International Tax Bulletin (December 1996)
U.S Treasury Office of Tax Policy:
Selected Tax Policy
Global Electronic Commerce
For further information on this topic, please contact Brian Wainwright, a
now in the Palo Alto office, or Kerne Matsubara, now
partner in the
San Francisco office of Pillsbury Winthrop
Shaw Pittman LLP.
In November 1996 the Office of Tax Policy of the United States Treasury Department released a
paper entitled Selected Tax Policy Implicatons of Global Electronic Commerce. Set forth
below is the Executive Summary of that paper.
If you have or can obtain
you may wish to download the pdf version of the paper (a 140K pdf file we created from the
Treasury's WordPerfect version). That pdf file is also available via ftp at
New information and communications technologies such as the Internet are creating exciting
opportunities for workers, consumers, and businesses. Information, services, and money may
now be instantaneously transferred anywhere in the world. Firms are increasing their imports and
exports of goods, services, and information as the costs associated with participating in global
markets plummet, and they are forming closer relationships with suppliers and customers around
the world. New markets and market mechanisms are emerging. Consumers can choose from a
much broader range of goods and services, and "intelligent agent" software will soon give
consumers an unprecedented ability to hunt for bargains.
These new technologies, particularly communications technologies including the Internet, have
effectively eliminated national borders on the information highway. As a result, cross-border
transactions may run the risk that countries will claim inconsistent taxing jurisdictions, and that
taxpayers will be subject to quixotic taxation. If these technologies are to achieve their maximum
potential, rules that provide certainty and prevent double taxation are required.
In order to ensure that these new technologies not be impeded, the development of substantive tax
policy and administration in this area should be guided by the principle of neutrality. Neutrality
rejects the imposition of new or additional taxes on electronic transactions and instead simply
requires that the tax system treat similar income equally, regardless of whether it is earned through
electronic means or through existing channels of commerce.
A major substantive issue raised by these new technologies is identifying the country or countries
which have the jurisdiction to tax such income. It is necessary to clarify how existing concepts
apply to persons engaged in electronic commerce. In addition, transactions in cyberspace will
likely accelerate the current trend to de-emphasize traditional concepts of source-based taxation,
increasing the importance of residence-based taxation.
Another major category of issues involve the classification of income arising from transactions in
digitized information, such as computer programs, books, music, or images. The distinction
between royalty, sale of goods, and services income must be refined in light of the ease of
transmitting and reproducing digitized information.
In the area of tax administration and compliance, electronic commerce may create new variations on
old issues as well as new categories of issues. The major compliance issue posed by electronic
commerce is the extent to which electronic money is analogous to cash and thus creates the
potential for anonymous and untraceable transactions. Another significant category of issues
involves identifying parties to communications and transactions utilizing these new technologies
and verifying records when transactions are conducted electronically. However, developments in
the science of encryption and related technologies may lead to systems that verify the identity of
persons online and ensure the veracity of electronic documents.
Treasury invites comments on the issues raised by this paper as well as any other issues relating to
Comments should be addressed to Joseph H. Guttentag, International Tax Counsel, Department of
the Treasury, 1500 Pennsylvania Avenue, NW., Washington, D.C. 20220. Comments may also
be submitted via Internet e-mail to TAXPOLICY@treas.sprint.com, with the
subject line "technology issues." All comments will be available for public inspection and copying.
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