E-Commerce Tax Issues
by Claudia Gramaccia
the following is an extract from a PowerPoint Presentation, that you can order from Professor Claudia Gramaccia by sending an e-mail to Claudia or visiting her site.
(it is available anche in Italiano)
E-Commerce and tax neutrality
Tax neutrality has been internationally endorsed as the key principle of an efficient tax system and as such, the one that grants the development of the economy to its fullest extent. OECD,European Union, UN, WTO, G8 Governments expressly have,among the others, recognised that e-commerce taxation should be informed to tax neutrality.
Neutrality of e-commerce taxation.
What does it means?
United States interpret e.commerce tax neutrality having regard to the functionality of the economic transactions rather than on the object or method of its delivery. Under this criteria "functionally equivalent transactions shall be treated in the same way under tax law".
European Union tax neutrality interpretation does not only refer to the above (equivalence between transactions conducted on or off line) but also to achieve a substantive neutrality among transactions conducted outside or within the Internal Market. Therefore tax provisions should be made in a way that: "the consequences of taxation should be the same whether goods and services are purchased from within or from outside the EU"
The crucial question: can the actual Italian tax system be considered neutral?
VAT
INCOME TAX
VAT on e.commerce issues
A supply that results in a product to be placed at disposal of the recipient in a digital form via an electronic network is to be treated for VAT purposes, as a supply of services
Functionally equivalent transactions are subject to different VAT rates accordingly to the delivery method used
VAT is not neutral since electronic delivery of equivalent transactions is subject to higher VAT rates (20% instead of 10% or even 0%). Examples may be:
newspapers,periodicals,books, scientific publications;
music and video recordings;
sporting, cultural and entertainment performances;
health services;
educational and professional training services;
Distance sales and incomplete VAT rates harmonisation
Since VAT rates within the EU are far from being fully harmonised it is common that the same good/service being subject to different VAT charges across EU Member States (from 15% to 25%). In case transportation is made on behalf of the customer, distance sales apply suppliers’ VAT rate rather than consumers’ one. It is clear that enterprises located in low VAT rate country enjoy an unjustified competitive advantage over those located in higher ones.
Intra-community services and VAT
A - General provision of services:
Intra-community provision of services VAT rules consider as place of supply where the services provider is established (albeit with many exceptions).
Since the lack of VAT rates harmonisation, here again, services providers established in a low VAT rate Member State enjoy a competitive advantage over the others especially when such a service may be rendered trough an electronic network. (eg: marketing analysis; translations etc).
B - The specific situation of telecommunication services
Customer Provider VAT
Priv.ITA ITA 20 %
Priv.UE ITA 20%
Priv.ITA EU 0%,or it may be +/- 20%
It is very clear that with the current technological development VAT system determines significant and unjustified distortion of competition within the European Union. To give you a small example, the auto recharge on reply system on mobile phones is actually possible because the above illustrated non neutral VAT regime.
The downloading paradox
Besides the above examples, actual system of VAT provides an unbearable competitive level field for Italian enterprises any time it is possible to provide a direct service to final consumers on line in digital form. In fact the VAT situation is the following:
Service provider Customer VAT
Enterprise/Professional ITA Priv.ITA YES (always)
"" Extra EU YES (sometimes)
Enterprise/Professional non UE Priv.ITA NO (never)
If one takes into account the extreme interchange degree among goods and services it is not a non sense to say that the VAT regime strongly penalises the entire Italian productive system.
1° example: software
when an Italian consumer purchases a software from an Italian softerhouse the price is 100 + 20 of VAT =120. The price remains the same in both cases of purchase on the shop (in CDs) or from a downloading from the Italian company web site. The paradox is that if the same consumer purchases the same software from a web site of a NON Italian ( e.g US) softerhouse the price would be without any VAT and therefore it would be only 100 by definition.
2° example: professional translation services
when a private customer requires a professional translation service to an Italian professional, the price will be 100+20 VAT=120 in both cases where the customer is Italian or not (US customer for example);
on the other hand, when the same Italian customer requires the same translation service to a non Italian professional (US provider) there is no VAT at all and therefore, made equal all the other element of cost, the price would be 100 only.
This example clearly shows the double competitive disadvantage suffered by Italian enterprises and professionals because of the actual VAT system.
INCOME TAX
The Italian Income Tax system follows the criteria of :
world-wide principle that provides taxation in Italy of all incomes wherever the source, for Italian Residents;
source principle for any income with Italian source earned by a non Italian Resident;
Business profits earned abroad by an Italian Resident Company:
a) with a Permanent Establishment in the source country: in this case the source country has the primary right of taxation while Italy shall grant relief from double taxation (by tax credit or tax exemption);
b) directly, without any Permanent Establishment: in this case, in principle, business profits will only be subject to tax in Italy.
E.commerce, especially in the downloading of digitalised products situation may easily give rise to double taxation (multiple taxation as well) or on the contrary to unwanted non taxation at all.
Case A: double taxation: it may arise any time the source state considers like a PE a server (providing the digitalised product ) established on its territory. In this case, the source country is entitled to tax the server’s produced income. At the same time, the Company’s State of residence does not recognises the PE status to that server and therefore does not provide any double taxation relief for that income.
Case B: no taxation at all: it may arise any time a server is established in a tax haven and it belongs to a company resident there.
It is not difficult to foresee that the actual development of telecommunication services, the increased use of smart cards etc will encourage that structures of e.commerce that operates in complete absence of taxation (both VAT and income tax). The consequences be unfear competition on the one hand and serious damages to the State’s tax revenues on the other.
Answer to the question at point 4: is the Italian tax system neutral?
Taking into account the above the only possibly reply is a clear: NO, it is NOT.
It is not neutral and therefore it is non-efficient because functional identical transactions are treated differently whether conducted on or off line;
It is not neutral and therefore it creates serious competitive distortions among domestic and international transactions since it only places unbearable competitive burdens on domestic producers.
Final remarks
I believe that e.commerce tax issues need to be seriously taken into account and further explored at proper National, European and International level in a way to secure certainty at the national enterprises’ competition level field and tax revenues stability.
I am most convinced that without a proper tax system Italy may risk definitely to loose the incredible chance to enhance its competitive position that the Digital Economy is bringing to its door.
last modified: 05/30/06 13:43