Status Jurisdiction
Majority of the Commonwealth Caribbean Income Tax Act defines the status of persons who are liable to income tax. S.85 (5) of the Barbados Income Tax Act, for example, states that a person is deemed to be a resident of Barbados with regard to any income year if he spent an aggregate of more than 182 days of that income year in Barbados. Countries that have statutes that are silent on residence, for example, Trinidad, resort to common law to get a definition. In Levene v. Inland Revenue Commissioner, Viscount Cave in the House of Lords, laid down six badges of residence: physical presence, past history, present habits and mode of life, frequency, regularity and duration of visits and family and business ties. His definition of residence came from the oxford Dictionary, “To dwell permanently or for a considerable time; to have one’s settled or usual abode, to live in or at a particular place.”
The definition of residence, whether defined in various countries income tax acts, the common law as evident in the badges of residence (in the case cited above), cannot be strictly applied to the persons who conduct e-commerce activities. Whilst it has been accepted that an individual can have more that one residence, per Cooper v. Calwalder, there can be positive and negative repercussions for the Commonwealth Caribbean. The positive emanates mostly if there is a Double Taxation Agreement. In this case the country in which the income is obtained will deduct the necessary taxes. On the other hand, if there is no double taxation agreement between the domicile’s residence and the foreign country, then that individual may be taxed twice for the same income. An individual who is rational, and recognizes that this could be a problem, will be more inclined to evade taxes.
Certainty is also an important criterion for assessing taxes by virtue of the fact that this principle must be established to determine ordinary residence. In cyberspace, the taxpayer is invisible; as such the whole process is replete with uncertainty. Applying taxation to businesses in the e-commerce industry, using the test of certainty, which is a noted requirement in the Commonwealth Caribbean Region, will be woefully inadequate.
Furthermore the need for physical presence is now an absurd criterion. This is so because of the virtual attributes of the Internet and the invisibility that underpins it.
The dependence on these definitions, therefore, to collect taxes from e-commerce activities will be virtually impossible. Furthermore, because of the uncertainty Governments in the Region will be unable to make definitive statements about fiscal marksmanship and the evasion ratio. As a result tax bases, particularly for developing countries, can easily be eroded, if the necessary corrective measures are not imposed. The evident delay in enacting legislation to remedy the definition of physical presence and residency (as it relates to e-commerce) does not contribute to government’s objective of taxing and collecting from all activities.
This will no doubt have serious repercussions in terms of the countries development plans. There is recommendation for a Third Party Collection- Establishment of several “Trusted Third Party” clearinghouses. Until some mechanism of this kind is implemented, we can safely conclude that for now that the e-commerce industry has forced tax administrators in the region to employ new mechanisms to ensure if not total certainty then at least a high level of certainly in their tax collection.
Compounding the problems outlined above is the fact that the conduct of electronic commerce creates opportunity for cross-borders interaction, which may result in conflict of laws. This can be resolved by having international cooperation on tax enforcement, which could include the exchange of information on resident taxpayer. However, one should be cautious with this approach, as there could be possible encroachment on individuals’ constitutional right, in the hope of achieving prevention of non-compliance and fraud associated with e-commerce transactions.
Another solution lies is applying a purposive interpretation as to what should constitutes a resident. Pursuant to article 4 of the CARICOM Double Taxation Treaty (1994) "resident of a Member State" means any person who under the law of that State is liable to tax therein by reason of that person's domicile, residence, place of management or any other criterion of a similar nature. It is submitted that “any other criterion” lends it self to be employed as a tool to capture the “elusive taxpayer” in cyberspace, as it operates as a catch all provision.
Residence of Corporation
Based on the several rulings by the Court, the test for residence of a corporation is clearly where the management and control of the company resides. 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…” 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. Additionally, tax administrators cannot currently check the identity of e-commerce traders operating through computers systems. This point was amusingly illustrated by a cartoon that first appeared in the New Yorker Magazine where two dogs are seen sitting in front of a computer terminal with the caption “on the internet, nobody knows you are a dog.”
Permanent establishment
Businesses in the Commonwealth Caribbean are only liable to tax if they conduct their operation through some form of physical or contractual nexus such as branch or agency.
Article 5, paragraph 1 of the OECD Model Tax Convention On Income Capital provides that the term “permanent establishment… is a fixed place of business through which the business of an enterprise is wholly or partly carried on”. Paragraph 2 adds that the term permanent establishment includes a place of management, a branch office, a factory, a workshop, a mine, an oil or gas well, a quarry or any other place of extraction of natural resources. Further, paragraph 24 states that “It is often difficult to distinguish between activities which have preparatory or auxiliary character and those which have none. The decisive criterion is whether or not the activity of the fixed place of business in itself forms an essential and significant part of the activity of the enterprise as a whole.”
The Inland Revenue department of the United Kingdom announced that it did not intend to regard a server of itself as a permanent establishment. This means that companies operating in the United Kingdom will need to have other activities of sufficient substance to constitute a permanent establishment before being liable to corporation tax. Clearly the OECD’s view is a divergence from this.
Not only is the definition of a permanent establishment for income tax purposes change from country to country, but this brick and mortar requirement has been usurped by ecommerce. India has tried to remedy this in the ruling, which held that non–resident businesses can have a permanent establishment in India, thus subjecting its business profits to taxation, where the company has no physical presence in the country. In one case, Indian authorities ruled that a company offering an online reservation system from outside the country had a “virtual PE in India, and fees received from Indian customers are business income taxable in that country.”
“… as e-commerce grows, the permanent establishment concept may become less appropriate and it is unclear whether a local and fixed place of business is the right threshold for taxation in the long term…” The examination of physical presence shows how ecommerce blurs the notion of geographical boundaries and makes it difficult to determine legal jurisdiction. It enables traders as never before to decide when they pay tax, if at all, on their activities.
Double Taxation Issues
Double taxation can be mitigated by the existence of a Double Taxation Agreement.
Most of the Commonwealth Caribbean States are parties to the CARICOM Double Tax Treaty and tax treaties with other countries.The British Virgin Islands for example, have double tax treaties with the UK, Japan and Switzerland. Board of Inland Revenue v. Valley illustrates the operation of the double taxation in the Commonwealth Caribbean. In this case the Agreement is between Trinidad and Tobago and Canada. A resident made alimony payments to a former spouse living abroad, the court held that the spouse was exempted from liability to pay tax on alimony within the term ‘annuity’ in the Double Taxation Relief (Canada) Order 1960.
The non-existent of double taxation agreements between countries could result in individuals and companies being taxed twice, deliberately practicing tax evasion or keep income in countries that have lower tax rates. In this case, the government does not benefit from the tax that ought to be collected. The presence of offshore banking and electronic transfers of funds across geographic boundaries makes the problem of collecting taxes on e-commerce activities more difficult.
The Authority of the OECD and United Nations
The OECD and the UN have made significant headways in developing regulations to deal with all aspects of taxation, inclusive of e-commerce activities.
The OECD has been spearheading the drive to achieve harmony and cooperation in the ecommerce industry, as it relates to taxation. If one examines the States that are party to the Treaty , however, it will reveal that none of the Commonwealth Caribbean countries are signatories. What implication does this have for the region? Developing countries, such as those in the Commonwealth Caribbean are keen to maximize their tax base and thus may need to apply different characterization rules or apply the permanent establishment concept in a less rigorous way than the OECD. It has been argued that OECD does not have a distinct personality under international law and is therefore without standing to impose any variance into the tax laws of sovereign states.
United Nations
The United Nations has recently called for the establishment of a global commission to strengthen international cooperation between governments on the issues of tax policy and tax evasion. Although acknowledging the efforts of the OECD fight to combat harmful tax activities, UN under-secretary general for economic and social affairs, Jose Antonio Ocampo argued that the only body that can facilitate a truly global forum on taxation issues is the United Nations. Clearly the OECD is not a supranational body and thus cannot bind the Commonwealth Caribbean countries when it makes its decisions. The internet and e-commerce has however made the economies of the world so intricately intertwined, it is perhaps in the best interest of the region’s economies to try and conform to whatever reform is being submitted.
Opportunities.
E-commerce can be viewed as a more efficient means of conducting businesses for both individuals and businesses as it reduces transaction and search costs, increase competition and more streamline business processes. Greater efficiency may manifest itself in a number of ways, including lower prices, finer, albeit, more frequent price modifications and a narrower spread in the prices of identical products.
In addition to improvement in efficiency, ecommerce provides an opportunity to reduce the unemployment rate in the region. For example, Barbados' major objective in e-commerce is to establish the island in the hosting of e-commerce activities for corporations around the world as well as Internet gaming. Consequently, it has been developing an informatics industry over the last 15 years and sees e-commerce as one of its most important future development opportunities, based on the existing pool of skilled labour and advanced infrastructure.
Although there are vast economic opportunities in the e-commerce industries, which have been increasing over the years, governments in the Commonwealth Caribbean have been unable to collect the necessary taxes from these activities.
Consequently, most of the countries of the region are on the verge of implementing e-commerce legislation. Guyana for example is currently working on its E-commerce Bill, which will seek to, inter alia, establish and clarify the legal basis of ecommerce. Jamaica, Barbados, St. Lucia and St. Vincent and Grenadines are also working to implement the necessary legislation to enable e-commerce to become a thriving industry and assign the appropriate taxes to it.
However, so as to not be prejudiced, in terms of taxation treatment, in the international community, the Commonwealth Caribbean, should utilized their newly formed Caribbean Regional Negotiating Machinery (CRN) which was created by the Caribbean Community (CARICOM) Governments to negotiate terms and conditions for the Community. This will achieve two main objectives. Bring a systematic and focused approach to new pressing international issues and ensure that the Caribbean's development is not impeded by changes in global trade arrangements and that maximum benefit can be secured.
Recommendations
An integrated approach needs to be adopted by the Government of the Caribbean Commonwealth countries to deal with e-commerce and its impact on taxation. The first thing that needs to be addressed is the current legislation for the different countries. As outlined above, there seems to be strict applicability of residence, the certainty principle and physical presence in order to determine the tax base. The current legislation would have to be amended to deal with the invisibility, ubiquitous and uncertainty of transactions via the Internet in order to widen the tax net.
This however, cannot be done in a vacuum. International cooperation would have to be sought from all affected countries, so as to preserve the constitutional right of individuals and corporations.
Tax administrations in the Commonwealth Caribbean Region should also exploit the technology available to improve taxpayer service and at a lower cost. To accomplish this task all the Electronic transactions bills that are currently in draft form should be immediately implemented. 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. The overriding aim should be that the right amount of tax is paid at the right time and in the right country. 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. Immediate implementation of effective legislation is therefore the call, so as to protect these tax bases.
Bibliography
Davies Denzil, Booth, Residence,Domicile and UK Taxation, Butterworths London, 1995.
Willie, Govers, Desmeytere, VAT aspects of electronic invoicing and e-commerce, Oxford 2000.
See for Example s.48 (1) of Barbados Constitution, similar provision in Trinidad and Tobago.
See for example Bata Shoe Company v. IRC [1976] 24 W.I.R where the Court of Appeal of Guyana held that the levy of compulsory savings to be used by government as a loan for financing development works in accordance with the Development Fund Ordinance 1954 was not a tax, but it was a forced loan affecting compulsory savings.
[1964] 7 WIR 496 Jackson JA was quoting Bradley J in Boyd v US
See further Mootoo v. Attorney General (1976) 28 WIR 304. The Constitutions of the Commonwealth Caribbean is based firmly on the separation of power doctrine therefore, the functions of the Judiciary, Legislature and Executive should not overlap.
See for example the mission statement of CARICOM as (accessed 17th November, 2003)
Internet Tax Freedom Act s.155 (4), see also the, “Fiscal Challenge of E-commerce”, Julian Hickey [2000] B.T.R: No.2 Sweet and Maxwell and Contributors 2000.
“To tax or not to tax: the struggles of e-commerce taxation policies” Sandra Mingail (accessed 7th November 2003).
Arises by reason of the fact that a particular payment is derived or has its source in that country.
Relies on the concept of residence.
Cap 73. This provision also obtains in most jurisdictions.
Electronic Transactions Act, 2001
Electronic Evidence Act whose objective is “to make provisions for the legal recognition of electronic records and to facilitate the admission of such records into evidence in legal proceedings; and to provide for matters connected therewith or incidental to”
A bit tax is where you pay tax on the amount of bytes it takes to complete a transaction via the internet .
. Accessed November 21, 2003.
In Re Young a master mariner was held liable for assessment of salary notwithstanding he is abroad for the greater part of the year. The court held that, “if a man has his ordinary residence in this country, it does not matter much whether he is absent for a greater or a shorter period of each year from that residence or from the country itself. That is a thing that depends a good deal on a man’s occupation…”
In this case an American resident in New York who had taken a house in Scotland, which was at anytime available for his occupation, was held to be resident there, although in fact he had only occupied the house for two months during the year.
In Lysaught the House of Lords held that a person is ordinarily resident in a country for income tax purposes if his residence there is not casual or uncertain, but is in the ordinary course of life. The requirement of certainty was also highlighted in Thomson v. M.N.R, R and J said, “it is held to mean residence in the course of the customary mode of life of the person concerned …” A custom connotes a great degree of certainty. See also decision of Lord Scarman in R v. Barnett LBC and Brightman J in IRC v. Bullock.
This deals with the certainty with which the authorities can predict the revenue, which fall due to be paid in the year in question.
See further VAT aspects of electronic invoicing and ecommerce. (Book in the tax section check it for proper citation)
See also Trinidad Leasehold Limited v Commissioner of Inland Revenue. (Harman J) stated that the trading operation all take place outside the United Kingdom, but there appears to be active control by the board here and there was no evidence of administrative acts outside England.
The Fiscal Challenge of E-commerce, Julian Hickey.
OECD Model Tax Convention On Income Capital (1992 update)
UK’s Taxation Agenda See Hickey’s article.
e-commerce : impacts and policy find website
As available at (accessed 11th November 2003) and
The benefit of these Double Tax Treaties applies only to BVI resident companies, which must necessarily be incorporated under the Companies Act (Cap. 285). Since the overwhelming majority of BVI companies take the form of the International Business Company, the International Limited Partnership or the Trust, all of which are exempt from taxes and fall outside the ambit of the Double Tax Treaties, offshore investors will not often be in a position to use the BVI Double Tax Treaties.
OECD means Organization of Economic Co-operation and Development and UN means United Nations.
Convention on the Organization of Economic Cooperation and Development.
E- commerce – A Snapshot- Gary Richards [2000] B.T.R No. 3.
See further Walcott Lesley, “Issues relating to recent tax reform in the Commonwealth Caribbean –Netting the elusive taxpayer.” Caribbean Law Review.
As available at (accessed 3rd November 2003)
It should be noted, however, that given the OECD political clout, it has been able to put international pressure on several Commonwealth Caribbean countries by labeling them tax havens.
find website e-commerce : impacts and policy challenges.
As available at (accessed 17th November 2003)
Copy the inland revenue website here.
As available at www.oecdobserver.org/news/fullstory.php/aid/416/ E-commerce …: a virtual _reality.htm visited 7/11/2003 interview with Simon Woodside, Fiscal Affairs at OECD.
