceful coexistence” among tax authorities. The objective is to have tax systems that are responsive to market forces, which at the same time do not interact in ways that adversely affect the international allocation of resources.

At the November 1997 conference entitled “ Dismantling the Barriers to Global Electronic Commerce” held in Turku, Finland, government and business representatives met for informal discussions on the challenges posed by global electronic commerce to tax systems.

Since that initial meeting much work has been done by the OECD and revenue authorities world wide to provide greater certainty on how e-commerce will be treated for tax purposes. Less than year after Turku, OECD formulated a Committee on Fiscal Affairs (CFA) who had formulated the Taxation Framework Conditions that were discussed at Ottawa conference in 1998.

At Ottawa it was agreed that the following broad taxation principles should apply to e-commerce: neutrality, efficiency, certainty, simplicity, effectiveness, fairness and flexibility.

The WTO approach is also similar to OECD with more emphasis on economic aspects of e-commerce. However this issue has not been able to gain as much importance comparing other sectors.

The pressure is now mounting on WTO to take on the issue. Steve Cisler, an information consultant in the USA , at the conclusion of WTO Seattle conference observed that by 2005 he sees the pressure being applied on WTO to call it “WETO” (World Electronic Commerce Trade Organization) The WTO members have now begin to explore how the body should deal with the question of e-commerce. Observers say governments are skirting a very complex issue and need to become aware of the complexities involved.

It is further argued that the WTO agenda was very backward-looking keeping in view the rapid economy changes brought about by advanced information technology in creating an economic system very different from the post-World War II situation for which the GATT/WTO process was designed.

Before we proceed further it is very pertinent to mention the WTO Agreement on Information Technology. During the Singapore Ministerial Conference of the WTO, a proposal for the expansion of world trade in information technology products was adopted vide the “Ministerial Declaration on Trade in Information Technology Products” dated 13th December 1996.

The declaration was adopted by 14 parties including the QUAD Countries (USA, Canada, Japan & EU), Singapore and Hong Kong representing about 80 per cent of the trade in these products. The agreement became effective once the number of countries joining the agreement represent 90 per cent of the trade in information technology products.

Other WTO Members could opt to join the agreement as a participant. The ITA, a plurilateral agreement within the WTO, aims to expand world trade in information technology products considering the key role this trade plays in development of information based industries and the dynamic expansion of the world economy. India joined the ITA on 25th March 1997. Pakistan has not yet signed the agreement.

Issues: In the preceding paragraphs, it has been briefly attempted to:

* Review international trends in e-commerce;

* Identify the potential growth and uses of e-commerce in future;

* Track the developments at world forums relating to e-commerce;

* Identify the concerns shown by various groups associated with regard to tax related issues.

In this background it could safely be concluded that Pakistan is still at a nascent e-commerce development stage. Despite having approximately million Internet users, the volume of goods and services sold and bought online still represents a minuscule part of the total economy.

However, if Pakistan follows what has happened in Europe and North America, tax authorities will soon be questioning whether our current tax systems are adequate for the expected e-commerce onslaught.

Specific issues: 1. Whether the current Permanent Establishment Definition (P.E) applies to e-commerce transactions on account of goods and services bought / sold on-line ?

2. What is the impact of e-commerce revolution on the application of concept of Place of Effective Management?

3. Whether e-commerce would shrink the tax base of the country?

4. What type of Tax Treaty Characterization issues are expected to arise from e-commerce transactions?

5. Why the consumers at destination (Pakistan) should pay the consumption tax (VAT/ sales tax ) in compliance to the Consumption Tax Laws of the country of origin (eg USA,EU,JAPAN )? Despite being not in their tax jurisdiction.

Due to consideration of space all the issues identified above can not be tackled in detail. Therefore, an attempt shall be made to discuss the concepts in brevity for proper appreciation of the gravity of the matter under consideration.

The first issue is PE. There are two main principles under which countries including Pakistan tax income- - source and residency. Host countries usually tax the ‘profits of the enterprise’ but only so much of them as are ‘attributable’ to a permanent establishment of the enterprise in the host country,.

Over the years, tax authorities in Pakistan have routinely ruled on specific cases and defined what types of profits are attributable to a permanent establishment and thus were subjected to tax. For instance, under the Income Tax Ordinance, 2001 tax is imposed on the income accruing in or derived from Pakistan”.

The Pakistan Tax Statute thus, uses various operations test to determine whether the income is derived in Pakistan and liable to tax. If the business operations are carried out in Pakistan, then income derived from those activities are taxable.

Prior to the appearance of the Internet and e-commerce, the permanent establishment test was quite simple; however, today, with e- commerce, business can be conducted from anywhere in the world.

For instance, would a company headquartered in USA or for that matter in any other EU country but operating an E-commerce website on a server located in Pakistan be deemed or treated as conducting business in Pakistan?

The Pakistan Tax Statute specifically does not answer the question that the mere presence of a physical server in Pakistan will amount to trading in Pakistan. With the Internet, the income-attribution and permanent establishment definitions have become blurred.

The second issue is the ‘place of effective management’. This issue is intertwined with the first issue discussed above, i,e, the concept of PE. A taxpayer may have a number of places all over the world where business activities are conducted in phases of single business activity or otherwise The implementation of strategic decisions may take place through virtual or mobile offices moving between jurisdictions.

The management may resort to taking decisions through video conferencing while physically not being present in the place where effective management rule would apply.

The taxpayer could have therefore a number of places of effective management during one particular tax year, so its residence status could be amorphous.

Further, the development of electronic cash will probably facilitate both electronic commerce and tax evasion since payments; no longer leave a paper trail, becoming anonymous and untraceable.

The third issue i,e, “tax base erosion,” would become a frequent e- commerce problem if we will not be sure as how to tax the transactions discussed as issue one and two above . This will seriously hamper the efforts of the government to broaden the tax base.

This issue is even staring in the eyes of tax collectors in the developed world. For instance, in the US, Which normally charge sales tax on retail purchases , the tax collectors are having a difficult time collecting tax on Internet transactions.

The fourth issue, which stares us is the tax treaty characterization. Pakistan is signatory of various avoidance of double taxation treaties (ADTT).

The problem has emerged globally as to how various treaty characterization issues arising from e-commerce transactions be addressed. Here comes the problem, which revolves around the characterization of various transactions.

Whether the transaction in issue is business profit or royalty or fees for technical services? In such situations we have to revert back to the statute and if the definitions found therein controvert the definitions given in the ‘Treaty’ (ADTT) the later shall prevail. Unfortunately, lot of such treaties are not meeting the requirements of e-world. This issue is still being debated at OECD (TAG).

This clearly indicate that OECD has recognized the problem and is contemplating changing various definitions given in the model tax convention.

The issue in hand can be well comprehended with the help of following examples;

* Whether the income received by a foreign company on account of electronically downloaded computer software is business income or royalty? or services?

* Whether the use of software in above situation is a patent or copy right?

* In above situations , what is the essential consideration?

* What shall be the nature of payments made by the Pakistani concern towards acquiring the services of foreign industry expert, through Internet communication? Whether such consideration is for fees for technical services? In this situation the foreign expert also demanded money through Internet by way of Credit Card.

There can be hundreds of such situations as above, for which answers are to be found.

Others: The income tax base erosion problem, as discussed above is beginning to attract the legislatures of many countries, particularly the developed states in the west. Even our neighbouring state India is alive to address the issue.

In September last year, a high-powered committee on electronic commerce and taxation specifically addressed the e-commerce income tax base erosion issue in India where the said committee concluded as under:

“What is crucial is that e-commerce represents a fast growing base, which the country cannot afford to exclude from the direct tax net. The committee is of the view that there is not a case for exempting e-commerce from direct taxation,”

The countries, including Malaysia, are also actively looking at various possible systems on taxation for the Internet era to make sure that they do not miss this important source of revenue.

The European Union (EU) is ahead in this by recently imposing value-added tax (VAT) to firms outside of its 15-nation regional grouping selling digital services like software and music downloads to Europeans, to create a fair business environment between European companies that are already paying taxes in their countries of origin and their online competitors from abroad.

Conclusion: There remains no ambiguity that fast growing e-commerce has raised enormous tax issues. In this scenario, traditional rules of taxation based on source, derivation and physical presence will be rendered ineffective, resulting in significant loss of tax revenue.

This is going to hit the roots of Pakistan tax regime challenging the relevance and application of tax laws and principles. These issues, therefore needs to be addressed seriously. Pakistan need to re-study its existing system of taxation and implement necessary measures if the country does not want to lose tax revenues when its citizens conduct transactions via electronic commerce (e-commerce).

The following measures can be taken realizing the increasing impact of e-commerce to the economy: The formulation of a national tax strategy to address tax conflicts arising from e-commerce transactions.

In formulating the strategy, the government will need to closely follow leads from findings of the OECD on e-commerce taxation and WTO.

In formulating such national e-commerce tax strategy, the government will need to create an environment where it can monitor tax revenues and yet not impede the development and advancement of e-commerce.

Apart from developing a national strategy, the government will need to prepare Pakistan for an eventuality of a global system of taxation, which may arise when governments of the future can no longer depend on national borders to define their right to tax revenues from businesses transacted within their own boundaries.

The committee of experts be constituted , both from public and private sectors, with the specific objectives to address the above issues, for safeguarding the economic sovereignty.

Companies and consumers should be made aware that e-commerce, though a different mode of doing business, involves similar concept of traditional business transactions.

3- Proper and forceful representation at international forums like OECD and the WTO, which are already seized with such matters as discussed above.

4 Training of Pakistan tax officers to equip and make them understand the complexities involved in e-commerce business and its taxation

However, with increasing cross-border transactions and until international consensus on the taxation of global trade is achieved, less developed countries, as Pakistan will find themselves at the losing end in terms of revenue collection from businesses conducted within their own territories.

On the other hand, developed nations with the technological infrastructure to carry on business in a borderless world will have the upper edge.

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