Academic journal article Journal of Financial Management & Analysis

Taxation of Electronic Commerce: An Examination of Canadian Government Tax Policies and Directives: Application of Adam Smith's Canons of Taxation

Academic journal article Journal of Financial Management & Analysis

Taxation of Electronic Commerce: An Examination of Canadian Government Tax Policies and Directives: Application of Adam Smith's Canons of Taxation

Article excerpt


In the eighteenth century, Benjamin Franklin said, In this world, nothing is certain but death and taxes. However, the evolution of electronic commerce challenges this venerable adage through elaborate tax avoidance schemes across transnational borders. Most developed countries have implemented comprehensive tax regimes which levy income tax on all income earned within its borders. The current tax system in Canada, as well as the majority of Western European and North American countries - - both emerged and evolved - - in the wake of the First World War when countries became increasingly industrialized and highly centralized. In order to fund the war effort, Canada introduced an emergency act, which became the current tax system in this country. The first major tax reform occurred with changes subsequently in focus and policy effective in 1972, with a subsequent reform in 1986. Will the growing popularity and complexity of electronic commerce and its effect on taxation result in the necessity for further reform ?

The purpose of this paper is to examine the models of taxation that have advanced in various parts of the developed and developing world. Tax Policy will also be reviewed to determine whether the current trends towards the taxation of electronic commerce are congruent with the very foundation of taxation. A review of the Canadian taxation system on income and the application of traditional concepts to electronic commerce taxation is reviewed from a domestic and an international perspective. Emerging trends in electronic commerce taxation on the international front is also examined. In order to ensure an electronic-commerce tax system that is fundamentally sound, a review of the methods currently being applied to construct this system is paramount to ensuring that governments are undertaking the right measures.

Developed Models

Electronic commerce has actually existed for many years through the use of such telecommunications equipment as the telephone. The Government of the U.S.A. has actually been cited as the original user of technology that has advanced as electronic commerce (Urbaczewski)1. Subsequent to the development of the technology by the US Government, major corporations established networks of computers to communicate across borders. These networks were referred to as proprietary networks and required all corporations to use the same networks to communicate. These networks were the only conduits for electronic commerce until about 1994. The development of the world wide web in the mid-1990s provided the incentive for companies, both large and small, to reach customers through the internet. This intensification of the growth in e-commerce was precipitated by the increase in the number of home computers. Companies recognized the tremendous potential of e-commerce transactions that could increase their customer base and hence sales - Borders were eliminated.

Taxation in this era of electronic commerce is not similar to anything that tax policy makers had envisioned. Initial progress in the arena of international taxation has been made through models developed by various organizations such as the Organization for Economic Co-operation and Development and the United Nations. A review of these models establishes groundwork for determining the direction that is in progress in this new clicks and mortar era. Traditional business transactions which involved bricks and mortar establishments are being replaced with computers operated from any location in the world. While the development of these models is in the nascent evolutionary stage, its importance cannot be underestimated as the magnitude of the taxes applicable to electronic commerce is expected to increase dramatically in the future. The time to ensure a model with veracity has emerged.

Organization for Economic Co-operation and Development (OECD) Model2

The Organization for Economic Co-operation and Development Committee on Fiscal Affairs issued a Draft Paper on the Application of the Permanent Establishment Definition in the Context of Electronic Commerce in October 1999. …

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