Taxation Of Electronic Commerce: Conflict And Countermeasure

Since the middle of 1990s, an effective and convenient worldwide virtual market is formed because of the rapid development of electronic technology and the prevalence of the internet. On one aspect, e-commerce pour new energy into the workd, accelerate the development of the world economy; On the other aspect, e-commerce changed the traditional form of trade and brought many challenges to the traditional tax law. Among those challenges, the most noticeable one is that the traditional tax jurisdictional rules are often unsuitable when applied to economic activities that are tied to the Internet. In the case of traditional trade, countries negotiate bilateral tax treaties to govern the tax treatment of cross-border transactions. Under most tax treaties, a company that sells goods and services to foreign markets can have its profits taxed by the foreign tax authority only if the company maintains a "permanent establishment" within the foreign jurisdiction (the "source country") and profits are attributable to this permanent establishment. In the absence of any permanent establishment, the source country is not permitted to levy its income tax on any profits arising from the international transaction and the country where the business is based (the "residence country") will generally tax all of the profits. A permanent establishment is defined within each tax treaty and generally involves fixed places of business such as a branch, an office, or a factory. The definition of a permanent establishment is additionally extended to cover the activities of a dependent agent within a source country as long as the agent habitually exercises authority to conclude contracts.The emergence of e-commerce, however, upset this balance because physical locations are no longer required in foreign markets in order to engage in significant commercial activities. The e-commerce is an intangible, anonymous, paperless and global trading. The geographic factors which are crucial in traditional trade are no longer important in e-commerce. New connecting factors have to be found in e-commerce.Although revenues associated with e-commerce are still relatively small, studies forecast trillions of dollars in international revenues within the next few years, especially in the e-commerce business-to-business market. As a result, governments throughout the world are concerned that they will not receive their fair share of the revenues associated with taxing e-commerce profits. The America as the largest e-commerce net exporting country, announced its "tax free" policy in e-commerce. OECD launched a scheme of taking the computer server as the permanent establishment. While most developing countries as e-commerce net importing countries are indifferent to the tax rule of e-commerce. Developing nations are particularly vulnerable to the development of rules that permit e-commerce producing nations to exclusively tax cross-border e-commerce transactions. E-commerce are rapid developing, even represent the future direction of international trade. Regulators, however, have to devise a way to effectively tax the exploding e-commerce industry. This inability to effectively tax Internet transactions will eventually lead to significant revenue losses.This article discusses how (and why) governments should strive to use Internet technologies to protect their ability to collect taxes. The need for effective regulatory action is particularly acute in the tax area because more and more commercial activity is taking place over the Internet. Many experts are dedicating in this area and various projects are brought forward. Such as the proposal of taking the computer server as the permanent establishment; the project of "bit tax"; the project of "virtual Permanent Establishment" and the "economic presence test" and so on. The author thinks that the project of "virtual PE" and "economic presence test" are more practical in solving the tax difficulties in e-commerce. Part One of this article introduces the definition and character...