Electronic commerce is a relatively recent phenomenon, and several changes arising from electronic commerce are currently seriously challenging tax authorities – these include, inter alia, a globalised customer base, the transition from paper to virtual transactions, the transition from physical to digitised products and the possibility of conducting business through a server in the source country or elsewhere.

While electronic commerce is intrinsically global in nature, law has always been based on principles of territoriality, such limits defining the jurisdiction and legislative power of each sovereign state. The virtual environment of electronic markets makes it more difficult to determine who the contracting parties are, where an electronic commerce operator is established and whether that operator is complying with all relevant legal obligations and regulatory regimes. This can create legal and regulatory uncertainty about which jurisdiction will be competent and about the applicable law in disputed cases and thus makes it difficult for electronic commerce enterprises to adapt their sites to conform with domestic as well as international rules of law.

The greatest threat posed to the taxation of electronic commerce is anonymity – it is today virtually impossible for tax administrators to identify each transaction concluded over the Internet, and it is also extremely unlikely that tax administrators can check the identity of anonymous enterprises trading online.

These problems have alerted tax authorities to the need for worldwide agreement/harmonisation of fiscal systems regulating the taxation of electronic commerce, since a country-by-country approach would create a significant obstacle to the development of electronic commerce. According to the International Chamber of Commerce (ICC), no nation should create a new regime or alter its existing regime with respect to electronic business without serious consideration as to the impact on its trading partners. In order to avert the potential for double taxation, an internationally accepted consensus to the taxation of electronic commerce must be developed.

As explained by Jeffrey Owens, Head of Fiscal Affairs of the Organisation for Economic Co-operation and Development (OECD);

“Tax authorities have a role to play in realising the full potential of electronic commerce. They must provide a fiscal environment within which electronic commerce can flourish. However they must also ensure that electronic commerce does not undermine the ability of governments to raise the revenue required to finance the public services voted for by the country’s citizens.”

A key issue for tax administrators is to determine whether electronic commerce is a new type of commerce or merely a more efficient method of conducting existing business. A new type of commerce is much more likely to challenge existing tax principles than a more efficient medium of business communication. This leads to the question – should tax authorities apply existing tax principles to electronic commerce transactions or is there the need for new tax principles, specifically designed for electronic commerce?

Most practitioners seem to agree that the current taxation structure is flexible enough to adapt to the new challenges posed by electronic commerce – as explained by Lovells, the grey areas created by internet transactions are no more extensive than those generated by many new kinds of business operating on an international scale with the ability to locate their operations wherever is most tax efficient.


The OECD has, in close cooperation with the European Union, the World Customs Organisation and the business community, laid down the framework conditions that should govern the taxation of electronic commerce. These were discussed at the October 1998 Ottawa OECD Ministerial Conference “A Borderless World – Realising the potential of Electronic Commerce”, where the following conclusions were reached:

i. Neutrality – Taxation should seek to be neutral and equitable between different forms of electronic commerce and between conventional and electronic forms of commerce. Economically, similar transactions should be treated equally and business decisions should be motivated by economic rather than tax considerations.

ii. Effectiveness and fairness – Taxation should produce the right amount of tax at the right time from taxpayers engaged in electronic commerce. The potential for tax evasion and avoidance should be minimised and counteracting measures should be proportional to the risks involved.

iii. Certainty and simplicity – The tax rules should be clear and simple to understand so that taxpayers can anticipate the tax consequences in advance of an electronic transaction, including knowing when, where and how the tax is to be accounted for.

iv. Efficiency – Compliance costs for taxpayers and administrative costs for tax authorities should be minimised as far as possible.

v. Flexibility – The systems for the taxation of electronic commerce should be flexible and dynamic to ensure that they keep pace with technological and commercial developments.

As regards individual states, many countries have adopted the strategy of wait and watch. They want to see how electronic commerce evolves and what are its full ramifications, before coming forward to tax it. Most countries have also taken the stand that the existing tax laws should be adapted and applied to electronic commerce to the fullest extent possible, and changes should be considered only under inevitable circumstances. There is also recognition of the need for co-operation and common policy for taxation of Internet.

As suggested by Doernberg, it is still too early to predict the overall effect of electronic commerce upon the fiscal and other revenue of states. Even if a source state may lose fiscal revenue when a non-resident conducts electronic commerce with little or no fiscal presence in that state, the added commerce may ultimately prove to be beneficial to the source country – it may create jobs and lead to economic growth and ultimately to a broader tax base.

Dr James Muscat Azzopardi