Finance: There are taxing times ahead for the industry of the future

For e-commerce to fulfil its potential, governments must modernise tax policy in order not to strangle this new business at birth.

The greatest challenge to a tax regime today is its ability to adjust and adapt to a changing world. The dawning of the age of e-commerce is the latest and perhaps the most demanding of these challenges.

The challenges that e-commerce poses for governments are opportunities for business - the increased mobility e-commerce brings, the greater flexibility it offers to the way that transactions and communications are made, and the increased revenue opportunities that it creates. The Organisation for Economic Co-operation and Development (OECD) believes that, by the year 2000, the electronic commerce industry will have grown 10-fold, and be worth over pounds 123bn. A research company, Datamonitor, predicts that by the year 2003, more than 245,000 companies in Europe, and 640,000 companies in the US, will conduct Internet-based, fully-integrated, business-to- business e-commerce.

It has been estimated that the potential for tax avoidance could create a worldwide tax hole of pounds 8bn. As such, governments are devoting significant resources to looking at ways of modernising their tax systems. These changes could dramatically affect the growth of this rapidly developing industry.

The changes required are now being debated by the major industrialised countries, through the forum of the OECD. In an unprecedented move, the OECD is actively encouraging business involvement in the decision making process. Deloitte & Touche is playing an active role in the forum as a representative member of the working party for taxation and electronic commerce. As such, its representatives will continue to vigorously pursue what they believe to be a fair, sensible and workable solution, which does not stifle the growth of e-commerce. Deloitte and Touche's primary objective is to discourage all OECD countries from introducing burdensome substantive and compliance rules that would hamper the growth of the industry or invite non-compliance.

As international tax policy regarding global e-commerce is still in its infancy, industry has the opportunity to influence the taxation of a major new commercial medium. However, the ability to affect international tax policy requires an understanding of the mechanics of global e-commerce, the international tax issues that e-commerce raises, and the broad range of alternatives already put forward. No country has so far enacted any tax laws in this area. Governments say they are keen for e-commerce to develop, and invariably do not want their countries left behind. However, this does not mean that they do not have concerns and, in the tax arena, the threat that it poses. Nor does it mean that they are united in their approach.

It is important to note that many of these issues are not new. They are similar to those faced by businesses involved in mail order or distance selling. The reason they are receiving attention now is the sheer potential size of electronic business and the speed, flexibility and mobility which trading electronically offers. It is now much easier for a company to establish a direct relationship with a customer in a foreign country, without the need for a physical presence. Consequently, the intermediaries in the supply chain between the manufacturer and the customer, such as a local distributor, wholesaler or retailer, even a manufacturer's own sales organisation or warehousing facilities, may disappear. The issue for governments is that, as these activities no longer take place in their countries, the profit margins relating to them can no longer be taxed.

Much of the discussion has focused on whether a website, or an internet server, constitutes a taxable presence in the jurisdiction in which it is located, or whether an Internet Service Provider (ISP), hosting a website, should be viewed as a taxable agent of the business for whom the website is being operated.

Governments' concerns also lie around the difficulty of monitoring transactions and identifying parties involved. Plans could involve tracking all business- to-business and consumer transactions taking place over the Internet. This could lead to an unprecedented amount of transaction recording, which may discourage companies from exploiting the opportunities that e-commerce provides. Companies may be forced to take responsibility for keeping detailed records of every transaction for tax authorities.

Clearly, technological developments have necessitated a re-examination of existing taxation law. However, business concern should focus on ensuring that new and developing taxation laws do not strangle e-commerce at birth.

It is vital that business seizes this opportunity to influence and shape tax policy for the electronic future. The business world needs to make its views known to the OECD, and monitor the implementation of laws and regulations in individual countries. The next meeting of the OECD working party on this matter is scheduled for October. The OECD wants to bear the views of international businesses. This is an unprecedented opportunity, and I urge businesses to take it.

The author is a member of the E-Commerce Group at accountants Deloitte & Touche