Article - Internet taxation - Devil is in the detail (January 1998)
The Australian Taxation Office has completed a special investigation into Internet taxation issues. The report’s major recommendation is that no new taxes should be introduced and that the application of existing taxes to electronic commerce should be achieved with as little red tape as possible. The report emphasises the need to create a regulatory environment that keeps the Internet industry in Australia and does not result in companies moving their business offshore.
The ATO commissioned several research and consultants reports to back up its own investigation. The 140 page report lists a number of key findings, and then makes 29 recommendations.
However, despite the general positive tone of the Report, a closer analysis of the recommendations shows that the legal framework for Internet taxation will be complex and subject to constant change and re-evaluation. The findings and recommendations are listed in full below. The ATO is happy to receive submissions and comments on the Report’s content.
The discussion paper and the background consultants’ reports are available from the Australian Taxation Office. They are also available for download at http://www.ato.gov.au/ecp/
At the same time, the Joint Committee of Public Accounts is conducting an Inquiry into Internet Commerce, and taxation issues are included in the Terms of Reference. Written submissions will be accepted, and public hearings are to be held in early 1998.
Australian Taxation Office electronic Commerce Project - Key Findings:
1. Electronic commerce is still emerging, the emergence is rapid and needs to be constantly monitored.
2. The lack of a legal infrastructure, until it is resolved, is likely to be an impediment to electronic commerce.
3. Electronic payment systems are of fundamental importance to the efficiency of Internet markets.
4. Australian bandwidth capacity is growing rapidly, but is not yet large enough for the delivery of some types of digital products.
5. Easier to use interfaces will increase the number of consumers making use of electronic commerce.
6. Electronic commerce will increase the numbers of businesses engaged in international trade and reduce the average transaction size.
7. Website costs may be low, but successful commercial websites may require considerable investment.
8. It is likely that with maturity, the Internet will become dominated by large corporations.
9. The short term impact of electronic commerce may adversely impact some Australian businesses but this trend could be reversed in the longer term.
10. No immediate appreciable impact on tax collections.
11. Consequential on finding 9, there is potential for reduction in the tax base in the medium term, which could be corrected in the longer term.
12. The impact of electronic commerce on tax administration varies according to industry.
13. The impact of electronic commerce varies according to tax type.
14. With income tax, the impact of electronic commerce varies according to income type.
15. Electronic commerce will increase the scope for tax planning.
16. Consequential to finding 6, increased participation in international trade raises some challenges for tax administration.
17. Some electronic payment systems have significant evasion potential.
18. The application of the existing jurisdictional rules is doubtful.
19. Allocative tax rules may take some time to clarify.
20. Enforcement rules should be easier to clarify than allocative tax rules.
21. Broad based international cooperation will be required to administer domestic tax laws in relation to electronic commerce.
22. Taxpayer identity is less certain in the electronic commerce environment.
23. It would be possible to maintain a list of Australian Internet device addresses to aid identification.
24. Electronic commerce technologies can reduce the availability and reliability of information required for tax administration.
25. Encryption presents difficulties, but is inevitable.
26. In relation to the electronic commerce environment, the ATO will require access powers and certainty of records comparable to those in the physical environment.
27. The effectiveness of existing collection mechanisms is reduced by electronic commerce.
28. Sales tax will be adversely affected by digital technology.
29. Sales tax will be adversely affected by disintermediation.
Australian Taxation Office electronic Commerce Project - Recommendations:
1. The ATO should establish policies associated with e-commerce in cooperation with other relevant federal government agencies.
2. The ATO should plan for cooperation with other revenue agencies.
3. The ATO should seek cooperation at international forums to seek certainty of jurisdictional rules, appropriate information sharing arrangements and to discourage the use of tax havens.
4. The ATO should be sensitive to the effect of regulation on electronic commerce.
5. The ATO should become an Internet citizen.
6. The ATO should continue to measure the risks to the tax system from electronic commerce.
7. Tax returns should capture email and commercial website addresses.
8. The ATO should monitor developments in the banking and financial sector.
9. The ATO needs to check taxpayer compliance in relation to offshore stores of value.
10. The ATO should seek to have ACN numbers displayed on commercial websites.
11. Webshops (commercial Internet sites) should be licensed.
12. Organisations that operate or host webshops should be licensed.
13. The ATO should participate in the development of a legislative and technical framework to monitor commercial IP (Internet) traffic.
14. A record of the ranges of IP numbers (Internet addresses) of Australian based computers should be maintained.
15. In relation to digital signatures, the ATO should specify the minimum evidence of identity requirements acceptable for tax administration purposes.
16. The ATO should examine the practical effectiveness of s262A (general record keeping) of the ITAA in the electronic commerce environment.
17. AUSTRAC should be requested to review the definition of ‘cash dealer’ under the Financial Transactions Reports Act.
18. The ATO should seek to technologically increase the reliability and integrity of electronic commerce records.
19. The ATO should seek to have access to credit card and electronic payment system records held outside of Australia.
20. The ATO should have a watching brief over the post Wallis banking and financial sector and provide input into any proposed regulation of the sector.
21. The ATO should liaise with the Reserve Bank to require reporting of amounts on issue for various electronic cash systems.
22. The ATO should seek to stop the potential for Nostro / Vostro bank accounts to be used for client funds.
23. The ATO should seek regulatory neutrality between physical cash and electronic cash.
24. The ATO should seek a $100 to $500 limit on certain cash-like electronic payment systems.
25. The ATO should convene a forum to discuss electronic payment systems with interested agencies.
26. The Australian Customs Service should be requested to examine revenue leakage from imports under the ‘insubstantial or negligible’ value exemption.
27. The ATO should monitor the production and marketing strategies of selected industries.
28. The ATO in conjunction with the Treasury should review the current classifications under Wholesale Sales Tax to identify items likely to be impacted by developments in technology.
29. The ATO and Treasury should jointly re-examine Tax Advantaged Computer Programs (TACP) Sales Tax exemption.