The metaphysics of taxing e-commerce companies, part one
This column has never been one to rush headlong into new trends or to get carried away by something newfangled and hi-tech. After waiting an appropriate time, I am now going to be the last columnist in the entire universe to mention this apparently exciting internet thingy. Rumors of the column being renamed "TaxWatch.com" and relocated to Cyprus in preparation for an IPO are just that, so you can breathe easy knowing I am going to continue concentrating on doing what this column does best: adding to your global tax confusion on an ongoing basis.
When we tax people start talking about e-commerce taxation, the discussion can veer off in several directions.
For many, e-commerce taxation equals tailoring tax services to e-commerce companies, for example by designing stock option plans for dot.com employees. The appearance of online tax returns, submissions and payments also means the discussion raises questions about a potential revolution in the tax business.
Still others use every e-commerce conversation as an opportunity to complain about how dot.com people are making squillions more than the tax brigade is. But we'll let that one go.
Others understand e-commerce taxation to refer to the complicated technical aspects of how existing taxes, which apply equally to e-commerce and normal commerce, can be enforced and collected when the physical location of the business is indistinct. This sober topic, as you may gather, is the aspect of e-commerce the column will be addressing.
The first thing to remember is that companies doing e-business are still companies in the true sense of the word: they have a legal form, employees, the need to keep accounting records and make tax filings, and so on. They are therefore not immune from the normal, boring tax issues affecting the rest of us. But that's not a very scintillating subject, so I will move on.
The more exciting issue is whether internet transactions are subject to tax. The most common misconception is that internet transactions aren't taxed or have preferential tax treatment. Actually, the taxability of e-commerce transactions is closely tied to the tracking of transactions that cross a physical border. So if a transaction takes place over the internet, the authorities face the difficulty of identifying a suitable point at which to levy taxes.
A Polish company supplying goods in Poland to Polish customers is subject to the same corporate and VAT tax as if the transaction had taken place over the phone, fax, or face to face. If the transaction takes place across a border and over the internet, the supplier is still subject to corporate taxes in his country of residency.
But things are different in the customer's country. If the supplier had physical premises in the customer's country, then it would be easy to tax him. If his presence is only virtual, however, it becomes far more difficult to tax. In theory, tax could be leveled at the customer as a withholding, but if each of your customers is collecting your taxes for you, this could become a real nightmare.
At the core of the e-commerce taxation discussion lies the question of what constitutes a taxable presence. Do you need to have people making decisions to be taxable, or is the presence of an owned or leased server enough for there to be a taxable presence?
The physical presence of a server is likely to be meaningless, because modern telecom technologies allow a server to be located anywhere. If server location became the determining factor of taxable presence, a country could design its tax rules around that requirement and become a hub of expensive servers operating in a people-free environment, with an automatic and virtually tax-free economy. The country would just levy a small "appearance fee" to profit from encouraging firms to locate servers in it. This could be Poland's opportunity along with that of every other country that would jump on this idea, which is why I believe such a scenario is unworkable.
In many ways, existing double-tax treaty rules, which determine when a company resident in one country has a taxable presence in another, apply to e-commerce. If the company is or has the power to conclude transactions that bind its parent company, then it is taxable in the country where the transactions take place, whether in a "new economy" or in a traditional way.
Far more interesting or complicated, depending on how you look at it, is the area of indirect taxes such as VAT. In Poland, VAT is levied on the physical cross-border importation of goods, so an e-commerce transaction would still be subject to VAT in the same way as a normal sale. Life gets more difficult if the physical delivery takes place online, as in the case of digitally transferred software of music. Theoretically, online deliveries are also subject to VAT, but enforcement is far more complicated.
In addition, once Poland joins the European Union, the free movement of goods within the bloc means there will be no taxable border crossings, which will make tax collection more difficult. But as this column has often said in the past, the mere difficulty faced by tax authorities in tracing or finding something is entirely different from whether that something is subject to tax.
It seems like I've run out of space and there's still more to talk about. We will continue this rambling discourse next time ...
Peter Ferrigno is a tax manager in the Warsaw office of Arthur Andersen.
