Abstract
E-commerce plays an increasingly important role in the modern corporate world. However, due to its novel nature, it is poorly compatible with the existing taxation laws and regulations. The following paper aims at exploring the available empirical literature in order to determine the most common challenges to e-commerce taxation across the world. The chosen research method is a systematic literature review. The findings indicate an apparent need for an updated taxation legislature that would recognize the unique properties of e-commerce, eliminate tax avoidance possibilities, and, in some cases, reduce inequality between businesses with different financial backgrounds
Introduction
In the recent years, e-commerce has grown enormously both in volume and profitability of operations. However, the taxation process is still riddled with inconsistencies that introduce unnecessary complexity into the system (Low, Kabasunakatuba, & Sharma, 2013). Besides, on some occasions, it opens up the possibility to avoid paying taxes through unfair practices (Kirti & Agrawal, 2014). The following paper aims at outlining the most apparent challenges to e-commerce taxation on an international scale by comparing the issues pertinent to different counties. The findings will be useful for determining the most relevant directions for the policymakers and possibly highlighting the areas overlooked by previous researchers.
Literature Review
The current size and scope of e-commerce have reached an unprecedented magnitude. The volume of operations conducted on the Internet allows for the speculations on the possibility of the inevitable decline of the brick-and-mortar stores (Gałuszka, 2013). At this point, the concerns with the taxation are evident. However, several problems were outlined during the early phase of e-commerce development.
For instance, Nellen (2001) pointed out several policy issues that required resolution considering the existing laws and regulations in the United States. Specifically, the issues included the possibility and necessity to tax the services of providing internet access, the collection of sales and use tax from the vendors that were not bound to a specific territory (e.g. non-present), the possible damages to brick-and-mortar businesses resulting from the incomplete taxation of the e-commerce entities, and the criteria for subjecting businesses of different kinds to the telecommunications taxes (Nellen, 2001).
The author also pointed out that several states collect tax on digitized products and that this could lead to a situation where the retailer would be unable to know whether the customer is subject to such tax or not (Nellen, 2001).
While some of the issues were addressed over time, the majority of problems identified in the early phase of e-commerce development can be observed in the segment today. Most of them can be connected to the specific attributes of the phenomenon. The most significant of these attributes is the inherent virtual quality of the e-commerce process. In simplest terms, at least part of the transaction that occurs between a vendor and a customer is not present on the physical plane (Gałuszka, 2013).
In other words, the involvement of the Internet effectively brings the deal outside the familiar notions, which, in turn, renders many of the well-established regulations and legal principles obsolete. Importantly, the products and services involved do not have to be virtual. According to Gałuszka (2013), three types of e-commerce activities can be identified. The first type involves selling a tangible product, such as a book, over the Internet.
The second uses an intangible product, such as a digital copy of a media. The third involves the purchase of services, which can be Internet-based (e.g. an online lecture) or traditional (e.g. a reservation in a hotel) (Gałuszka, 2013). Notably, only one of the three categories involves virtual goods while other two use the Internet as means of communication to conduct the otherwise traditional business activity.
However, this component serves as a major source of controversy as it creates inconsistencies on both national and international level. From the global perspective, two categories for tax jurisdiction are recognized: source-based and resident based taxation. For the former, the contribution of an infrastructure of the source country to the process of income production is recognized as a justification, and for the latter, the contribution of the country to the abilities of the income production is a relevant factor (Gałuszka, 2013).
Such approach leads to the situation where certain businesses are taxed twice. In addition, according to Kirti and Agrawal (2014), e-commerce makes it difficult to categorize the income according to the identified categories as the concept of jurisdiction becomes vague and unclear. In the extreme cases, businesses can operate entirely in the virtual space without the need for the physical space or with a level of decentralization that renders the connection to a physical location useless (Kirti & Agrawal, 2014).
Ward and Sipior (2004) identify five types of e-commerce and argue that the completely virtual organizations pose a relatively moderate challenge compared to other categories. The convergence of numerous aspects of businesses (e.g. communications and payments) creates greater barriers to taxation since they fit poorly into the existing government regulations. In addition, the complete absence of borders or distances in cyberspace eliminate the need for numerous intermediaries but introduce ambiguous rules such as taxation of regional actors without the apparent justification (Ward & Sipior, 2004).
The combination of the factors above creates two distinct threats. First, the governments and responsible organizations are experiencing increased load while attempting to establish the eligibility of each business to taxation. This, in turn, creates a situation where state and federal authorities experience significant financial losses. According to the estimates, these losses can aggregate to more than $52 billion in five years of e-commerce functioning in the United States only (Bruce, Fox, & Luna, 2009).
These losses can be mitigated by introducing the adjustments to the tax regulation and using a revenue estimation methodology, which would make remote vendors eligible for the collection of sales and use of taxes (Bruce et al., 2009). Second, the identified gaps in taxation approach open up the possibility of tax avoidance, where the businesses could move their operations into the virtual domain in order to remain exempt from taxes.
According to Low et al. (2013), the transactions that occur in cyberspace are hard to identify and relate to a specific jurisdiction, and both the accessibility to records and their accuracy is trusted to vendors that can deliberately resort to unfair practices in order to conceal their eligibility for taxation. In other words, e-commerce contains the risk of both the unintentional and deliberate tax avoidance.
Method of Analysis
The following method of approach to analysis is a qualitative and is in the form of the systematic literature review. The research takes a form of a descriptive study and uses secondary data for the analysis. The data is collected from the available academic literature. The sources of the data are selected based on several criteria. First, the source must contain a clearly defined issue or set of issues pertinent to the taxation of e-commerce.
It must be stated explicitly and justified using compelling evidence. Second, the issue must be conclusively bound to a specific location (e.g. a country) or defined as an international one. Third, the source must be published in a reputable journal and comply with academic standards. The analysis will be done in a narrative form due to the empirical nature of the used data.
Several reasons can be identified for the selection of the described approach. First, while the issue of taxation of e-commerce is recognized as important by the responsible entities, little quantifiable data is published on the matter. This limits the possibility of conducting a quantitative research based on the secondary data. While it is possible to gather primary data on the topic, such opportunity is severely limited by the time and resource requirements available for the project.
Finally, while the issues of specific jurisdictions have been addressed in previous studies, no attempts have yet been made to compare the findings of different researchers. Such situation requires for an exploratory, descriptive study to identify the perspective directions of future inquiries as well as summarize current trends and achievements in the area.
Analysis
Six papers were located and used in the analysis. Five of the articles dealt with taxation issues in specific countries – the United States, India, Brazil, Kenya, and Fiji, while the sixth article viewed e-commerce taxation as a global problem. In two cases, the findings were based on primary data collected via interviews and surveys. In the rest of the papers, secondary data was used, which was requested from the involved organizations or collected from the studies by other researchers. The sets of issues identified as a result of the analysis are listed below.
United States
The main issue within the United States associated with e-commerce taxation is the amount of revenue generated by the virtual businesses that remain exempt from taxes. The model developed by Bruce et al. (2009) applied to the data on estimated revenues of business-to-business sales (presumably accounting for the overwhelming majority of profit) revealed massive losses resulting from lack of appropriate regulations.
The conservative estimates range from $52 to $56 billion in five years (Bruce et al., 2009). Importantly, the authors provide no justification for priority assigned to the identified issue and do not cite other potential problems. However, they suggest a possibility that some businesses may change their principles of operation once it provides them with the way to avoid creating collection responsibility. In this scenario, it is possible to predict much larger losses.
Kenya
A survey administered to 50 value-added tax officers in Kenya revealed several common issues. Two of the most frequent concerns reported by the respondents were the lack of acknowledgment of the uniqueness of e-commerce in the official documents and the lack of relevant policies to regulate it (Patel, 2014). Other common complaints included the lack of resources at the disposal of the organization responsible for tax administration, the inability to monitor the industry, and the absence of the infrastructure that would allow managing financial operations in an accessible and transparent way. It should be noted that while the mentioned issues can be applied to those identified for the United States, the connection is indirect, and the apparent emphasis is on the structural and organizational aspects of the issue.
Brazil
Brazil has already undergone a change in regulations that deal with e-commerce taxation in the form of Protocol 21. However, it turns out that the burden of the newly imposed tax is distributed unevenly across the states, with poorer ones ending up at a disadvantage in comparison to the richer ones such as Rio de Janeiro and Sao Paulo (Sousa, 2014). Thus, the situation in Brazil can be described as a logical extension of that in Kenya in a sense that the authorities in the country have already attempted to address the issue of e-commerce taxation. Unfortunately, the current resolution turned out to have its disadvantages, which is neither uncommon not irreversible.
Fiji
Fiji is another country where businesses suffer from incompatibility between the taxation laws and the actual functions and parameters of e-commerce. The administration of semi-structured interviews revealed the complexity of matching the sections of the tax laws with the poorly fitting sources of online income (Low et al., 2013). In other words, the insufficiency and ineffectiveness of current tax legislation remain a primary issue despite the steps taken to embrace the trend of shifting towards e-commerce.
India
Kirti and Agrawal (2014) highlight the possibility of tax evasion by individual businesses through the loopholes in the current Indian taxation legislation. The researchers point to a specific concern – identity verification. Apparently, in India, there is a visible trend of using diverting mechanisms and proxies as well as encrypting data in order to avoid compliance with tax collection criteria (Kirti & Agrawal, 2014). While the described situation is notably similar to that hypothesized by Bruce et al. (2009), it provides concrete examples of legislation abuse and offers a real-world scenario that can be used to develop relevant interventions.
Global Perspective
Instead of focusing on a specific country, Gałuszka (2013) turns to the issue of international interactions that are inevitably involved in any e-commerce transaction. The common problems identified in the study are the lack of justification for source country’s specific contribution, the vagueness of proportion of each actor’s contribution, and, most importantly, the absence of norms that could confirm fairness and effectiveness of the determined tax (Gałuszka, 2013). It is apparent that all three of the identified issues can be resolved through the implementation of a unique set of laws and regulations, which places these concerns on par with those identified for Kenya, India, Fiji, and the U.S.
Conclusion
The analysis above reveals that all of the reviewed sources described the setting where e-commerce taxation attempts are in the early stage of development. In five cases, the unique regulations are absent or inefficient while in one case their efficiency is nullified by the discovered inconsistency that introduces inequality among businesses (Sousa, 2014). In two cases, the possibility of unfair practices is hypothesized, and, in one of these cases, concrete examples are provided to prove the reality of the scenario (Kirti & Agrawal, 2014).
In five cases, the stated concerns can be effectively addressed through adjustments of the regulatory system in the direction of acknowledgment of the unique qualities of e-commerce, and in one case the proposed amendments need to target the unintended side effect of the newly incorporated law. Therefore, it would be both necessary and beneficial to seek ways of addressing the gaps in legislature both to simplify the business operations and to ensure the profitability of all involved parties.
References
Bruce, D., Fox, W. F., & Luna, L. (2009). State and local government sales tax revenue losses from electronic commerce. State Tax Notes, 52(7), 537-558.
Gałuszka, J. (2013). How to tax e-commerce – global or national problem? Studia Ekonomiczne, 150, 193-202.
Kirti & Agrawal, N. (2014). Impact of e-commerce on taxation. International Journal of Information and Computation Technology, 4(1), 99-106.
Low, M., Kabasunakatuba, L. L., & Sharma, U. (2013). The challenges to taxing e-commerce: A comparative analysis for the Pacific. African Journal of Accounting, Auditing and Finance, 2(4), 334-359.
Nellen, A. (2001). Overview to e-commerce taxation issues. Web.
Patel, S. H. (2014). Challenges of value added tax on international e-commerce in electronic goods and services in Kenya. Research Journal of Finance and Accounting, 5(7), 139-143.
Sousa, M. P. (2014). The challenges of taxation on e-commerce in Brazil: Lessons learned from the United States. Web.
Ward, B. T., & Sipior, J. C. (2004). To tax or not to tax e-commerce: A United States perspective. Journal of Electronic Commerce Research, 5(3), 172-180.