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Critically assess the impact of the Internet and E-commerce on Tax Regimes in the Commonweath Caribbean.

Extracts from this document...

Introduction

Critically assess the impact of the Internet and E-commerce on Tax Regimes in the Commonweath Caribbean. Introduction Most, if not all, of the member states of the Commonwealth Caribbean derive their right to tax from their Constitutions.1 Section 48(1) of the Jamaican Constitution, for example, provides that '...Parliament may make laws for the peace, order and good government of Jamaica.' The Courts have continuously interpreted this right as one that is not unbridled and therefore, the governments of the region have to take every step to ensure that enactments do not contravene the provision of the Constitution.2 The stance of the Court was aptly put by Jackson JA in Inland Revenue Commisioners v. Lilleyman3 "...the courts need to be watchful for the constitutional rights of the citizens and against any stealthy encroachments thereon..." The power to tax, therefore, rests upon necessity and is inherent in any sovereign legislature under its general legislative power.4 The necessity being to provide the government with revenue necessary to meet its expenditure, thus satisfying the social, political and economic needs of its people. An erosion of the region's tax base will therefore be an issue of major concern. Globalization has impacted upon the region and as a result there has been a concerted thrust by most of the member states, to come together to attain a sustainable competitive advantage in the international marketplace.5 Perhaps the aspect of globalization that has impacted most on the region is the Internet and E-commerce. The United States Internet Tax Freedom Act defines electronic commerce as meaning: "any transaction conducted over the Internet or through internet access, comprising the sale, lease, licence, offer, or delivery of property, goods, services, or information, whether or not for consideration, and includes the provisions of internet access."6 Given the lack of geographical and national boundaries in transactions conducted over the Internet through E-commerce activities, the problem of applying the appropriate taxes to these transactions arise. ...read more.

Middle

Lord Viscount L.C in Swedish Central Railway Co v. Thompson stated "...when the central management and control of a company abides in a particular place, the company is held for purposes of income tax to have a residence in that place ...". There has been some disagreement, as brought out in Todd v. Egyptian Delta Land and Investment and De Beers Consolidated Mines Limited v. Howe, on the strict applicability of the rule that registration determines residency. In the latter case, it was decided that a foreign corporation registered abroad may reside in the United Kingdom, and so is subject to income tax. According to Lord Loreburn it was " clearly established that the majority of the Directors and Life Governors lived in England, that the Directors' meeting in London are the meetings where the real control is always exercised in practically all the important, business of the company..."23 Notwithstanding this disagreement, this test, which is based on UK common law principles, has been adopted by many of the territories of the Commonwealth Caribbean. As technology allows information to be transferred easily electronically, it is likely that the company residency test using "centre of management" or "control of the company" maybe more difficult to apply under e-commerce. Decisions can readily be made during video-conferencing or e-mail with management and/or directors located in different countries. Section 25 in the Barbados Act, for example provides for telephone meetings. Similar to assessing domicile of persons, the traditional concept of taxation based upon the physical presence for corporations is quickly being surpassed by technological developments in commerce. It has been argued, however, that this test was developed in an era when telecommunication and transportation was significantly less well developed than today. But with the rapid growth of the Internet there is no requirement to establish branches or agencies within a jurisdiction. This directly challenges the application of tax concepts such as residence based upon the existence of a branch or agency.24 Additionally, tax administrators cannot currently check the identity of e-commerce traders operating through computers systems. ...read more.

Conclusion

Also consideration should be given to the construction of one Electronic Transactions Bill for the Region, instead of the current piecemeal implementation process. This would no doubt further the effectiveness of the Caribbean Single Market and Economy (CSME), towards sustainable and viable economic development and one of the objectives of the Revised Treaty Of Chaguaramas, that is, the harmonization of internal tax regimes. Consideration could also be given to the four e-commerce taxation models proposed by the Advisory Commission on Internet Commerce in the United States, namely: (i) A use tax: this tax would bypass the inability to collect an interstate sales tax for e-commerce transactions that cross-geographical borders. This would be imposed on citizens that choose to shop online. (ii) Third Party Collection-Establishment of several "Trusted Third Party" clearinghouses. (iii) National Sales Tax: (iv) A proxy tax - Instead of introducing a sales tax, the telecommunications community would pay a tax. However, the necessary legislation and technological infrastructure would have to be in place to make any of these models effective. Conclusion Traditional concepts of taxation based upon physical presence and source of profits within a jurisdiction are quickly being surpassed by technological developments in commerce. E-commerce activities have been increasing over the years, and whilst it has provided economic opportunities for countries, governments for the most part, have been unable to collect taxes on these transactions because of the invisibility of the activities and lack of audit trail. Effective international co-operation will avoid the risk of individual countries taking unilateral action, which could create double taxation and/or excessive compliance burdens, which would damage international business in general.40 The overriding aim should be that the right amount of tax is paid at the right time and in the right country.41 In the face of all of this it is important that tax revenues in the Commonwealth Caribbean remain secure, so that public services can be adequately funded.42 Immediate implementation of effective legislation is therefore the call, so as to protect these tax bases. ...read more.

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