eCommerce Transactions: OECD Commentary

Abstract

The EU has implemented a ‘VAT Directive’ allowing member states to apply common ‘shared principles’ for purposes of defining the ‘place of consumption’, and the USA has introduced a Streamlined Sales Tax Agreement in an attempt to prevent double taxation in cross-state border transactions. The OECD guidelines address the difficulties in determining the place of consumption of products which are electronically supplied or digitally downloaded via the Internet (op cit OECD Taxation and Electronic Commerce, Implementing the Ottawa Taxation Framework Conditions (2001), OECD Publications, Paris, France, p24). The OECD advocates the ‘destination based principle’ for determining the ‘place of supply’ of services and intangible property, and endorses the ‘place of consumption principle’. The point at issue is the identification of a ‘virtual customer’s’ jurisdiction of residence. Furthermore, collection of VAT by customs officials is plausible in terms of tangible goods but is not an option in terms of intangible property and services provided via the Internet. The OECD has considered a new collection system which would require the enlisting of third parties to collect consumption taxes in respect of electronically supplied services. However, it was deemed that such a system would be initially costly to implement and would substantially alter the character of most consumption tax systems. However, such a system may become practicable in respect of virtual market places such as Second Life. It is submitted that the indirect tax model, VAT, is a more flexible system than income tax models and would be more easily adaptable to such substantial changes.