In a world that is increasingly becoming digital, tax authorities are faced with the challenge to minimize the loss of revenue from electronic commerce on one hand and using it to drive down the cost of administering revenue collection on the other.
In his speech during the 27th Study Group of Asian Tax Administration and Research (SGATAR) Summit, Commissioner Graham Holland of the New Zealand Inland Revenue, told delegates that the increasing use of electronic commerce will widen the tax gap between theoretical revenue and actual collected revenue.
However, Holland added that on the administrative end, e-commerce can lower the total economic cost of collecting taxes, by bringing down the taxpayer's cost of compliance as well as lowering administrative expenses on the collection side.
Holland said that since last year's SGATAR conference in New Zealand, a significant level of work has been carried out around the world on the revenue aspects of taxing income generated by electronic commerce.
For instance, at the APEC (Asia-Pacific Economic Cooperation) summit in Vancouver, leaders will consider a proposal to discuss a neutral system for taxing Internet sales. “Electronic commerce without a doubt increases the likelihood and speed of the continuing globalization of world trade,” said Holland. "However, tax authorities must prepare for and avert any potential risk to taxation revenue that arises from the increasing use of electronic commerce.”
Holland also said that global e-commerce may increase the volume of trade, but will not alter the fundamental rules that determine who gets taxed where.
He said that in a country where the tax authority has strong rules on residency that capture the worldwide investment income of a resident, electronic commerce is likely to have little effect on tax revenue. However, e-commerce will make tax collection more difficult in countries that rely on source-based taxes.
“There has been a lot of talk suggesting that consultants, instead of physically coming to your country and performing their services, will base themselves in a tax haven and provide you with their services solely by electronic means, thus avoiding non-resident withholding taxes,” said Holland. He said that if this were to become serious business practice, then it would be a risk to revenue.
Holland admitted that e-commerce is not all doom and gloom. He said that it offers tax authorities new ways of conducting their own business electronically. “Where electronic commerce gets more interesting for us as taxation authorities is at the interface between the taxation authority and the taxpaying customer,” he said.
At the same conference, Bruce Jones, second commissioner of the Australian Tax Office (ATO) said that technology plays an important role in the reinvention of taxation administration. New taxes and activities are expected to be approached in a different way, Jones said. “The increasing amount of business transacted through technology such as the Internet will also lead to fundamentally different approaches.”
He said that provisions of Internet Web sites and availability of transactions and forms online are rapidly becoming the norm. Jones also said that ongoing automation is essential if compliance improvement, operational costs and client expectation are to be met. “Reinventing tax administration systems remains the tax administrator's greatest challenge,” said Jones.
During her speech on administrative reforms, Commissioner Liwayway Vinzons-Chato of the Philippines' Bureau of Internal Revenue (BIR) said that the BIR has put itself through major organizational, process and technological changes with one big bang. “Some skeptics would say we are biting more than we can chew. Whether you like it or not, we will succeed,” said the commissioner.
Commissioner Chato said the creation of a new deputy commissioner's position to handle the Legal and Enforcement Group coupled with the bureau's tax computerization project will enable the BIR to obtain the needed information for stronger and better prosecution of tax fraud and tax evasion cases.
The backbone of BIR's transformation program is its tax computerization project called SPIRIT (System for Philippine Internal Revenue Information Technology), which seeks to set up a new integrated, computerized tax administration system. The system is being built by the Manila office of Andersen Consulting Inc. and Philippine Systems Products Inc.