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Electronic Commerce – An International Overview
The Internet has changed the way in which the world conducts business. Goods are purchased and sold, services are rendered, stocks are traded, newspaper and magazine subscriptions are sold, and up-to-the-minute news and financial information is readily available, all from the convenience of the consumer's home or office. In its April 15, 1998 report, “The Emerging Digital Economy,” the U.S. Department of Commerce found the following:
It is estimated that by 2002, businesses will buy and sell $327 billion worth of goods over the Internet. By the end of 1997, more than 100 million people were using the Internet; by 2005, that number is likely to have grown to one billion. As of December 1996, 627,000 Internet domain names had been registered; by the end of 1997, the number of domain names more than doubled to 1.5 million. Traffic on the Internet has been doubling every 100 days. By 2003, over 9% of all business-to-business commerce is expected to be transacted over the Internet.
Business owners around the world are increasingly turning to the Internet to increase their efficiency and profitability. Lower purchasing costs; reduced inventory; lower cycle times; more efficient and effective customer service; lower overhead; lower sales and marketing costs; increased awareness of competition; new sales opportunities and a global customer base are only some of the benefits enjoyed by businesses conducting electronic commerce.
Legal Issues: The U.S. and major international organizations such as the European Commission, the United Nations Commission on International Trade Law (UNCITRAL), and the World Trade Organization (WTO), are presently engaged in discussions regarding the development of domestic and global legal frameworks that will facilitate electronic commerce worldwide. Consensus exists that uncoordinated policymaking should be avoided, and international cooperation encouraged. The goal of an international policy accord essentially is to secure a legal framework that will facilitate global electronic commerce without overly or unnecessarily impeding the freedom of governments to pursue their own objectives.
Income Tax Issues: In a 1996 report entitled “Selected Tax Policy Implications of Global Electronic Commerce,” the U.S. Treasury Department outlined the Clinton Administration's views of federal income taxation issues implicated by developments in communications technology and electronic commerce. Among other things, the report discussed the Internet and highlighted several key issues including what the Department referred to as the decentralizing effect of the Internet on taxation. Specifically, the Department discussed the difficulty of applying traditional source and residence concepts to link an item of income with a specific geographical location to transactions conducted through electronic commerce. The Department's report suggests that the focus on and importance of concepts of source-based taxation may decrease, and the significance of residence-based taxation may increase. In addition, standard tax concepts such as what constitutes a permanent establishment, and what qualifies as engaging in a trade or business in a particular jurisdiction, are less clearly applied in the context of electronic commerce. If a shift in focus to residency occurs then the selection of a corporate domicile will become increasingly important as corporations seek to benefit from the most advantageous local tax laws and international treaties.
Sales Tax Issues: A consensus exists among international organizations that efforts should be made to avoid inconsistent and redundant taxes on electronic commerce. The World Trade Organization has stated that, in order to enjoy the full benefits of electronic commerce, uncoordinated actions by governments must be avoided. Similarly, the European Commission has issued a communication in which the Commission recommended the launch of an international debate on global communications policy to create a framework for international policy cooperation.
In the United States, legislation was introduced in the House of Representatives and the Senate, creating the Internet Tax Freedom Act [S. 442, H.R. 1054], which represents a continuing effort of ensuring that the taxation of economic activity, whether electronic or otherwise, is dealt with in a neutral manner. This Act created a three year moratorium, in effect from October 1, 1998, until October 21, 2001, that precludes certain kinds of special, multiple or discriminatory Internet taxes. The Act does allow state and local governments to impose sales tax on electronic sales in a similar fashion as imposed on sales made via the telephone or mail order. This Act further calls on the executive branch to seek an international agreement that would keep the Internet free of taxes and tariffs.
If present mail order sales tax principles are applied, then sales tax would be imposed only on sales that merchants make in the state in which the merchants operate. This gives Internet merchants a significant advantage over their “off-line” competitors: The Internet merchant often will have greater flexibility to select the jurisdiction in which the business actually operates and maintains its inventory. Generally, this may only need to be a single location, as the nature of the Internet serves to eliminate the necessity of multiple retail locations. If the jurisdiction in which the merchant operates does not impose a sales tax, the advantage is even greater.
Jurisdiction Issues: Another issue arising in connection with e-commerce is exposure to liability in unforeseen jurisdictions. U.S. case law suggests that the extent to which the business's Web site is interactive with a particular forum may be determinative. In the U.S., accessibility alone does not appear to be a basis for jurisdiction. Where defendants have repeatedly and knowingly taken certain actions toward a forum state, however, courts seem more likely to assert jurisdiction. Case law suggests that risk of liability in a remote jurisdiction can be reduced by limiting the interaction of the site; by declining business from jurisdictions in which the electronic company wishes to avoid liability; and, perhaps through choice of law clauses in the contracts.
There is little case law indicating when a US company may be called into a court beyond U.S. borders. How this issue is resolved around the world will impact nearly every business that has a Web site or that engages in electronic commerce. Until this issue is resolved, companies should give special care to the structuring of their electronic businesses.
The dramatic growth of Internet commerce suggests equally dramatic opportunity for electronic commerce companies. However, unlike companies conducting business through more traditional means, electronic commerce companies are international from their inception, with websites exposing them to potential clients - as well as potential legal and tax liability - in jurisdictions worldwide. To structure themselves optimally and to minimize potential undesirable liability, Internet companies must consider the significance of their multinational character.