OECD Model Treaty and e-Commerce

Introduction:

A model tax treaty is a standard or a starting point used by nations for negotiating tax treaties. Instead of starting afresh, nations use various models of tax treaties to draft treaties with another country. There are mainly 3 model treaties available. The Organisation for Economic Co-operation and Development (OECD) Model, the United Nations Model Convention (UNMC), and the United States Model (US Model). This paper deals with the OECD Model treaty and e-commerce. The Organisation for Economic Co-operation and Development is an international organization consisting of 37 member countries founded in 1961 for the economic progress and world trade. This treaty is mostly used by developed countries while entering into tax treaties. To conclude bilateral tax conventions the OECD model tax convention is used. This also plays a vital role in removing tax barriers across nations. This model assists businesses and also helps to prevent tax evasion and tax avoidance.

A uniform basis for settling the most common problems like the issue of international double taxation is also provided. Since new issues are arising constantly with the evolution of the global economy the OECD model requires constant review.[1] The taxation aspect of electronic commerce in the OECD model convention is a work in progress. The OECD is working towards the implementation of the Ottawa Taxation Framework condition which is a huge leap towards reaching an international consensus on taxation with regards to e-commerce. The committee on Fiscal Affairs has undertaken the work for the most effective implementation of the taxation framework conditions. This work program involved an international dialogue consisting of OECD member countries, several non-member economies, and also the international business community.[2]

Problems of Taxation with e-Commerce

E-commerce grabs the headlines probably because it is one of the significant emerging features of the global economy. It raises basic concerns about the way our taxation mechanisms operate, whether it’s corporate income taxation or individual taxation. The technology that makes e-commerce what it is placed more focus on the future obstacles to efficient taxation-just how can you tax an e-business or all those transactions over the Internet? E-commerce makes foreign trade too much simpler, and so the tax issue is now shifting to the international stage. That’s where it blends into the OECD.

The mainstream opinion is that e-commerce should be taxed properly in the taxation net. The problem comes to implement it internationally. The same level of certainty is to be provided to businesses and governments in e-commerce as that of conventional commerce. The issue of double taxation, tax avoidance and evasion, unintentional non-taxation etc., needs to be addressed.[3]

The goal is to apply taxation norms internationally so that it is practical and effective. Many tricky technical issues need to be examined in detail and that is what the OECD model convention is about. Some common problems may be:

1. Lack of control of the place of operation by each user: As the geographical position of an activity becomes less important, it becomes more difficult to establish where an activity is conducted and thus the source of revenue.
2. No way of distinguishing users: The evidence of identification criteria for Internet usage are usually quite small. Just certain portions of an internet address (or domain name) show who is responsible for holding the name. It does not have a device or user relationship relating to that address or even where the system is located.
3. Limited use of information reporting and withholding institutions: Historically, taxation laws have placed readily identifiable reporting and withholding standards on financial institutions. On the other hand, one of the EC’s biggest commercial benefits is that the need for intermediate entities is always reduced. The possible lack of these intermediate functions provides the tax administration with a dilemma.[4]

e-Commerce: Taxation Framework Conditions

In the 1990s, the evolution of electronic commerce raised a host of taxation problems for both governments. With its long and fruitful experience of developing realistic solutions to foreign tax problems, the OECD responded rapidly and agreed to the Ottawa Taxation Framework conditions 1998. They lay down a set of concepts to be followed by policymakers in their approach to taxation in the new market. The work of the Fiscal Affairs Committee of the OECD has continued to transform these concepts into functional guidelines for foreign use since 1998.

The Ottawa Taxation Framework condition of 1998 specifies that consumption taxation in cross-border electronic trade can result in taxation where consumption takes place while retaining tax neutrality; this poses realistic difficulties in ensuring that consumption taxes are obtained on cross-border business-to-consumer electronic services transactions and intangible transactions. In the face of logistical challenges, collecting sales taxes directly from the customer is not effective. The issues are significantly reduced for cross-border supplies of goods, as customs administrations will ensure that any consumption tax due electronically is obtained before releasing the go.[5]

Based on the report by the Committee on Fiscal Affairs, as presented to Ministers at the OECD Ministerial Conference, “A Borderless World: Realising the Potential of Electronic Commerce” a few conclusions were drawn as mentioned below.

1. The fact that innovations underlying electronic commerce provide substantial new opportunities for revenue authorities to enhance taxpayer support is fully recognized by the Committee on Fiscal Affairs (CFA), and Member States are committed to completely leveraging these opportunities.
2. In relation to electronic commerce, the taxation principles which guide governments in relation to traditional commerce should also guide them in electronic commerce. The CFA claims that current taxation laws should enforce these concepts at this point of growth in the technical and commercial setting.
3. This method does not prohibit new regulatory or statutory measures or amendments to existing measures relating to electronic commerce, given that those measures are designed to promote the implementation of existing taxation standards and are not intended to enforce differential tax treatment on electronic commerce.
4. Any domestically adopted provisions for adapting these concepts to electronic commerce and any modification to current international taxation principles should be designed in order to maintain the fiscal autonomy of countries, to obtain an equal share of the e-commerce tax base between countries, and to prevent double taxation and unintended non-taxation. In order to encourage protocols and norms for electronic commerce that are consistent with these principles, tax authorities operating through the OECD shall play an active role.
5. Intensified business collaboration and consultation would be an integral part of the application process of these principles.[6]

Implementation of the Ottawa Taxation Framework Conditions

As the 1990s technology revolution progressed, policymakers around the world became aware of the ability of e-commerce to change the way corporations and people work. Modern ways of doing business have arisen to build a new business climate in which, among other factors, firms have unexpectedly found themselves needing access to customers around the world. The physical limitations of bricks and mortar were less important for big and small businesses, start-up costs were drastically decreased, and a modern entrepreneurship climate flourished. When the hardware needed to access the Internet was purchased by both corporations and users, e-commerce expanded fast.

A list of items was highlighted in the 1998 Post-Ottawa Agenda. Since then there has been a number of achievements made in the area of taxation of e-commerce. Taxpayer Service, Tax Administration, Identification and Information Needs, Tax Collection and Control, Consumption Taxes, International Tax Arrangements and Co-operation are some of the areas where significant development has been made. The member countries are encouraged to develop systems for the acceptance of tax returns through advanced technologies and the same technology for receiving payments as well. For queries and help interactive telephone answering systems are asked to develop.

The Ottawa Taxation Framework Conditions adopted a broad set of taxation principles that e-commerce should apply.

Neutrality

Taxation between modes of electronic commerce and between traditional and electronic forms of commerce should aim to be impartial and equal. Economic rather than tax considerations should guide business decisions. Taxpayers making similar transactions in similar circumstances should be subject to similar taxation levels.

Efficiency

As far as possible, enforcement expenses for taxpayers and administration costs for the tax authorities should be reduced.

Certainty and Simplicity

Tax laws should be transparent and easy to understand so that taxpayers can predict the tax ramifications of the sale in advance, like understanding where, when, and how to account for the tax.

Effectiveness and Fairness

Taxation at the proper time should yield the right amount of tax. It is important to minimize the scope for tax evasion and avoidance while keeping the counter-acting steps proportionate to the risks involved.

Flexibility

In order to ensure that they keep pace with technical and commercial innovations, the taxation structures should be versatile and dynamic.

Challenge to the Individual Government

Initially internet was only seen as a means of communication. As it shifted from the means of communication to supporting commercial activities there was friction between those who saw the internet as a new platform for commercial activities and those who perceived that there should be a defined framework within which the commercial internet could operate. In situations that would historically have demanded a degree of physical presence, the possibilities created by the technologies to market goods seemed to challenge the implementation of tax principles built for a physical, rather than virtual environment.

ICTs are also used by administrations as an incentive to boost government business. The potential was clear to allow the interface between government and people to grow. One of the main fields defined in this regard was taxes and, in particular, the use of technology as a way of simplifying the interaction between tax authorities and taxpayers. As an environment for growth that could reduce logistical pressures on both sides, online tax returns have inevitably been emphasized. In order to lead the e-government transition, several governments use tax administration.[7]

The Post 2001 Progress

It was reported that the tax structure applied to conventional commerce should be applied to e-commerce as well. The first issue which was with regards to direct taxes was addressed.

Direct Taxes

Four concerns relating to direct taxes were addressed by the 2001 Report. The first was the explanation of the framework in e-commerce of the concept of permanent establishment (PE). The Committee released two drafts for public consultation and approved the suggested revisions to the OECD Model Tax Convention on 22 December 2000. Such modifications explain under what situations computer equipment may constitute a permanent establishment at a given venue.

PE for Electronic Commerce

The EC may raise problems with the concept of permanent institutions, which are not addressed by current tax treaties. While unexpected problems are expected to emerge, the present debate on what constitutes PE can be summarised narrowly in the following questions.

• If the simple usability of a website from within a certain jurisdiction is subject to income tax in that jurisdiction for site owners.
• If a server presence would constitute a PE.
• If the computer of a consumer constitutes a PE.
• If a PE will constitute the distribution of services by an Internet Service Provider (ISP).

These problems would have to be discussed by Treaty negotiators to see if Treaty definitions can be implemented for new ways of doing business.

The second issue concerned the first: the drafted discussion on the distribution of income to a permanent institution constituted by a server at a given location was generated by the Company Profits technical advisory group (TAG). The third issue was dealt with in the Treaty Characterisation TAG paper, which made recommendations on the characterization of different forms of e-commerce payments within the context of the OECD. The fourth problem concerns the effect of e-commerce as a tie-breaking law on the implementation of the location of successful management. This was the subject of a business Gains TAG Topic Draft

Consumption Taxes

The supplier is responsible for the proper application of tax on each sale under consumption taxes such as Value Added Tax (VAT) – referred to by some jurisdictions as Goods and Services Tax (GST) -. In an e-commerce setting, this ensures that systems must be able to apply the correct tax rate automatically and at the time of the sale in the correct jurisdiction.

It is important from a business perspective to ensure that VAT/GST is properly implemented at the moment the transaction takes place, as there is little risk of fixing errors later, particularly in the B2C context. Most e-commerce functions in processes with the minimum of human interference, so it is necessary to provide reliable information on the implementation of these taxes so that operators of systems can function in a fiscal climate that offers certainty.

The 2001 Report acknowledged that more analysis had to be done to thoroughly improve the Ottawa Taxation Framework Requirements, as reinforced by the Recommendations and Proposed Approaches. This assignment included:

• Verification of the authority and the client’s standing
• In the sense of simplification, the registration threshold has to be seen
• Study of collection mechanisms dependent on technologies and enabled by technology
• Establishment of administrative cooperation internationally
• Options and programs for simplification.

Conclusion

The Internet’s phenomenal pace would cause us to redefine our world views and to recreate the laws and regulations that apply it. Since conducting business through EC is rapidly becoming the standard of the day, the pace of knots at which foreign organizations and nations are implementing strategies to face EC’s challenges is too sluggish. Current income tax canons based on foundation laws tend to be being obsolete. International organizations, such as the OECD, have an urgent need to establish more fair principles for cross-border EC transactions so that tax collections can be allocated more equitably amongst nations. Countries suffering tax erosion should not be pressured to take urgent steps that could be short-term and thus likely to adversely affect the EC economy’s growth. EC has made geological precincts obsolete and transformed the planet into a digital civilization. The creation of the EC must not be disrupted by bureaucratic and administrative challenges. The prevention of dissonance between nations on the distribution of profits from taxation of EC transactions is of special importance. Nations must make a concerted effort through a body consisting of members of all nations to establish the taxation concepts of these operations.

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References:

[1] www.oecd.org. (n.d.). OECD. [online] Available at: https://www.oecd.org/ctp/treaties/model-tax-convention-on-income-and-on-capital-condensed-version-20745419.htm [Accessed 19 Jan. 2021].

[2] www.oecd.org. (n.d.). Taxation Aspects of Electronic Commerce: Publication of reports and technical papers – OECD. [online] Available at: http://www.oecd.org/tax/treaties/ecommercereportsandtechnicalpapers.htm [Accessed 19 Jan. 2021b].

[3] oecdobserver.org. (n.d.). E-commerce and taxation: a virtual reality – OECD Observer. [online] Available at: https://oecdobserver.org/news/archivestory.php/aid/416/E-commerce_and_taxation:_a_virtual_reality.html#:~:text=E%2Dcommerce%20can%20and%20will [Accessed 20 Jan. 2021].

[4] Bagaria, S. (n.d.). Taxation For E-Commerce – A Global Perspective. [online] www.legalservicesindia.com. Available at: http://www.legalservicesindia.com/articles/tax_ec.htm [Accessed 19 Jan. 2021].

[5] The IT Law Wiki. (n.d.). 1998 Ottawa Taxation Framework Condition. [online] Available at: https://itlaw.wikia.org/wiki/1998_Ottawa_Taxation_Framework_Condition [Accessed 19 Jan. 2021].

[6] ELECTRONIC COMMERCE: TAXATION FRAMEWORK CONDITIONS. (1998). [online] OECD.org, p.3. Available at: https://www.oecd.org/ctp/consumption/1923256.pdf [Accessed 20 Jan. 2021].

[7] IMPLEMENTATION OF THE OTTAWA TAXATION FRAMEWORK CONDITIONS. (2003). [online] OECD.org, OECD, p.13. Available at: https://www.oecd.org/tax/administration/20499630.pdf [Accessed 20 Jan. 2021].