Report (Part 2): Third World Summit on the Internet and Multimedia

Fiscal and Regulatory Issues of Digital Trade Implication for Developing Countries

Time: 9 October 2002, 14:00-14:45 Location: A 400 Chair: Pradhumna Dutt Kaushik Presenters/ Participants: Susan Teltscher (Economic Affairs Officer, E-Commence Branch, UNCTAD, Germany) www.unctad.org/ecommerce  Reporter: Viban Ngo, Simone Theiss (ICVolunteers) Languages: French & English Key words: Digital divide, taxation, fiscal regulations, import / export taxes, UNCTAD

New rules and regulations enacted at governmental and institutional levels (World Trade Organization, USA, European Union, etc.) are affecting the way Information Technology and multimedia goods and services are traded off and online. The emerging role of electronic commerce (via Internet), expected to reach one trillion U.S. dollars by 2005 (one quarter of global trade), is also changing the way companies worldwide relate to each other and do business. Some of the questions addressed are: How are the new rules charted in such multilateral institutions as the World Trade Organization influencing the way Information Technology and multimedia companies develop and distribute digital goods and services? Are these rules establishing a level playing field in the area of cross-border trading off and online? Are they enhancing the participation of developing countries in electronic commerce? How are they influencing governments and related organizations in their attempt to develop a strong national Internet and multimedia industry? In other words, do these rules help bridge the digital divide?

Dr. Susan Teltscher, Economic Affairs Officer of the E-Commerce Branch of UNCTAD, Germany, presented the fiscal and regulatory issues of digital trade and the problems faced concerning taxation. She illustrated the situation with a classic example of a firm located in India that wanted to sell downloadable software in Switzerland. With non-digital goods traded in "traditional" ways, the goods would need to undergo custom duties and import fees. If the goods were to go from Switzerland to India, custom duties and other charges would have to be levied. Through the use of Internet, all these regulations are bypassed. Some of the issues faced are:

• Issued related to Income Tax
• Consumption Tax
• Import / Export Taxes, etc.

In the Trade Regulation Sector, there is concern regarding import quota, national treatment, import tariffs, etc. These become the concerns of various Governments, as tax revenues account for 90% in developed countries and 80% for developing countries.

Cyber-Taxation and E-Commence
Further discussed was the issue of cyber-taxation with e-commence and what Dr. Teltscher called permanent establishments in cyberspace. Next, hypothetical questions were presented regarding how companies do business through the web. Dr. Teltscher explained that a web site was not considered to be a business establishment. Consequently, it was not considered and treated as a "permanent" establishment. Web services can move across frontiers and the question is what to do with permanent savers. If companies were not physically present in, for example, an office, they may not be captured for taxation. If there were any taxation, it would have to involve the taxation of the carrying medium and not the content, commented a speaker from the audience. Hence, the question seems to be whether the contents or the carrier medium should be taxed.

Consumption and Tax Issues
Continuing on the subject of taxation of digital services, the question of verification of consumer location was raised, as well as who should be responsible for verification. It was noted that the European Union (EU) was the first economy to modify this legislation, addressing services provided by companies located outside the EU, in countries such as India.

World Trade Organization (WTO) and Custom Moratorium of E-Commence
WTO recently decided that they will not tax electronically transmitted goods and services, such as books, music, film, software or video games. This was supported by the fact that if they were being delivered digitally, they would no longer be classified as tangible goods.

Dr. Teltscher brought up issue of defining digital products and services (commodities). She explained that this definition has not been well established or agreed upon. She pointed out that digital products for the year 1999 only accounted for an estimated 1% of the total world trade, with the developing nations showing a faster increase than the developed nations. Dr. Teltscher also mentioned that developing nations tend to have high tariff rates (US$ 630 million compared to US$ 347 million for developed nations). On the whole, total recorded revenue for developing countries was very high: approximately US$ 1.4 billion, compared to approximately US$ 2.7 billion for industrialized nations.

Surprising Issues
It appears that there is not a clear cut definition of what is being considered for taxation, whether it was the taxation of the medium or the content of the digitally transmitted information.

Interesting Questions
As a concluding remark, a delegate asked if digital delivery was likely to overtake physical sales of goods and services. Dr. Teltscher prognosticated that this was the case for certain products. She mentioned that digital CD sales were going to overtake physical sales by the year 2004. 

Conclusions
The session made it clear that enforcement of taxation and tariff payment is not in place yet. E-commence is burgeoning and so is cross border trade. Developing countries are diversifying as a result and export and related industries are expanding. It appears that developing countries are increasing their production of digital products. However, there is no tangible information on this. It is therefore difficult to clearly grasp the impact of these new digital trade opportunities on the world economy and in particular on developing countries.