PASSING OF PROPERTY IN THE GOODS

E-COMMERCE AND INTERNATIONAL TAXATION: MAJOR PROBLEMS ASSOCIATED WITH TAXATION OF ONLINE TRANSACTIONS

CHAPTER ONE

1.0 Introduction
“The invention of the steam engine two centuries ago and the harnessing of electricity ushered in an industrial revolution that fundamentally altered the way we work, brought the world’s people closer together in space and time, and brought us greater prosperity. Today, the invention of the integrated circuit and computer and the harnessing of light for communication have made possible the creation of the global internet and an electric revolution that will once again transform our lives....
One of the most significant uses of the internet is in the world of e-commerce. Already it is possible to buy books and clothing, to obtain business advice, to purchase everything from gardening tool to high-tech telecommunications equipment over the internet. This is just the beginning. Trade and commerce on the internet are doubling or tripling every year and in just few years will be generating hundreds of billions of dollars in sales of goods and services. If we establish an environment in which electronic commerce can grow and flourish, then every computer can be a window to every business, large and small, everywhere in the world”[1]- William J. Clinton.

1.1 Background to the Study
Since the evolution of the internet in 1986 and the public attention that it acquired in 1990s, the internet has continued to grow[2] and revolutionise every sector of the economy. One of the developments is the growth of electronic commerce[3], which has made the world witness changes in economic and social life. E-commerce has brought not only simplification in ways of life and trading but also challenges to different industries, sectors of the economy and to stakeholders that have necessitated changes or slight adjustments to the traditional way of doing things in order to keep pace with the new technology.[4] According to Rifat,[5] there is e-commerce in tangible products, e-commerce in intangible products and e-commerce in services. As noted above in the speech delivered by Clinton,[6] trade and commerce has been doubling or tripling every year necessitating a change to the existing policies and rules regulating commercial transactions. One of these areas is the international rules of taxation. In international taxation, the challenge posed by e-commerce stems from the basic character of e-commerce as global, borderless, virtual and anonymous whereas international taxation is a state based regime focused on territorial borders and physical presence. As opposed to the physical environment where trade and commerce used to be conducted – in tangible and physical environments where enterprises would be stationary and within the jurisdiction of a certain defined state – electronic commerce is conducted in a borderless environment where no fixed place of business is needed and delivery is not necessarily physical but can also be in an intangible form. Marketing, advertising and payment is done through websites, thus there is no need for a businessman to travel around the world to search for markets or to place business representatives abroad. This has led to business disintermediation where an enterprise can reach its customers directly without the use of intermediaries. Consumer shopping online is quickly increasing[7] and gaining acceptance world wide, and, as a result, the emerging online market place has generated debate over the taxation of transactions on the internet. The internet has enabled business to be transacted with an insubstantial presence in a particular jurisdiction.

1.2 Problem Description
The supersonic growth of the sale of goods over the internet is considered to have generated large amounts of money[8] and governments are scrambling to take their part of the pie.[9] Potentially taxable e-commerce events include access to the internet, digitized services and tangible goods and services sold on the internet. This has resulted in policy makers and stakeholders deliberating on whether cyber purchases should be subject to the same sales taxes levied in the physical environment[10].
It is feared that, on the one hand, the non-taxation of these online transactions will result in tax evasion and loss of government revenue, but, on the other hand, that the imposition of taxes may slow the growth and opportunities offered by e-commerce – which has revolutionized in less than a decade – before it gains a foothold among consumers. However, even if governments decide to tax the issue is how these taxes can be imposed, and whether current principles of taxation are sufficient to ensure that e-commerce does not escape taxation. Furthermore, e-commerce tax administration and enforcement is another dilemma since business is conducted across national frontiers and governments’ tax jurisdiction does not extend beyond their countries' geographical boundaries. As rightly noted by Rifat:
“All types of e-commerce are also virtual, in the sense that their existence is on the Internet and their physical existence outside the Internet is limited..... It is very artificial to pinpoint the location of e-commerce in terms of a geographical location outside the Internet. The last feature of all types of ecommerce is its anonymity, in the sense that the e-commerce transaction, its parties, and its details are at least partially anonymous and as the level of anonymity increases, the tax challenges become harder”[11]
This makes every internet transmission vulnerable to double taxation, which would stop the rapid growth of the medium. Servers can be located almost anywhere in the world, their location not easily known and is unimportant in a business transaction anyway. Little control of the internet and the fact that it is driven by the private sector makes it difficult for tax authorities to effectively design the mode of administration and enforcement of tax rules.[12] Some of the difficult questions include: how to determine when a taxable event has occurred; whether a system based on voluntary compliance is still viable; how to establish audit trails; the proper level of information exchange; and efficient tax collection.[13] This has led many commentators to question the OECD’s use of permanent establishment (PE) as the defining nexus by which a country may tax the business profits of a non-resident entity.[14] The arguments are based on the idea that while permanent establishment was an effective criterion in the pre-digital age when cross-border commerce required physical presence to conduct business, this criterion is no longer viable in an age where technology allows buyers and sellers to conduct cross-border business without ever establishing a physical presence in a non-resident state. However, despite the frequent calls for a change, the OECD and other tax theorists maintain that the current PE rules are robust and flexible enough to respond to the challenges presented by the digital economy.[15]

1.3 The Purpose of this Study
The main purpose of this study is to examine to what extent tax rules are currently able to treat e-commerce transactions. In terms of this, the following issues have been selected: permanent establishment and jurisdiction. A further aim is to evaluate the response of international bodies, publicists and national states towards the challenges e-commerce poses to the traditional principles of international taxation. In the course of the study, apart from the questions raised above, an attempt will be made to test and answer the following questions and/or hypotheses:
1. Can the existing principles, definitions and concepts be extended to cover taxation of online transactions? If not;
2. What should be the basis for international taxation of e-commerce transactions?
3. Should a website or server constitute a permanent establishment? If not, what should constitute a permanent establishment online or is there any need to totally depart from this principle?
4. To what extent are the activities carried on through a server preparatory or auxiliary?
If the existing rules are not appropriate in the new environment, the study will propose changes that will be based on the relationship between the electronic communication technologies that produce e-commerce and the existing international tax principles. At the end of the study, it is expected to reveal any new progress that has been attained so far by the international community and the remaining questions to be settled.

1.4 Study Hypothesis
This study is premised on the hypothesis that,
The existing principles of international taxation cannot be extended to cover taxation of online transactions in the belief that the existing conceptual basis of international taxation is inadequate to cope with the challenges presented by e-commerce. A reason for this is that the internet is a new regime not anticipated by traditional principles, so any new international tax framework with regard to e-commerce must be worked out through a multi-dimensional approach that will work hand in hand and complement the existing international tax framework.

1.5 The Scope and Limitation of the Study
While the internet revolution has affected all aspects of life, this study will focus specifically on electronic commerce. Issues such as privacy, the legal status of online contracts, intellectual property rights or the rise of new forms of electronic crime will not be addressed even though they may well have implications for the development of international tax law relating to online transactions. However, major problems currently affecting the taxation of e-commerce are jurisdiction (corporate residence), permanent establishment, characterisation of payments and VAT. The study will focus mainly on the major problems affecting international taxation of e-commerce, namely jurisdiction and permanent establishment. The study will concentrate on these two major issues because they are more important than issues of characterisation of payment and VAT as these latter cannot arise without determining, firstly, jurisdiction and, secondly, whether the entity liable to pay tax has a permanent establishment in a particular territory. The study will further look at the response of the OECD on these issues and of the member countries towards solving the highlighted problems.
The study is divided into five or chapters. Chapter one is this introduction while chapter 2 provides an overview of electronic commerce, the history and a brief explanation of how the internet works. The focus of Chapter 3 is the major problems of international taxation of e-commerce. The first part of this chapter will address the issue of jurisdiction, will consider how this poses problems and how can it be articulated to suit the challenges posed by e-commerce. The second part will address the issue of permanent establishment and explore the questions raised by applying the concept of permanent establishment to e-commerce. It will also examine the rationale for permanent establishment in traditional 'brick and mortar' commerce and whether this rationale is still tenable in a virtual environment. Chapter 4 will present a conclusion and recommendations. This section will propose some suggestions and recommendations as well as highlight recent developments (if any) that have been attained to date.

1.6 Research Methodology
This research is desk-based to the extent that it is based on existing international and domestic legal instruments and documentation relating to general international law of taxation and e-commerce as well as available literatures on the international taxation of e-commerce. Thus, the main research methods used for collecting the information required to achieve the main objectives of this study will be through literature review including technical and conference papers, internet web pages, reports, commentaries, decisions and judgements on the subject matter. The research has also involved the perusal and analysis of existing academic literature, textbooks and research studies, journals, dissertations, theses and other materials on the subject in both hard copy and electronic form


1.7 Literature Review
Since the evolution of the internet in the 1990s and the resultant e-commerce, many studies have been done in relation to the legal problems associated with taxation of online transactions. However, no particular study has managed to come up with a concrete solution with regard to taxation of online transactions. Every author has tried to come up with policy proposals and recommendations, but the OECD has adopted none of them, thus leading to a continuation of this debate. This study reviews some of the relevant literature to see what the commentators have discussed. It aims to come up with and realise some areas of departure and to identify where there are any gaps that might be filled or if there is any theory that can be tested into practice or extended. In the course of reviewing the literature, the study compares and contrasts different authors’ views on the issues raised herein; it groups authors with similar conclusions, notes the areas in which authors are in disagreement, and aims to come up with alternative solutions to improve on the previous authors' findings or to totally depart from them. All the information collected from literature review is reflected in different parts of this study by way of concurring or dissenting opinions.

CHAPTER TWO
INTRODUCTION TO ELECTRONIC COMMERCE
2.0 Introduction
In the previous chapter we looked at the brief introduction to this study aiming at explaining why the same is conducted. The debate on international taxation of e-commerce cannot be accomplished without a clear understanding of e-commerce itself; thus this chapter aims to highlight what e-commerce is, its history, and how it works, the aim being to become familiar with this and to appreciate its underlying principles. This will also give a better understanding of the challenge taxation faces in the electronic environment, the main question here being how e-commerce interacts with traditional principles of taxation.

2.1 The Nature, Scope, and Definition of E-commerce
The term electronic commerce, abbreviated as e-commerce, has received multifarious definitions from different authors[16] from different perspectives. There is no single definition of e-commerce although one may be able to identify a similarity of certain features in all definitions presented. The famous one is that given by the OECD (1997),[17] which defined electronic commerce generally as referring to all forms of commercial transactions involving both organisations and individuals that are based on the electronic processing and transmission of data, including text, sound and visual images. It also refers to the effects that the electronic exchange of commercial information may have on the institutions and processes that support and govern such activities.[18] At its broadest, this definition means e-commerce includes both EDI and open network (internet) transactions. Open network (internet) is, however, what is often referred to when the term e-commerce is used. E-commerce transactions include those involving telephone, faxes, televisions, electronic payment and money transfer systems that are well established to facilitate the production, distribution, sale and delivery of goods and services in the market place.[19] In all definitions, one will find that e-commerce involves commercial transactions which are conducted in the electronic environment – termed the internet and the world wide web (www) – which all refer to it as an ‘electronic market place’.

2.2 History of the Internet
According to various commentators,[20] the internet was developed and designed in 1969 by Bolt, Beranek and Newman Inc.[21] under contract to the US Department of Defence. The resulting network became known as the “ARPANET”. US universities joined ARPANET in the 1970s, and some connections to European Universities were made at the end of that decade (i.e. the 1980s). It is believed that Queen Elizabeth II sent the first e-mail to a friend in 1976.[22]
The World Wide Web was developed by a further government agency, CERN, the European Particle Physics Laboratory.[23] The internet began to be opened up to commercial internet service providers after 1992 and through them, private individuals gained access. Since then the internet has created an unlimited virtual market place for the propagation and sale of ideas, goods and services on a global scale.[24]
2.3 The Nature of the Internet
The internet has been defined as a term which refers to thousands of interconnected logical networks linking millions of computers with a common addressing scheme worldwide.[25] It is a collection of networks which are connected together by traffic-forwarding devices called routers which can be accessed through an ISP (internet service provider).[26] Information is carried by packets via telephonic connections through the standard of transmission control protocol/Internet Protocol (TCP/IP) which look like an electronic parcel.[27] No single organization owns or controls the internet. The various networks that make up the internet communicate among themselves in accordance with internationally accepted protocols refined and developed by NGOs with a worldwide membership.
From a commercial perspective, the most important part of the internet is the World Wide Web (www). A website is a location on the www. It is a navigation tool for locating and accessing information presented in graphic form available on the hard drives and other storage facilities of computers known as web servers on the internet. The web allows access to information in a multimedia format featuring colour, graphics, audio and video.[28] Each website contains a home page which is the first document users see when they enter the site. The site might also contain additional documents and files. Each site is owned and controlled or managed by an individual, company or organisation. The Web also utilizes browsers, such as Internet Explorer or Firefox, to access web documents called web pages that are linked to each other via hyperlinks.[29] The browsers locate a website, using the URL of its home page. It then interprets the information contained on that page and presents that information in a viewable form on the computer screen of the user.[30]
2.4 Activities Conducted on the Internet.
There are a wide range of activities conducted via the internet such as e-mail, www, chat services, discussion forums, bulletin boards, the paperless exchange of business information from business computer to business computer using electronic data interchange (EDI) technology, business advertising, marketing, data entry and processing, payment, customer support, file transfers, etc. But it is the focus of this study to deal with commerce by e-mail and the World Wide Web (www) which involves computer software, entertainment products such as motion pictures, video games and sound recordings, information services such as data bases and online newspapers, technical information, product information, product licences, financial and professional services including business and technical consulting, accounting, architectural design, legal advice and travel services – to mention a few.[31] Thus, many websites allow a certain level of interaction between the user and the website.
2.5 The Website Server
The web server – commonly referred to as 'the server' – is primarily a program that runs on a machine, providing a particular and specific service to other machines connected to the machine on which it is found. It accepts the HTTP[32] connections from web browsers and delivering it to those web pages and other files to them as well as processing form submissions.[33] On receiving HTTP (Hyper Text Transfer Protocol) from a web client as a request, it sends a response to the client by using HTTP; the response contains HTML, images, videos, texts, links and so on. The communication server passes documents in the form of HTML or in other forms such as XML, JavaScript, JSP and ASP. Web pages can be static or dynamic (i.e. generated on request). The modern client server is used largely for long term storage of data. A server can be any computer from a simple pc to a main frame. It handles client applications, storage and security, and provides scalability which is the ability to add more clients[34].
There are two types of servers, platform server and applications server. The platform server is the server that contains the operating system to be used by other clients, whereas the application server – or client server – is the server that is used to serve other clients who share that application; there are many types of application server.[35] A computer can be both an e-mail and a web server, or function as a server for a host of other applications. In the context of e-commerce, a server might handle thousands of simultaneous users and manage those users' transactions; for instance, information requests, order processing, billing, etc, and deliver information to clients.[36]
A web server can be located anywhere;[37] it need not be located where the business is managed. Using a telephone or other cable or wireless connection, the server can be accessed easily from anywhere in the world. It is not necessary for a business to own its own server. Many companies offer web hosting capabilities or services that may use mirror servers that duplicate the web hosting of a customer’s content in order to provide the quickest access possible. When an end user accesses a website, there may be no way to tell which server is providing the content. The next time the web site is accessed, it may be a different server.[38] In addition, a server may be controlled automatically or manually, but as technology keeps on growing most of the servers are controlled automatically. The server serves its clients automatically, it does not need any human help. What is done is to let it know what to do during the configuration time. This manual control is during the configuration of the server, but after that it provides and serves its clients automatically by using configuration information provided in the conf file.

2.6 How the Web Server Operates
For a website or internet to operate, there must be three main components, namely: 1. the client side (customer); 2. the service system (internet side); and 3. the backend system (the server side). In the server side there are web browsers, e.g. Netscape, Internet Explorer, Opera, etc. In the service system there must be a connector, which is the internet, i.e. communication protocols; for instance, HTTP/FTP.[39] These communicate by passing documents in a basic format and in other formats. The documents contain texts, images and links pointing to other documents and files in other formats such as Adobe Acrobat, media,[40] etc. The web server must communicate with the application server through intranet, which will communicate to the backend system where the database is located. The server fetches documents from the local file and transmits it to the operating system in the client’s side through the internet.[41] In short, the client side provides the customer interface, the service system handles the business logic and the backend system provides the necessary information to complete a transaction.

Figure 1
The internet only provides the communication platform for transferring the information between the web client and the web server. This is done through locating services known as URLs. In this way, users visit a web site by either clicking on a hyperlink that brings them to that site or by keying the site's URL directly into the address bar of a browser. Through an internet connection, your browser initiates a connection to the web server that is storing the web files by first converting the domain name into an IP address (through a domain name service) and then locating the server that is storing the information for that IP address[42].

2.7 Establishing Online Presence
When a company decides to establish a business online, the first thing it does is to establish its own website. This is done through acquiring a domain name and arranging for the development (building) and hosting of a website.[43] There are many web hosting companies that provide domain name registration services, one of which is the international body for registration of domain names called Internet Corporation for Assigned Names and Numbers (ICANN). ICANN operates an accreditation system whereby some parties are allowed to act as registrars of domain names to intended registrants. Domain name systems exist in a hierarchical pattern, where there are top level domain names which are traditionally of two types, i.e. generic (gTLDs) and country codes (ccTLDs), and second level domains e.g. .co.uk, .ac.uk, or .org.uk. Recognised gTLDs include .com, .org, .net, .biz, .info, .name, .pro; while ccTLDs domains end with two letter suffixes indicating the country base of the root server(s); e.g. .uk, .de, .ng, .fr. After all this is done the company is able to establish business online.

2.8 Payment Mechanism
Internet payment is mainly through electronic payment. Electronic payment mechanism refers to a payment mechanism that involves an electronic process. According to Professor Benjamin Geva,[44] a payment mechanism is any mechanism or machinery that enables money to be transmitted from one person (payer) to another (payee) without the need for transportation or physical delivery of the money. If the mechanism operates through the regular banking system then it is sometimes called a payment system. Payment, from a legal perspective, has been defined as “a gift or loan of money or an act offered and accepted in performance of a money obligation".[45] Electronic payment mechanisms/systems include payment by debit and credit cards, other electronic funds transfer schemes such as BACS or CHAPS and, nowadays, a range of new (many of them yet to be proven) products that may be categorised within the generic headings “electronic cash” or “digital cash” or “electronic money[46]. Electronic money is defined in Art. 2 of SI 2002/682[47] as “monetary value, as represented by a claim on the issuer, which is – (a) stored on an electronic device; (b) issued on receipt of funds; and (c) accepted as a means of payment by persons other than the issuer". This is what has featured in most electronic transactions and poses another problem for the taxation of e-commerce.
Online payment is done through secure socket layer (SSL). SSL is a commonly used protocol for managing the security of a message transmission on the internet. SSL has recently been succeeded by Transport Layer Security (TLS), which is based on SSL. SSL uses a program layer located between the Internet's Hypertext Transfer Protocol (HTTP) and Transport Control Protocol (TCP) layers.[48] The "sockets" part of the term refers to the sockets method of passing data back and forth between a client and a server program in a network or between program layers in the same computer. SSL uses the public-and-private key encryption system from RSA, which also includes the use of a digital certificate. Since its introduction in 1994, SSL has been the de facto standard for e-commerce transaction security and is likely to remain so into the future.[49] The SSL certificate sits on a secure server where it encrypts the data and identifies the site. The SSL certificate helps to prove that the site belongs to whom it says it belongs to, and it also contains information about the certificate holder, the domain that the certificate was issued to, the name of the Certificate Authority who issued the certificate, the root (or origin of the certificate) and the country in which it was issued.[50] Visa, MasterCard, American Express and many leading financial institutions have endorsed SSL for commerce over the internet.
Figure 2:
Figure 2: adopted from Chapter 1 of the High Powered Committee of India on E-commerce and taxation, 2001, available at http://www.laws4india.com/indiantaxlaws/notification/ecomchapter1.asp

CHAPTER THREE
MAJOR PROBLEMS OF INTERNATIONAL TAXATION IN THE ELECTRONIC ENVIRONMENT

3.0 Introduction
Having looked at an introduction to e-commerce in the previous chapter, this chapter aims to examine the major problems affecting the taxation of e-commerce, notably jurisdiction and permanent establishment. With the internet revolution of the 1990s, determination of residence jurisdiction becomes even more complicated. It also makes the traditional co-relation between the extent of physical presence in the source country and the volume of business non-existent. This is particularly so for services, entertainment, music and software industries as delivery can be in digitised form. Absence of a permanent establishment (“PE”) in the source country raises fears of revenue erosion in net importing countries and the demand for abandoning the concept of PE. Delivery in digitised form makes characterisation issues,[51] compliance and enforcement very complicated thus posing a great challenge to international tax authorities.[52] However, it is not the aim here to discuss all these problems as this would require comprehensive and extensive research and discussion which is beyond the scope of this study. Hence, the study will focus on discussing two major problems currently under global discussion, namely fiscal jurisdiction and the concept of permanent establishment. At the end of this section, it is the intention to suggest policy proposals and recommendations that will help to improve the current debate on jurisdiction and permanent establishment. These two issues are discussed in the following paragraphs, along with the views of the author.

3.1 A Hypothetical Case of E-commerce in Action
Before looking at the jurisdiction question let us consider the following example:
· An e-commerce firm (S.COM) has its headquarters in country ‘A’ whose directors live in China, UK and Russia. Board meetings are held by web-conference and the company accepts customers ordering through a website that is maintained in country ‘B’.
· The website then transmits orders to the company’s sales department in
Country ‘C’. A customer residing in country ‘D’ places an online order.
· The order is then channelled electronically through a chain of servers in a number of locations, ultimately arriving at the company’s website in country ‘B’, which in turn transmits the order to the sales office in country ‘C’.
· Let us further assume that the company has a ‘storage facility’ under yet another jurisdiction in country ‘F’.

· After approving the order, the sales office arranges for shipment of the product from the storage facility in country ‘F’ to the customer.

The likely questions here can be: firstly, what is the country of residence of S.COM; secondly, where does S.COM have PE; thirdly, is S.COM taxable anywhere else beside country of residence and PE; fourthly, is S.COM obliged to pay indirect taxes and if so, where; and fifthly, is S.COM entitled to have PE in the countries in which it has its servers? These and other questions trigger debate on the international taxation of e-commerce. For goods that are traded online and delivered physically, taxation may not be an issue; it can be done at the border. The problem rests with goods that are traded and delivered electronically and relates to the identification of the taxpayer, the definition of jurisdiction and enforcement of payment.

3.2 PART ONE.
3.2.1 Establishing Fiscal Jurisdiction

3.2.1.1 The Concept of Jurisdiction
Jurisdiction is one of the current problems affecting international taxation of e-commerce, thus it has been argued that the internet forms a jurisdiction of its own merits.[53] This is due to the fact that the internet disregards national frontiers; it is anonymous in nature and sophisticated. According to Qureshi,[54] even without electronic commerce jurisdiction is still a complex phenomenon because the principles themselves are subject to differing perspectives amongst states and international jurists. Generally speaking, jurisdiction is an attribute of state sovereignty. A state’s jurisdiction refers to the competence of the state to govern persons and property by its municipal law (criminal and civil). This competence embraces jurisdiction to prescribe and proscribe, to adjudicate and enforce law.[55] Jurisdiction is primarily exercised on the basis of the territoriality principle, personal principles, the protective principle, the universality principle and other bases.[56] According to the jurists,[57] the most favoured basis for exercising state jurisdiction is territorial jurisdiction. A state territory has been stated to be a three dimensional fixed area of the earth’s surface comprising of land, water, and airspace[58] and it extends to its continental shelf[59]. Territorial jurisdiction can be subjective, objective and effective. Subjective territorial jurisdiction applies where an incident which is initiated within one territory completes in another, whereas objective territorial jurisdiction is where the country applies its law to an incident that is completed within its territory even if it was initiated outside its territory; for instance; the prosecution for murder of bombers by the state in whose airspace a bomb on board an aircraft exploded, even though the bomb had been loaded onto the aircraft in another state.[60] Effective jurisdiction applies where the effects of an incident are felt.[61] This is an extension of the objective territorial jurisdiction principle.
Likewise, fiscal jurisdiction refers to a state’s competence to tax persons, property, and transactions or events.[62] As such, fiscal jurisdiction is an aspect of state sovereignty, thus it can be determined according to general international law or by international agreements.[63] The significance of the state’s fiscal jurisdiction is firstly, to enable the state in the formulation of its tax legislation and in the design of its enforcement apparatus; and secondly, to effectively negotiate double taxation agreements and exercise of fiscal enforcement.[64] It is generally accepted practice that a state has a right to impose taxation,[65] and therefore legislative fiscal jurisdiction where there is a personal link; for instance, by reason of nationality, residence, domicile, place of incorporation or effective management in the case of a corporate entity.[66] This right is considered a component of jus cogens[67] and part of international public law. A territorial connection justifies the exercise of taxing jurisdiction because a taxpayer can be expected to share the costs of running the country which makes possible the production of income, its maintenance and investment and its use through consumption (economic attachment).[68] The principle of territoriality applies with respect to persons and objects (income).[69] Territorial jurisdiction over a person (residence) is analytically similar to jurisdiction based on nationality. Jurisdiction can also be exercised on the basis of source even if the taxpayer is not a citizen or resident of a country because the source of income is within that country.[70] Therefore in all cases, it is the connection or the link that the person has to a country that justifies the exercise of jurisdiction and, in the case of territorial jurisdiction over a person, the connection is factual, i.e. whether a person is actually resident in a particular country.[71]

3.2.1.2 Jurisdiction Problems Posed by E-commerce.
With the evolution of the internet and electronic transactions, traditional jurisdiction principles have faced many challenges as they were developed in an era when commerce was typically conducted through the so called “brick and mortar” presence in a country, i.e. physical presence and fixed establishment, and when people were less mobile. These challenges stem from the basic character of the internet as global, borderless, virtual and anonymous, whereas the international tax regime is a state based regime focused on territorial borders and physical presence.[72] Thus the main questions have been: (a) which country has jurisdiction to tax (i.e. resident or source state); (b) whether jurisdiction should be where the business activity is taking place or the place where the seller is resident; and (c) if so, on what basis should this jurisdiction be based? Consequently, these issues have triggered debate in the OECD, in institutions and amongst various authors as to whether the traditional jurisdictional approach can still hold water in an e-commerce regime. However, neither the convention of the OECD model nor the commentary by various commentators provides a satisfactory answer, thus it suffices to conduct further research on these issues.

3.2.1.3 Jurisdiction in E-commerce Taxation Discussed.
In addressing these problems, various attempts have been made to allocate jurisdiction to a particular country. One of these attempts was made by the OECD. The OECD proposed to give tax jurisdiction to the country of the server, if the server is an essential part of the business activity.[73] However, this proposal presupposes that the server is immobile and located at a certain physical location. It ignores the fact that the server can be located anywhere in the world, not only on land but also at sea on a ship or on a cruising aircraft. Take an example of, say, e-commerce carried out from a server on board a ship or aircraft and not connected with a transportation business, which country would have jurisdiction? This is still unsettled. Another weakness of this proposal is that it presupposes that an enterprise owns and runs the server itself. It ignores the fact that the server could be hired or leased and that one website may use more than one server every time one accesses the website. Thus, this proposal is still problematic.
Another proposal is that given by Professor Avi-Yonah,[74] who proposed to give tax jurisdiction to the country of the consumer, i.e. demand jurisdiction. This proposal seems to be good; it also helps to avoid double taxation if the same can be agreed through a tax treaty or multi-lateral Double Tax Agreements. However, it runs against the principle of fairness where the country of the producer will be denied the right to collect tax.
Another proponent is Professor Jiyan Li,[75] who proposed to apply formula taxation in determining jurisdiction and allocation of income as royalties or dividends. In determining jurisdiction for direct business income, she proposed to divide the jurisdiction to tax the income among the different countries involved in the transaction according to a formula that takes into account all the relevant economic allegiance factors. In dissenting to this proposition, Rifat[76] argued that Li’s propositions ignore the basic features of e-commerce as global, virtual and anonymous. It tries to locate the places of e-commerce and contribution of each place to the production of income; hence, the proposal generates the same challenges that face the current international tax regime. According to Rifat,[77] the global character of e-commerce makes it difficult to determine the relevant countries to plug into the formula.
Another proposal is that given by the US Department of Treasury[78] in 1996, which proposed to tax e-commerce exclusively to personal jurisdiction. However, Rifat[79]criticised this proposal on the bases that the proposal can work for an individual but for corporations it is very difficult to determine residency, and it would be easy to escape taxation because e-commerce is anonymous. Contrary to Rifat’s criticism above, the experience with US courts using personal jurisdiction has shown that jurisdiction has not been based on residence, as Rifat seems to suggest, but on interactive use or passive use between the person (be it legal or corporate) and the defendant; this jurisdiction has also involved corporations.[80] Thus, it has been held that maintenance of a website or internet advertisement alone is not enough to subject a party to personal jurisdiction in the forum state, rather there must be something more to indicate that the defendant purposefully (albeit electronically) directed his activity in a substantial way to the forum state.[81]
Similarly, Doernberg and others[82] have suggested some possible bases for exercising jurisdiction for online transaction in a country where a firm has no physical presence. These possible bases include:1. an exercise of jurisdiction at the location of the customer base;2. where the contract between the firm and the country of source customers is concluded;3. transmission of bits from the firm’s website server to a customer’s browser in response to a customer’s request (bit tax);4) the use of phone lines and telecommunications infrastructure; 5) the presence of the firm’s ISP;6) the activities of agents at the telecommunications company.

All the above suggestions have their pros and cons; for instance, jurisdiction based on the location of the customer base will have the impact of making the firm liable to tax everywhere in the world and thus subject to multiple taxation. Moreover, on the internet the person(s) is not only dual resident but also multi-resident, thus even a tie breaker rule needs a revision.[83] On the other hand, it is very difficult to know when the contract is concluded online and where it is actually concluded. Similarly, basing jurisdiction on the firm’s ISP has the impact of taxing the ISP rather than the web operator because an ISP can host many websites in his server and can be located more easily than the web owner or operator who actually conducts the business. Again, with sophisticated technology,[84] the online presence or visibility of a website anywhere in the world does not necessarily need the presence of an ISP in a jurisdiction where the website is seen, or any contract between an ISP and the telephone line providers (assuming it is broadband or wireless), or any ISP’s agent. It rather depends on the capacity of the server hosting a website and a webhosting company itself to have many back up centres and points of presence or links.
Another proponent who has, of late, widely discussed the jurisdiction problems leaving no stone unturned is Dr. Riffat Azam.[85] According to Azam, the existing international tax rules relating to jurisdiction have been overtaken by events and thus cannot be applied to e-commerce. His main argument is that the current debate on international taxation of e-commerce cannot be accomplished without involving cyberspace law because the link between tax issues and other cyberspace law issues is very strong, thus he develops a new theory called “Integrative Adaptation Mode” to the existing international tax regime instead of changing it so that the process is evolutionary rather than revolutionary. His mode calls for four layers of adaptation:1. the regime should develop income classification rules and residency rules by case law;2. it should introduce new source rules based on the location of the parties to the transaction;3. it should use technology to enforce tax laws; and4. it should gain international consensus through treaties. All these questions, and others not raised here, lead to the continuation of this debate.

3.2.1.4 Residence and Source Based Jurisdiction
(a) Theories for State’s Taxation Rights
According to Vogel,[86] there are two competing theories influencing the state’s right to tax – the benefit theory and the sacrifice theory. Under the benefit theory, where the source jurisdiction is derived, a jurisdiction’s right to tax rests on the totality of benefits and state services provided to tax payers that interact with a country. Therefore, under the benefit theory, taxes are regarded as the price paid for all state services by all taxpayers taken together; and countries obtain their jurisdiction to tax based on the services provided. In view of this, McLure[87] observed that, “the country where income originates should be compensated for the cost of providing public services”. The benefits can be specific or general.[88]
In terms of general services, or benefits, obvious examples are education, police and fire services, telecommunications infrastructure (e.g. telephone networks, satellite receivers, public servers), airports, harbours and electricity, etc, whereas specific services include conducive and operational legal infrastructure for the proper functioning of business.[89] In terms of e-commerce, these benefits can include facilitation by the state of the presence of national satellites and ISPs administration,[90] telephone lines,[91] (e.g. broadband, VSAT[92] and wireless services technology), power, a suitable telematic environment, etc, which enable direct international internet access in the country, licensing and digitization. Usually the country of source provides most or all of the benefits relevant for the production of income and therefore incurs costs in providing these benefits. Thus, according to Vogel’s view,[93] to which I concur, exclusive taxation should occur in the source country as compensation to the government bearing them.

(b) Source Based Jurisdiction
The international tax regime recognises two bases for tax jurisdiction: territorial, or source based, taxation; and secondly, residence or personal jurisdiction.[94] Source jurisdiction is typically restricted to the income that arises from sources within the state and this is where income characterisation rules occur, whereas residence jurisdiction is restricted to the connection or the link that the person has to a country. Since source rules are strongly territorially based, the difficulty they face in e-commerce is to determine the source country and how the country has contributed to the source of income when the place is considered virtual. As noted above, traditional source rules subject one to tax for using either state provided services or benefits which the source country has spent money on to make them available, whereas with the internet it is difficult to say exactly on what basis taxation will be justified. This is due to the fact that e-commerce enterprises can sell their products or services worldwide with very limited physical presence; they can operate without agents because they can easily, directly and cheaply contact customers worldwide, and, thus, the very root of source rules is challenged.[95]
According to Professor Avi-Yonah,[96] the source jurisdiction should be given exclusive rights to tax because it has contributed its markets to the production process of the income used to purchase the item, be it online or anywhere else. His reasoning is good in the sense that it will help to avoid double taxation between the source state and the residence state, even though Dr. Rifat[97] is worried that his approach is problematic from a neutrality point of view as it creates two separate international tax regimes; one for e-commerce and another for none-commerce. It can, however, be argued that there has in reality never been so-called neutrality in taxation, especially between capital importing countries and capital exporting countries because of different factors, one of which being the difference in the level of technology, unfair terms of trade and differing tax enforcement mechanisms. To add to Prof. Avi-Yonah’s view, perhaps it is correct to have two regimes that must complement or supplement each other.[98] It should also be noted that, since international tax principles are not immutable, there is no reason why they should not be modified to suit new circumstances. As Sachdeva puts it,
“No rule of law can be fit for all ages even in identical set of circumstances; a change in time, accompanied by changing circumstances, socio-political order, therefore calls for modification, and in some cases, abdication of the old in favour of a new rule”.[99]
In view of the above, there is no harm for traditional tax principles to change or be modified so as to suit the new environment. It is further argued that e-commerce cannot in any way stand alone as a branch of law without complementing the current traditional law. These two can work together best like two sides of the same coin.
Johnson and Post[100] argue that cyberspace is a place of its own that should have its own set of distinct legal rules. The borders between this place and the real world are sharp and clear. For that matter, it is argued that e-commerce transactions take place on the internet as a unique place of business. In this respect, Dr. Rifat[101] claims that the source of e-commerce is the internet for purposes of the territorial jurisdiction question, which means that there is no source for e-commerce income outside the internet and that the territorial tax jurisdiction on e-commerce should not be given to any country and that due to this the OECD source rules are fundamentally wrong.
Conversely, Rifat’s view above is incorrect in the sense that, even if the internet is a unique place of business, the source of e-commerce is not the internet for taxation purposes because all factors and major means of production are in the physical world, even people who are key players in e-commerce are living on the earth; they are not in cyberspace. Cyberspace is only a trading ground, thus even the income that is used to purchase things in cyberspace derives its source from the physical world where governments have jurisdiction. Furthermore, if one takes the definition of territory according to Articles 1 and 2 of the Geneva Convention on the Territorial Sea and the Contiguous Zone of 29/4/1958, a state’s territory includes the land, the sea and airspace and therefore Rifat’s view may be incorrect.

Conclusion on Source Jurisdiction.
From the foregoing discussion it can be proposed that since airspace belongs to a particular country, and people who trade on e-commerce have their nationality, residence or incorporation somewhere in the physical world, jurisdiction should be given to relevant countries. This corresponds with Rifat’s second integrative adaptation mode, which proposes to enact source rules that are based on the location of parties to the transaction and the location of other physical components of the income-production process. In this, Dr. Rifat is correct when he argues that because parties to the transaction, personnel and corporations are located somewhere in the physical world, the parties are the central component in the income production process, and they contribute a lot in the process. On the seller’s side is the website that generates income, and the seller who is the subject of the income tax on e-commerce. Human beings stand behind the website as owners, employees, programmers, and others. Thus, when selling software by downloading from a website, there are human beings who developed the software, who uploaded the software to the site, and who maintain and update the site. Therefore, it is justifiable and feasible to base the source rules on the location of these human beings on the side of the seller. Constructively, Rifat seems to import the doctrine of lifting the corporate veil when it comes to identifying who is behind the website (the owner), which we can refer to here as “lifting the website veil”.
At the same time, the buyer’s side also contributes to the production process of the income; income that could not be produced without this process of consumption.[102] Thus, persons or corporations that purchase a product or service in e-commerce are located somewhere in the physical world, and their countries should and could receive part of the e-commerce income tax pie;[103] and, in the author’s opinion, apart from buyers and sellers, other physical facilities, policies and components might take part in producing or enabling e-commerce income. In such cases, the location of these facilities should and could receive part of the tax pie.
A similar view has been expressed by Catherine Pilkington,[104] where she maintains that, in online transactions, economic activity occurs with the customer and since the contributory elements in the channel to the customer could be located in many jurisdictions, the only firm or secure point at which tax revenue could be raised is at the location which is the customer.
Apart from that, the idea has already been put into practice by Hong Kong through section 18(1) (c) of the Hong Kong Electronic Transaction Ordinance which states that, “the response of the web server is deemed to be that of the operator of the website, and the electronic record or document is deemed to have been sent from the operator’s place of business and received at the address of the surfer’s place of business or residence”.[105] Again, in EDIAS Software International v BASIS International Ltd, an Arizona court exercised jurisdiction over a non-resident defendant in a defamation and tortious interference case because the defendant knew that his out-of-jurisdiction activities would have an effect in Arizona. The court said that the defendant could not escape traditional notions of justice through the use of modern technology.[106] This case shows the court’s willingness to accommodate challenges brought by new technologies within the traditional principles of law through statutory interpretation.

(c) Residency Based Jurisdiction
According to the OECD,[107] the term 'resident' is defined to mean:
“Any person who under the laws of that state is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. However, the term does not include any person who is liable to tax in that state in respect only of income from sources in that state or capital situated therein.”
Furthermore, the commentaries to article 4 at paragraph 3 define the place of effective management as the place where key management and commercial decisions that are necessary for the conduct of the entity’s business are in substance made. The place of effective management will ordinarily be the place where the most senior person or group of persons – for example, the board of directors – makes its decisions, the place where actions to be taken by the entity as a whole are determined.[108] However, the OECD noted clearly that no definitive rule can be given as to place of management (my emphasis) and all relevant facts and circumstances must be examined to determine the place of effective management.
However, the main taxation challenge to e-commerce is to determine the residency of e-commerce corporations because corporations usually lack fixed physical facilities.[109] Websites are their main store fronts, and their employees are highly mobile. As precisely noted by Catherine Pilkington,[110] this measure of allocating taxing rights to jurisdictions is established where there is necessarily a close physical link between a business activity and its management. Thus, it is very difficult to determine the “central place of management and control” as required by the OECD. There is a concern as well that if the current rules are left as they are, it is easy for companies to abuse the traditional definitions and locate their corporations in a low tax jurisdiction to reduce or even escape taxation altogether which, in turn, will affect countries' tax revenues.[111] Hinnekens,[112] for his part, is of the worried view that net importers of e-commerce will aim to strengthen source based taxation by establishing a “virtual physical presence” and will claim that the website functions as sales and ordering office, whereas net exporters of e-commerce will seek to strengthen the residence rules and will argue that, since a physical presence is required, a website cannot constitute presence for residency purposes.[113]These and other questions have attracted responses from the OECD and other academicians.


3.2.1.5 OECD Response to Jurisdiction Problems
Recently,[114] in response to residence jurisdiction problems, the OECD decided to review commentaries on the definition of the place of effective management,[115] striking out words which start with “The Place of effective management will ordinarily be the place where the most senior person or group of persons..........”, and adding there, under paragraph 24.1::
“Some countries, however, consider that cases of dual residence of persons who are not individuals are relatively rare and should be dealt with on a case-by-case basis. Some countries also consider that such a case-by-case approach is the best way to deal with the difficulties in determining the place of effective management of a legal person that may arise from the use of new communication technologies. These countries are free to leave the question of the residence of these persons to be settled by the competent authorities, which can be done by replacing the paragraph by the following provision:
‘Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, the competent authorities of the Contracting States shall endeavour to determine by mutual agreement the Contracting State of which such person shall be deemed to be a resident for the purposes of the Convention, having regard to its place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors. In the absence of such agreement, such person shall not be entitled to any relief or exemption from tax provided by this Convention except to the extent and in such manner as may be agreed upon by the competent authorities of the Contracting States’”.[116]
However, in determining the residence of a legal person as referred to above, the OECD has laid down the following factors to be taken into consideration by competent tax authorities:
(i) Where the meetings of its board of directors or equivalent body are usually held,
(ii) Where the chief executive officer and other senior executives usually carry out their activities,
(iii) Where the senior day-to-day management of the person is carried out,
(iv) Which country's laws govern the legal status of the person,
(v) Where the person’s headquarters are located,
(vi) Where its accounting records are kept,
(vii) Whether determining that the legal status of the person is a resident of one of the contracting states but not of the other for the purposes of the convention would carry the risk of improper use of the provisions of the convention, etc,[117]

This has been described as the “Hierarchy test” and it is seen as a very positive step by the OECD towards enabling the residence of corporations to be determined according to the changes in technology. It has been commented on that this new approach will be able to march with e-commerce and answer the question as to how the residence of a corporation will be determined, taking into account that corporations tend to manipulate their residence. This review follows the recommendations of the report on the Impact of Communication Revolution of the Application of Place of Effective Management[118] and the concerns of its member countries.

3.2.1.6 The Response from OECD Members, Jurists and Case laws.
The USA and UK authorities suggest that, because the presence in the economy where the business is being conducted is insubstantial, the taxing rights lie with the jurisdiction in which the business is resident. However, Catherine Pilkington criticises their proposition noting that e-commerce importing countries will not receive a fair share of the tax revenue for economic activity being conducted on their territory.[119] She therefore maintains that taxing of the consumer at the point of supply should be developed further and the taxing of business profits on residence principles should become less important.
The USA has attempted to use residency or personal jurisdiction to deal with various issues arising from internet use. According to the due process clause of the 14th amendment to the US constitution, personal jurisdiction can be over a defendant in any state with which the defendant has certain minimum contacts… such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice.[120]Thus, in the internet context, maintenance of a website or internet advertisement alone is not enough to subject a party to personal jurisdiction in the forum, rather there must be something more to indicate that the defendant purposefully (albeit electronically) directed his activity in a substantial way to the forum state.[121] Apart from personal jurisdiction, the effect theory[122] has been applied to extend jurisdiction in other countries, the USA being the leading example. In Panavision International,[123] it was held that personal jurisdiction may be based on the effects of international actions expressly aimed at the forum state.... even where the defendant never enters the plaintiff’s home state but merely posts material accessible on the internet, thus giving rise to unlawful act that a district court in the plaintiff’s home state has personal jurisdiction over the defendant because infringement would be felt mainly in that state.
Again in the Zippo case,[124] the court ruled that the likelihood that personal jurisdiction can be constitutionally exercised is directly proportionate to the nature and quality of commercial activity that an entity conducts over the internet..... the exercise of jurisdiction is determined by examining the level of interactivity and commercial nature of the exchange of information that occurs on the website. (my emphasis).
Furthermore, in the YAHOO case,[125] a French court exercised jurisdiction over the American corporation YAHOO Inc. in an action brought to the court by French NGOs against YAHOO Inc. and YAHOO France, to prevent the access of French users to Nazi materials. In compliance with French laws, the court ordered YAHOO to take all measures to dissuade and make impossible any access via www.yahoo.com to the auction service for Nazi objects and to any other site or service that may be constructed as constituting an apology for Nazism or contesting the reality of Nazi crimes. It was the court’s reasoning that jurisdiction was proper under French law because French people had access to materials via www.yahoo.com that were not permitted in France.
Similarly most common law countries have been using long arm statutes to extend their jurisdiction to a person who is outside the territory, if the transaction involved had certain paints of connection with the territory. Order 11 of the Rules of Hong Kong’s High Court, Cap.4 sub.leg.2, enables the persons resident or incorporated outside Hong Kong to be sued in Hong Kong and served with the country’s originating process at their place of residence or business where amongst other things, they have made contracts in Hong Kong or have committed torts in Hong Kong or torts the resulting damage from which is suffered within Hong Kong.

UK courts have long established in De Beers Consolidated Mines v. Howe[126] that, “in applying the concept of residence to a company. A company cannot eat or sleep, but it can keep a house and do business. We ought therefore, to see where it really keeps house and does business”. The court ruled finally that the place of central management and control was London where the board made its major decisions. However, with the internet, it is no longer necessary for a person or a group of persons to be physically located or meet in any one particular place to run a business.[127]
3.2.1.7 Conclusion on Residence Jurisdiction
From the foregoing discussion, it can be argued that, for a website which is interactive, there is all the justification for the country to exercise jurisdiction based on either source or residence rules depending on the circumstances of each case. And where there is a conflict between the source and resident state’s jurisdiction to tax, the same can be resolved by agreement. This follows from the discussion and examples derived from case laws above which have shown some flexibility to engulf the changes brought by technology. It illustrates, thus, that the residence jurisdiction question can be solved by case laws.

3.3. PART TWO.
3.3.1. PERMANENT ESTABLISHMENT
3.3.1.1 Introduction
The term 'permanent establishment'[128] has been defined by the OECD[129] as meaning a fixed place of business through which activities of an organization are wholly or partially carried out. The term 'permanent establishment' includes a place of management, a branch, an office, a factory, a workshop, and a mine, oil or gas well, quarry or other place of extraction of natural resources residing under a foreign jurisdiction.[130] However, the OECD model excludes some business activities of a general, preparatory or auxiliary nature. The use of facilities or the maintenance of a fixed place of business solely for the purpose of storage, purchasing, collection of information, display or delivery would not constitute PE, as also advertising or the provision of information[131]. Furthermore, the concept of a permanent establishment is not limited to a fixed place of business; it may extend to include an agent who is legally separate from an enterprise but sufficiently connected and dependent upon the enterprise so that a permanent establishment is implied to exist, through the actions of that agent.[132] The concept provides the foundation for the imposition of taxation and limits the ability of a state jurisdiction to tax profits or earnings of a non-resident if the earnings are not attributable to a PE in that country. However, this principle faces difficulties in e-commerce taxation due to the lack of an identifiable physical location for websites, as opposed to that of conventional business entities.

3.3.1.2 Prerequisites for Permanent Establishment
According to the OECD Commentary to article 5, for permanent establishment to exist, the following conditions must be met:
the existence of a place of business; for instance; machinery and equipment;
the place of business must be fixed, i.e. it must have a degree of permanence (situs test); and that this fixed place of business must be located in a certain territorial area (locus test);
the carrying on of the business of the enterprise through the fixed place of business (ius test).The use of the fixed place of business must last for a certain period of time (tempus test) and, also, the activities performed through the fixed place of business must be of a business character, as defined in the treaty law and the domestic tax laws (business activity test).[133]
Moreover, the place of business may also exist where no premises are available or required for carrying on the business of an enterprise, and it simply has a certain amount of space at its disposal. It is immaterial whether the premises, facilities or installations are owned or rented or otherwise at the disposal of an enterprise.

3.3.1.3 The Historical Background to Permanent Establishment
According to some commentators,[134] the history of permanent establishment emerged in the second half of the 19th century as a remedy to overcome double taxation in inter-municipal relations in Prussia by specifying the need for a stehendes Gewerbe (a trade with a fixed place of business) before full source tax jurisdiction could be exercised. Germany then introduced the requirement for a Bestriebsstatte (a fixed physical location) as well as requiring a “visible business activity” in the country of source. Both these elements featured as central elements of permanent establishment in what is commonly regarded as the first generation international tax treaty that was concluded in 1899 between Austria-Hungary and Prussia.[135]
By the 1920s, many European countries had concluded double tax treaties. It was from these treaties that it was recognised that taxing jurisdiction under the permanent establishment threshold could be justified by a physical connection (such as an office) and a personal one (e.g. agent). In 1921, the League of Nations was called on by the ICC[136] to find ways to overcome the problem of double taxation in the post war era. The League of Nations favoured residence-based taxation by deciding that the permanent establishment should govern the source-country taxation.[137] By then it was difficult to tax foreign enterprises efficiently and equitably when they did not have a permanent establishment in a country.[138] The OECC (later the OECD) consolidated the early work of the League of Nations by adopting the permanent establishment definition that is presently found in the OECD Model Tax Convention (as revised from time to time) though the definition of permanent establishment has remained substantially the same.[139]

3.3.1.4 The Rationale Underlying Permanent Establishment
From the historical perspective, permanent establishment represented an expression of “economic allegiance”, a concept that can be traced back to the works of the German scholar, George Von Schanz, and the US scholar, Edwin Seligman.[140] According to Schanz, economic allegiance arose in a situation where a person is economically bound not only to the state of his or her residence, but also to another state through business activities or by way of income arising in the other state. That means anyone who obtains significant benefits from an economic community must pay tax to that community.[141] Therefore, permanent establishment was thought to represent evidence of significant business activities since at the time, a physical presence was generally necessary to engage in significant business operations. However, with the emergence of the internet, the traditional rationale becomes ineffective. As a result, it has been argued that if permanent establishment principles are to remain effective in the new economy, the fundamental permanent establishment components developed for the old economy – place of business, location and permanency – must be reconciled with the new digital reality.

3.3.1.5 Problems Arising from Application of the Permanent Establishment Principle in E-commerce
The OECD prerequisites of permanent establishment, as outlined above, raise difficulties when it comes to e-commerce taxation; the main difficulty being the finding of a component of the internet that meets the OECD Model Tax Convention’s requirement for PE status. Easy communication, including tele-conferencing, makes personal presence in a country for decision making or for marketing unnecessary. Directors living in different tax jurisdictions could discuss issues without moving from their places of residence. Improved communication also removed the need for physical presence in the source country, even for transacting business of substantial volumes.[142] Since e-commerce is done through the server, which forms an integral part of the hosting of material on the internet, the issue becomes whether the use of such equipment would satisfy the OECD conditions for being classified as permanent establishment.[143] This requires a determination as to whether:
a server constitutes a place of business
the server can be said to be fixed
the activities of the website (such as advertising, ordering or payment) may be said to constitute the carrying out of business through such a fixed place of business, and if not, whether;
the activities carried on by the server can be said to be preparatory or auxiliary;
ISP constitutes a permanent establishment for the website.
These and other questions have triggered a debate on whether permanent establishment is still an effective criterion in the digital age where cross-border commerce requires no physical presence to conduct business. This debate is discussed in the following paragraphs along with the views of the author.


3.3.1.6 The Debate on Permanent Establishment.
The principle of permanent establishment has been widely debated; several authors[144] have put forward their views and policy proposals on the permanent establishment threshold. The main argument has been that, while permanent establishment was an effective criterion in the pre-digital age when cross-border commerce required physical presence to conduct business, this criterion is no longer viable in an age where technology allows buyers and sellers to conduct cross-border business without ever establishing a physical presence in a non-resident state.[145]

(a) The OECD Response to PE problems
From time to time the OECD has responded to this major impediment to using traditional PE rules in the Model Convention by making changes to the Convention’s commentary on article 5. The current position in the 2003 and 2007 Model Tax Convention reflects the changes that were made in 2000 and revised in 2003, respectively. The OECD has continued to maintain that, firstly, the traditional PE rules are conceptually correct therefore there is no need for a change as there is little evidence supporting the tax avoidance and loss of revenue scenarios caused by e-commerce; secondly, the PE rules are robust and flexible enough to handle the challenges of e-commerce; and lastly that, transfer pricing and other remedies (notably arm’s length principles) are available to correct any inefficiencies caused by existing rules. Thus, it has maintained that modest changes in international tax practice can be achieved through continuous interpretation of the existing rules as simple changes to the commentary on article 5 of the MTC have historically been used to account for new business realities.[146]
As a result of these arguments, the OECD has clarified that:[147]
(i) Websites are composed of software and data, not tangible property, and therefore cannot be considered a place of business sufficient for characterisation as PE.
(ii) The internet does not in itself constitute tangible property. It therefore does not have a location that can constitute a place of business as there is no ‘facility’ such as premises or, in certain circumstances, machinery or equipment.
(iii) A server may rise to the level of a PE since it is tangible property that requires a physical location and that location can be considered a fixed place of business regardless if the server is owned or leased by the business operating the server.
(iv) Presence of business personnel at the location of the server is not necessary to create a PE.
(v) If the server is operated by a web provider, it should not constitute a permanent establishment because the business has no control over the server and it is not a place of business of the enterprise.
(vi) It does not matter that a server can be moved, it is important if it stays in one location for more than 12 months.
(vii) Computer equipment in a fixed place does not constitute PE when the business conducted through it is limited to preparatory or auxiliary services.
(viii) When the business uses the computer equipment for essential/significant activities they create a PE.

(b) Commentators’ reactions to OECD Clarification
However, while the OECD has responded to these questions and challenges through changes to the Model Tax Convention’s commentary, it has stopped short of modifying the current PE system and thus, as noted above, has been the recipient of much criticism from all over the world. One of these critics is Professor Chetcuti,[148] who argues that the OECD’s clarification presupposes that every enterprise trading on the internet owns and controls its own server at a certain location, which is not always true and fails to acknowledge the fact that servers are highly mobile and flexible in nature.
A server need not have any geographical connection either to the source or to the residency country; businesses may lease or own a server located anywhere in the world, even at sea or aboard a flight. Servers can transfer their programmes almost instantaneously to a server in a different jurisdiction as and when necessary. And a server can be maintained or programmed remotely by employees located outside of the source country, or serviced by experts in the server state. Sometimes a computer user performs the function of a server by doing a portion of the processing through a programme planted by a server itself.[149] Thus, the current PE rules can be circumvented easily, either by carrying out only preparatory or auxiliary activities in the source state or by using a local ISP server to carry on the core business activities of the foreign enterprises, or by positioning the server and establishing a PE in tax havens. However, Chetcuti[150] does not suggest any solution for the challenges he raises.
Catherine Pilkington[151] has explained the view that a website is a substantial economic presence and, therefore, where full marketing activity happens online, the economic activity occurs where the customer is located; meaning that the place of business as defined by the OECD in relation to e-commerce should be where the customer is located for the purpose of taxation. This follows her argument that the customer is central to the exchange process and since it is the physical opportunity for the exchange process that is the fundamental tenet of marketing, the place of business should be where the customer is located. This view is supported by Godwin[152] who argues that a website that gives promotional information about products or services and which has the facility at the site for a transaction to be entered into (contract), and may even deliver the item (if it is a certain type of service, such as the transferring of software) is engaging in full marketing activity, i.e. e-commerce.
It follows, therefore, that a website which contains the above characteristics qualifies to be called a place of business as it does more than preparatory or auxiliary activities. However, the place of business is not fixed, it may be on the side of the vendor or buyer and this is why Catherine Pilkington concludes by saying it should be on the buyer’s side. In this author’s view, the place of business should not be limited to a fixed locus; the term should be extended to cover a movable place of business. As rightly argued by Hinnekens,[153] since the principle of permanent establishment has already been relaxed to accommodate artists and sports people who are taxed where they perform, the argument could be raised that the website is more than preparatory and auxiliary and a permanent establishment is created where the economic activity occurs. However, as per the OECD definition, permanent establishment should be on the part of the vendor rather than that of the customer, thus more justification is needed to make the place where economic activity occurs the place of permanent establishment.
Luc Hinnekens[154] and Dale Pinto[155] have suggested a new “virtual permanent establishment” threshold for source-based taxation that is lower than that of a traditional permanent establishment. The new approach will relax the traditional PE principle by creating a taxing nexus in source countries even in the absence of a fixed place of business in a physical territory. In their view, the core or mainstream business activities will be subject to source country taxation, while ancillary activities will not be subject to source country taxation. However, the proposed exclusion will require the development of suitable guidance and appropriate criteria to enable core activities to be distinguished from ancillary activities in the electronic commerce context.[156]
This proposal seems to be tenable although it has the danger of overhauling the whole international taxation system. Perhaps this new approach could work better if it applied to e-commerce related transactions only, while physical transactions continue to apply the old mode. Professor Hinnekens further argues for re-designation of the traditional PE concept to accommodate electronic commerce transactions in a way that would apply taxation consistent with the principles of economic allegiance and equivalence, but he does not suggest how that can be achieved.[157]
Pinto emphasises that since many exceptions exist with regard to permanent establishment – such as in the construction industry where the fixed place of business was replaced by a duration test in the 1930s by deeming PE to exist for construction projects that lasted for a specified period of say 6 or 12 months; or in petroleum related industries where it was observed that a number of mobile activities could be performed without the need for a place of business in the host country (in which case source country taxation was allowed despite the absence of a place of business); and lastly, in the taxation of artists and sportsmen under article 17 of the OECD convention, as well as the increased source tax that is possible under the UN model Double Tax Convention through the introduction of PE fiction, along with the Andean Pact Model – there is no reason why under the same scenarios the traditional permanent establishment principle should be extended to include virtual permanent establishment which does not require a fixed place of business.[158]
While agreeing with this view, it is submitted that the new threshold should not be called virtual permanent establishment as the word 'permanent' still implies a fixed place of business. Rather, the new threshold could be called either virtual establishment or virtual business establishment. However, with virtual PE there is a danger of increased international double taxation by each country claiming jurisdiction to tax on the basis of virtual presence and, furthermore, the danger of shifting the burden to the end consumer instead of the business enterprises. The answer to this could be found through DTAs. Perhaps companies could be made duty bound to disclose their place of effective management without regard to holding their meetings by video conference, or the residence of the directors, and/or the business headquarters. This can be achieved through international cooperation and coordination.
Another proponent is Dr. Rifat who claims that the current permanent establishment principle has been watered down due to technological development that enables e-commerce enterprises to sell their products or services directly with very limited physical presence in a consumer’s country because of business disintermediation – thus, the concept of fixed place of business is rendered meaningless in e-commerce. He suggests that the principle of PE should be replaced by a rule that relies on the location of the physical components of the transaction including persons and facilities. However, he does not specify this rule or state how it should operate, although he admits that these rules are predefined and that they change from transaction to transaction in response to the relevant physical components of the transaction.[159]
Professor Doernberg, through his ‘base erosion approach’, has suggested a mechanism where cross border payments from a taxpayer be subject to the withholding tax regime of the country of the seller and that of the buyer as he says;
“Countries could still tax all non-residents business with a permanent establishment within their borders but in addition, a country where consumption occurred would also have the right to levy a withholding tax on payments with a source in that country to a non-resident (out of country) vendor. In lieu of suffering the withholding tax, the non-resident payee could file a tax return in the host country (i.e. place of consumption) if that income were attributable to permanent establishment in that country”[160].
Thus, in his view, the approach would supplement, not completely replace, the current permanent establishment nexus principles. According to Hoffart,[161] Doernberg’s view has received backing from a number of commentators, notably from a group in India, the High Powered Committee on (Indian) Electronic Commerce and Taxation,[162] who, apart from supporting the base erosion approach, have added that the approach should replace rather than supplement the current permanent establishment rules and that it should apply to all commerce and not just e-commerce.

The Committee also considered the argument that, in the case of Internet Service Providers (“ISPs”), huge investments are required and that there is a long period of gestation before profits start coming in, thus tax incentives should be considered for ISPs. They arrived at the conclusion that there is no cases for exempting e-commerce, in any form, from direct taxation because income tax is levied only when profits are earned and in determination of taxable income, investments are tax deducted over a period. The focus has to be on how to tax e-commerce efficiently, keeping in view the basic principles of taxation.[163]

Similarly Cockfield[164] is of the opinion that taxation of the non-resident at the point of consumption rather than the location of production is a more sensible solution. This is on the basis that, firstly, e-commerce importing countries create market opportunities that enable profits to be made through cross border transactions. Secondly, this will also combat income shifting and tax competitions fostered by the OECD’s revised commentary, allowing servers to rise to the level of PE because the act of consumption requires a real human being who must necessarily be situated somewhere in geographical space whereas the act of production of intangible assets can be diverted to a location that does not have any meaningful connection to any real value-adding economic activity.

(c) The Implementation of OECD’s Position on Server as PE in OECD Member Countries.
On the same footing above, the idea proposed by the OECD that a server, to a certain extent, is deemed to be a permanent establishment of a company has not been accepted by its entire members. One of most notable exceptions is represented by the UK which holds that “that a server either alone or together with web sites could not as such constitute a PE of a business that is conducting e-commerce through a web site on the server. We take that view regardless of whether the server is owned, rented or otherwise at the disposal of the business”[165]. Similarly France holds that, servers are not deemed to be permanent establishments of the taxpayer provided that no human activity associated with the server’s operations is performed.[166] Spain and Portugal, for instance, “do not consider that physical presence is a requirement for a permanent establishment to exist in the context of ecommerce, and therefore, they also consider that, in some circumstances, an enterprise carrying on business in a State through a web site could be treated as having a permanent establishment in that State[167]. Thus it is submitted that, Spain and Portugal’s approach shows that the virtualisation of business activities has to be taken into account by lawmakers and tax authorities, and the notion of web site in the field of e-commerce should be necessarily re-drafted in the light of the current technological and business developments. On the other side, in a case involving servers of American companies located in a foreign jurisdiction, it has been reported that “the U.S. tax authorities have entered into an undisclosed settlement agreement with Indian tax authorities whereby both parties accept that a U.S. taxpayer’s server within India constitutes a permanent establishment.”[168] Such an approach is manifestly fully consistent with the assessment of the OECD in its Commentaries to the Model Convention.



3.3.1.7 Conclusion
In the author’s opinion, while agreeing with the reasoning of OECD as it stood in 2000, it was wrong to underestimate the growth of e-commerce and loss of revenues as evidence can found (even by naked eye) to the effect that many enterprises doing business online without there being evidence of registration or paying tax anywhere, yet they charge VAT and other taxes. Professor Bruce and Fox[169] estimated loss of revenue by 2011 to be US$ 54.8 Billion. For instance, in 2002 it was estimated that;
The U.S. online population would increase nearly 50%, from 141.5 million in 2001 to 210.8 million by 2006 (CAGR of 8.2%). (See Figure 3 attached at the end.)[170]
U.S. online retail sales would grow from $47.8 billion in 2002 to an estimated $130.3 billion in 2006 (see Figure 4 attached to the end).[171]
There are 2.3 million small companies in the U.S.; with 16% of these in the retail trade and 60% of all small companies having an online presence – potential market size for our service is upwards of 200,000 companies.[172]
Annual spending per buyer would increase from $457 in 2001 to $784 in 2006.[173]
These statistics show that e-commerce is still in its growth stages. The more internet technology reaches many people, the more e-commerce grows (see Table 1 below). Soon the OECD will realise that a lot of revenue is being lost through the non-taxation of e-commerce. Thus, even if by 2001 B2C still accounted for a very small share of all retail trade in OECD countries, increases in the B2C sphere was still expected and that is why the OECD Committee on Consumer Policy warned that B2C commerce should not be overlooked by policy makers.[174]
Table 1.
WORLD INTERNET USAGE AND POPULATION STATISTICS
World Regions
Population (2008 Est.)
Internet UsersDec/31, 2000
Internet Usage,Latest Data
% Population(Penetration)
% Usage of the World
Usage Growth2000-2008
Africa
955,206,348
4,514,400
51,065,630
5.3 %
3.5 %
1,031.2 %
Asia
3,776,181,949
114,304,000
578,538,257
15.3 %
39.5 %
406.1 %
Europe
800,401,065
105,096,093
384,633,765
48.1 %
26.3 %
266.0 %
Middle East
197,090,443
3,284,800
41,939,200
21.3 %
2.9 %
1,176.8 %
North America
337,167,248
108,096,800
248,241,969
73.6 %
17.0 %
129.6 %
Latin America/Caribbean
576,091,673
18,068,919
139,009,209
24.1 %
9.5 %
669.3 %
Oceania / Australia
33,981,562
7,620,480
20,204,331
59.5 %
1.4 %
165.1 %
WORLD TOTAL
6,676,120,288
360,985,492
1,463,632,361
21.9 %
100.0 %
305.5 %

NOTES: (1) Internet Usage and World Population Statistics are for June 30, 2008. (2) Demographic (Population) numbers are based on data from the US Census Bureau . (3) Internet usage information comes from data published by Nielsen//NetRatings, by the International Telecommunications Union, by local NIC, and other reliable sources. (4) Information in this site may be cited, giving the due credit to http://www.internetworldstats.com/. Copyright © 2001 - 2008, Miniwatts Marketing Group. All rights reserved worldwide.
Source: Internet World Stats-Usage and Population statistics available at http://www.internetworldstats.com/stats.htm
From the foregoing discussion, it is submitted – on the reasoning that PE rules are robust and flexible enough to handle the challenges of e-commerce –that this view is incorrect due to the reasons advanced by the eminent authors above. As to whether a server can constitute a place of business, it can be said that if the server is situated in a particular territory and performs activities which are more interactive (such as providing catalogues to the customers, processing orders and deliveries), this would make it a place of business provided it stays in a particular location for a sufficient period of time. However, as to whether the server can be said to be fixed or not, this depends on the facts of each case. It is well known that servers are of many types, as explained in Chapter Two; there are fixed servers and mobile servers. Fixed servers can be found in large organizations – for example, military servers and communication servers, etc – whereas mobile servers can be harnessed on board a ship, an aircraft or a satellite. In the case of a fixed server, this can be qualified to be a place of business provided that it is not run by the ISP. This conforms to the OECD clarification. However, it has been widely recognised that, typically, these conditions are not met by conventional web-hosting arrangements, and accordingly the OECD has clarified that a website hosting arrangement does not result in a PE for the enterprise that carries out business through that website.[175]
When it comes to the activities of a website, the OECD has ruled that a website cannot be considered a place of business sufficient for characterisation as PE. It is submitted here that this stance is wrong, since if in cyber law a website is considered a place of its own,[176] in e-commerce it should be considered a place of business where the website acts as more than an information, promotion or distribution channel. Thus, the website which provides promotional information about products or services, which has the facility at the site for a transaction to be entered into (contract formation), and furthermore may even deliver the item, should be considered as a place of business since it clearly engages in marketing activity.[177]The activities of the server can only be said to be preparatory or auxiliary when they do not conclude any sale contract, but where the activities result in doing more than advertising, displaying, storing, purchasing, collection of information, display or delivery, its activities should be considered as core. However, the lack of a fixed test makes all the above unqualified to be referred as permanent establishment.

On the question of whether an ISP is a PE of its customers, this can be resolved under well established agency rules. The treaty rules are that an agent does not create a nexus for its principal if it is an independent agent acting in the ordinary course of its business. In most cases, an ISP would be an independent agent for tax purposes. In some cases, nevertheless, the business of an ISP might be so enmeshed in the business of its principal that it would be treated as a dependent agent and possibly a PE. For example, if a foreign company set up a separate corporation in a country to act as its ISP on an exclusive basis, the ISP will lose the status of an independent agent and be treated as a dependent agent,[178] especially when it has the power to conclude contracts on behalf of its principal.
It is thus concluded that a server should not constitute permanent establishment due to the following reasons: 1) Construing placement of computer equipment as PE would only encourage the owners to shift to some other country since the location of the server is indifferent to the e-commerce businesses. Then, if the host state still imposes taxes, then it would be unequal, since the same material would be available from a different state untaxed. 2) The line between use of servers for business purposes and purposes of advertising is very thin, and liable to be breached in certain cases. 3) Use of mirror sites and routers further complicate the situation since it is not established whether such equipment belonging to a third party, and used temporarily, would be construed as PE.[179]

CHAPTER FOUR
CONCLUSION AND RECOMMDENDATIONS

From the outset, it was the aim of this work to address the following issues: firstly, whether the existing principles, definitions and concepts of international taxation can be extended to cover taxation of e-commerce; and if not, what should be the basis for international taxation of e-commerce transactions? Secondly, whether a website or server constitutes a permanent establishment; and if not, to see whether there is there any need to modify or totally depart from this principle. And lastly, to examine the extent to which the activities carried on through a server are preparatory or auxiliary.
With regard to the issues of whether the server constitutes permanent establishment and the extent to which the activities carried on through the server are preparatory or auxiliary, the answer to this is no and has been clearly explained in Chapter 3. In this section, I will only make the addition of a new proposal. The next point, therefore, is to assess whether the existing principles, definitions and concepts of international taxation (jurisdiction and permanent establishment) can be extended to cover taxation of e-commerce.
From the foregoing discussion, it can be argued that e-commerce has not changed the all important components of brick and mortar commerce: parties to the sales contract have remained the same, and have continued to live within territorial borders; the source of income has continued to remain in the physical world, etc What has changed is only the business models due to the lack of physical presence and digitised products, the identification of parties (which makes enforcement and collection difficult), the place of doing business (i.e. from a physical place to an online place), and how to balance the interest of net exporting and net importing countries. These have led to uncertainties over the application of current rules in e-commerce.
Since parties to the transaction, personnel and corporations are located somewhere in the physical world, and are the central component in the income production process, it is submitted that jurisdiction should be exercised by both countries based on source or residence principles. The source country should be the origin of income used to purchase e-commerce products, while the residence rule should apply to the residence of corporations engaged in e-commerce because they are situated somewhere in the physical world. Even if directors meet by web-conferencing there is still a place where their decisions are implemented or where the most senior person lives. It is not sufficient to only consider the place where the decisions are made; the new residence rules proposed by the OECD could overcome this problem of failure to locate e-commerce companies. In cases where e-commerce companies shift their business to tax havens, the normal CFC rules should be applied to curb this practice. However, it is submitted that jurisdiction based on residence or source rules should be determined on a case by case basis and where there is a conflict the same should be resolved by agreement. Dr. Rifat’s second integrative adaptation mode is the best solution.[180]
With these few examples of case law it can be argued that traditional jurisdiction principles can be extended to cover new scenarios happening on e-commerce taxation as in criminal law where laws dealing with the new forms of crimes have been enacted.[181] However, this approach should be multi-dimensional in the sense that tax challenges are similar to other challenges in applying the traditional principles to the internet. Therefore, similar efforts that are used in criminal law, cyberspace law and other branches of law should be used to determine jurisdiction to tax in internet transactions.
As regards permanent establishment, it is submitted that this threshold is no longer important in e-commerce. A new legal framework that takes into account digital techniques is necessary. The general legal framework, such as the EC Directive on Electronic Commerce,[182] is needed. This framework requires that basic information on the identification of a website be provided; this includes business and trade names, addresses, e-mail addresses, tax identification numbers, etc. Another useful approach is adopted by the above directive where a provider of information service is considered to be established at the place where the activities are pursued for an indefinite period.[183]
It is further suggested that perhaps the OECD could adopt a new threshold called “Business Establishment”. The new threshold will be divided into two parts: viz. permanent business establishment (PBE), and virtual business establishment (VBE). Virtual business establishment would not require the business entity to have any physical or fixed presence in any particular territory. This will apply to all e-commerce businesses, whereas permanent business establishment will still be applicable in conventional commerce. This would have done away with the terms fixed and permanent, which often bring problem in e-commerce taxation. Thus permanent establishment would be defined as follows: A business establishment means a place of business whether fixed or virtual through which the business of an enterprise is wholly or partly carries on. This will include among other things virtual office and all exceptions in article 5(4) will apply.
This Modification is inevitable in the sense that, law modifies itself in the light of new developments in science and technology, progressing at both a micro and issue-by-issue level, as well as at a broad, trans-substantive level. No single model solution is sufficient in itself to adequately address the problem. That is the reason why other areas of law – for instance, law on documentary credits, contracts, cyber crimes and criminal law – have been very successful, due to their flexibility in adopting new technology. In contract law, for instance, the Law Commission has reached a consensus that writing does not need a physical memorial such as paper.[184] The requirements of writing and signatures can be fulfilled for the purpose of online contracts via some electronic means without any changes being made to the law.[185] Likewise, the UNCITRAL Model Law on Electronic Commerce states that where the law requires information to be in writing, that requirement is met by a data message if the information is accessible for subsequent reference.[186]The same approach could be used by the OECD.

In conclusion, the existing principles, definitions and concepts of international taxation cannot be extended to cover taxation of e-commerce without any modifications; therefore, change is needed to meet these new challenges. Thus it is submitted that e-commerce taxation problems cannot be addressed in isolation but rather by a proportionate contribution from all the models, complementing and supplementing each other.[187] Again, when it comes to compliance and enforcement, technology and international cooperation is the solution. Tools facilitating search and identification are now being developed such that anonymity will no longer be an issue. If the Chinese government has been able to block access to some websites for its citizens,[188] there is no reason why enforcement should not be possible, even though admittedly it is expensive. The OECD and United States have started increasing pressure on tax havens to ease bank secrecy, making the havens less attractive for offshore e-commerce; hopefully this will make anonymity no issue in future[189].







ATTACHEMENTS
FIGURE 3
(http://www.jmm.com/xp/jmm/press/industryProjections.xml) (US only)U.S. Online Retail Sales

FIGURE 4
U.S. Online Users[190]





GLOSSARY OF WORDS.
Arm’s length Method The establishment of transfer of prices in transactions between related parties based on the prices charged or sometimes the profits derived in similar transactions between unrelated parties.
Capital Export Neutrality The situation in which resident investors bear the same burden whether they invest at home or abroad
Capital Import Neutrality The situation in which residents investing in a source country bear the same tax burden as other investors in that country.
Competent Authority An official of a treaty country who is responsible for the resolution of disputes and issues of interpretation arising under a tax treaty.
CFC Rules Rules that require the passive income and certain other tainted income of foreign corporations controlled by residents shareholders to be included in the income of those shareholders whether or not such income is distributed.
Neutrality Is a fundamental principle of taxation which means that the pattern of taxation should not interfere with or affect the tax payer’s choice between investing at home and investing in a foreign country
Tax equity refers to tax payer equity, that is; similarly situated tax payers should be taxed the same and tax payers with higher incomes should pay higher tax. Equity also in international context means that each country should receive a fair share of revenue from cross border transactions
Residence Jurisdiction A principle of taxation under which all income accruing to residents of a country regardless of its source, is subject to tax by that country
Withholding Tax A tax levied by the source country at a flat rate on the gross amount of dividends, royalties, interests or other payments made by residents to non-residents. The tax is collected and paid to the government by the resident payer.







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DISSERTATION
Kato N., Electronic Commerce and International Direct Taxation Issues [2001] ESSEX LLM (Dissertation);

STATUTES
The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2002
The 2008 Update to the Model Tax Convention, passed on 18 July 2008, available at http://www.oecd.org/
The Computer Misuse Act, 2002; the Fraud Act, 2006, http://www.uk-legislation.hmso.gov.uk/acts/acts2006/pdf/ukpga_20060035_en.pdf.
Directive 2000/31/EC on certain legal aspects of information society
UNCITRAL Model Law on Electronic Commerce
Electronic Communications Act, 2000.
Electronic Signatures Regulations, 2002, implementing article 9(1) of the European Directive on Electronic Commerce, 2000 and Electronic Signatures Directive, 1999,
Uniform Electronic Transactions Act, 2000





[1] “Message to Internet Users” 1st July 1997 obtained from The White House Office of the Press Secretary ‘Text of the President’s message to Internet Users’ available at www.whitehouse.gov/wh/New/commerce/message.html
[2] According to Carole Murray, internet growth in 2007 was estimated to be at the rate of 5-10 per cent every month while it was then estimated that there were 605 million internet users worldwide.
[3] In simple terms, electronic commerce has been defined as any form of business or administrative transaction or business information exchange that is executed using information or communications technology. See Carole Murray, Schmitthoff’s Export Trade: The Law and Practice of International Trade, 11th edition (2007).
[4] Richard L. Doernberg and others, Electronic Commerce and Multijurisdictional Taxation, Kluwer International (2001) at p.8.
[5] E-commerce Taxation and Cyberspace Law: The Integrative Adaptation Mode, Virginia Journal of Law and Technology, Vol.12, No.5(summer 2007) available at http://www.vjolt.net/.
[6] Supra fn.1.
[7] Jaap Fevier, UK e-commerce Forecast: 2006-2011 where it is predicted that by 2011, 32 million UK consumers will be shopping online. These consumers will remain the second biggest spenders in Europe. The value of the goods they buy online in 2011 will amount to almost €76 billion, making the UK the most lucrative e-commerce market in Europe (available at http://www.forrester.com/Research/Document/Excerpt/0,7211,39977,00.html accessed on 12 July 2008).
[8] Forester Research, Inc. found that worldwide e-commerce in 2000 was more than $650 billion. It predicted it to be ten times that amount ($6.8 trillion) in 2004.This number includes both business to business and business to consumer activities. Data available at www.forrester.com/ER/Press/ForrFind/0,1768,0,00.html. It predicted that US online retail would reach $175 billion in 2007 and is projected to grow to $335 billion by 2012. See http://www.forrester.com/Research/Document/Excerpt/0,7211,41592,00.html
[9] Supra fn.6.
[10] Isabel M. Isidro, Internet Taxation: Which Side are You? Available at http://www.powerhomebiz.com/vol4/internet-taxation.htm accessed on 12 July 2008.
[11] E-commerce Taxation and Cyberspace Law: The Integrative Adaptation Mode, Virginia Journal of Law and Technology, Vol.12, No.5(summer 2007)at 5, available at http://www.vjolt.net/
[12] Richard L. Doernberg and others, Electronic Commerce and Multijurisdictional Taxation, Kluwer International (2001) at p.7
[13] ibid
[14] Charles E. McLure Jr., Taxation of Electronic Commerce: Economic Objectives, Technological constraints, and Tax Law, 52 Tax L.Rev.269(1997);Walter Heller stain, State Taxation of Electronic Commerce,52 Tax Law.Rev.425(1997) Reuven S. Avi-Yonah, International Taxation of Electronic Commerce,52 Tax Lawyer 507(1997),Catherine Pilkington and Sue Farron, International Direct Taxation of e-commerce., Journal of Applied Accounting Research,Vol.6 Issue 1, December,2000 and Benjamin Hoffart, Permanent Establishment in the Digital Age: Improving and Stimulating Debate Through an Access to Market Proxy Approach, Nw. Journal of Tech.&Intell.Prop.106 – to mention a few.
[15] OECD Model Tax Convention, 2003, article 5(1), 7(1), Jan.28, 2003; R.S.Avi-Yonah, Tax Competition and E-commerce, Worldwide Tax Daily, Sept.17, 2001. Available at LEXIS NEXIS, 2001 WTD 180-11.
[16] WTO secretariat, Electronic Commerce and the Role of WTO (WTO,Geneva,1998) available at www.wto.org/wto/ecom/ecom.html; Paul Eden, Electronic Commerce-Law and Policy, in Yaman Akdeniz,and others, Internet Law and Society, Longman Pearson Education,2000 at 350; E-commerce: Fundamentals and Applications, John Wiley and Sons Ltd, Chichester, UK,2001 at 1; Electronic Commerce and Multijurisdictional taxation, Kluwer Law International, London,2001 at 9.
[17] OECD, Electronic Commerce: Opportunities and Challenges for Government (OECD, Paris, 1997)at p. 11.
[18] See also the UN definition of e-commerce in Richard Hill and Ian Walden, The Draft UNCITRAL Model Law for Electronic Commerce: Issues and Solutions, 13 Computer L.18 (1996).
[19] Paul Eden, Electronic Commerce-Law and Policy, in Yaman Akdeniz,and others, Internet Law and Society, Longman Pearson Education,2000 at 350; Henry Chan and Raymond Lee, E-commerce: Fundamentals and Applications, John Wiley and Sons Ltd, Chichester, UK,2001 at 1; Richard Doernberg, et al, Electronic Commerce and Multijurisdictional taxation, Kluwer Law International, London,2001 at p. 9.
[20] Clive Walker, David Wall and Yaman Akdeniz, The Internet Law and Society, Longman Pearson Education,2000 at p. 3; Naik, D.C., Internet Standards and Protocols, Microsoft Press,1998; Richard Doernberg and others, Electronic Commerce and Multijurisdictional taxation, Kluwer Law International, London, 2001.
[21] www.bbn.com/aboutbbn/history.htm.
[22] http://www.webopedia.com/DidYouKnow/Internet/2002/Web_vs_Internet.asp
[23] www.cern.ch/
[24] Cliver Walker and others, The Internet Law and Society
[25] Henry Chan and Raymond Lee E-commerce: Fundamentals and Applications, John Wiley and Sons Ltd, Chichester, UK,2001 at 1; Michael Chissick and Alistair Kelman Electronic Commerce- Law and Practice (3rd ed) Sweet & Maxwell, 2002
[26] Neil Warren, ‘Internet Challenge to Tax System Design’, in Andrew Lymer and John Haseldine, The International Taxation System, Kluwer Academic Publishers,2002 at 62.
[27] Yaman Akdeniz,and others, Internet Law and Society, Longman Pearson Education,2000 at 3
[28] Richard Doernberg and others, Electronic Commerce and Multijurisdictional taxation, Kluwer Law International, London, 2001 at p. 11.
[29] http://www.webopedia.com/DidYouKnow/Internet/2002/Web_vs_Internet.asp%20published%20on%2029th%20february,2008 accessed on 20 July, 2008
[30] Brian J. Anorld and Michael J. McIntyre, International Tax Primer, second edition, Kluwer Law International,London,2002 at 150-151.
[31] Paul Eden, Electronic Commerce-Law and Policy, in Yaman Akdeniz,and others, Internet Law and Society, Longman Pearson Education,2000 at p. 349.
[32] HyperText Transfer Protocol
[33] Dr Amnon H Eden, Software Design and Architecture, Spring term 2007/2008, Department of Computing & Electronic Systems, University of Essex, Richard Doernberg and others, Electronic Commerce and Multijurisdictional taxation, Kluwer Law International, London, 2001 at p. 31.
[34] Richard Doernberg and others, Electronic Commerce and Multijurisdictional taxation, Kluwer Law International, London, 2001 at p. 31
[35] Herman Mandari, LLM Software Engineering, University of Southampton, United Kingdom, 2008.
[36] Kosieur, D.R., Understanding Electronic Commerce, Microsoft Press, 1997; Schneider, G.P., and Perry,J.T., Electronic Commerce, Course Technology, 2000
[37] Richard Doernberg and others, Electronic Commerce and Multijurisdictional taxation, Kluwer Law International, London, 2001 at p. 31.
[38] http://www.mirror-image.com/
[39] Hypertext Transfer Protocol and File Transfer Protocol.
[40] Dr Amnon H Eden, Software Design and Architecture, Spring term 2007/2008, Department of Computing & Electronic Systems, University of Essex Lecture notes available at http://courses.essex.ac.uk/cc/cc439/restricted/notes/9-sw-arch-styles.pdf, at p.15 accessed on 11th July 2008
[41] Ibid, at p. 16.
[42] Korper,S. and Ellis,J., The E-commerce Book, Academic Press, New York,2001, also in http://www.webopedia.com/DidYouKnow/Internet/2003/HowWebServersWork.asp
[43] Dr. Gbenga Bamoudu, The Legal Aspects of Electronic Commerce notes, Department of Law University of Essex, 2007/2008; available at http://courses.essex.ac.uk/lw/lw616/
[44] The Law of Electronic Funds Transfer s. 1.03 and also L.S. Sealy & R.J.A. Hooley, Commercial Law: Text, Cases and Materials (2003) p. 684 ff.

[45] Professor Roy Goode in Payment Obligations in Commercial and Financial Transactions (1983
[46] Dr. Gbenga Bamoudu, The Legal Aspects of Electronic Commerce notes, Department of Law University of Essex, 2007/2008 available at http://courses.essex.ac.uk/lw/lw616/
[47] The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2002
[48] See Brendan Cussack, Definition of SSL available at http://searchsecurity.techtarget.com/sDefinition/0,,sid14_gci343029,00.html
[49] Sean Michael Kenner, SSL: Your key to e-commerce security available at http://www.smallbusinesscomputing.com/emarketing/article.php/3517191
[50] ibid
[51] Report of the High Powered Committee on (Indian) Electronic Commerce and Taxation, p. 60, available at http:www.laws4india.com/indiantaxlaws/notification/ecomchapter2.pdf (September, 12, 2001) at p. 61. Last visited 18/08/2008.
[52] Daniel Ho and Brossa Wong, new economy businesses: tax perspectives in the Hong Kong source-based taxation, Company Lawyer, 2006 at p. 316.

[53] Mann J. Fraser, and Gahtan, Alan M., Overview of the Legal Framework for Electronic Commerce, in Law of International Website Business (1998) at p. 4.
[54] The Public International Law of Taxation: Texts, Cases and Materials, Graham &Trotman/Martinus Nijhoff, Lodon, 1994 at p. 22.
[55] Rebecca Wallace, International Law: A student Introduction, second edition, Sweet and Maxwell, London, 1992; Vaughan Lowe, Jurisdiction, in Malcolm D. Evans, International Law, Oxford University Press, 2003.
[56] Vaughan Lowe, Jurisdiction, in Malcolm D. Evans, International Law, Oxford University Press, 2003 at p. 332.
[57] Asif Qureshi, The Public International Law of Taxation: Texts, Cases and Materials, Graham & Trotman/Martinus Nijhoff, London ,1994 at 22; Rebecca Wallace, International Law: A student Introduction, second edition, Sweet and Maxwell,London,1992; Vaughan Lowe, Jurisdiction, in Malcolm D. Evans, International Law, Oxford University Press,2003.
[58] Art. 1 and 2 of the Geneva Convention on the Territorial Sea and the Contiguous Zone of 29/4/1958, also in Asif Qureshi, The Public International Law of Taxation: Texts, Cases and Materials, Graham&Trotman/Martinus Nijhoff, London, 1994 at p. 104.
[59] Bjorn Westberg, Cross border Taxation of E-commerce, International Bureau of Fiscal Documentation, Amsterdam, 2002 at p. 90.
[60] Vivid example is DPP v Doot[1973]AC 807 and DPP v Stone House [1978]AC 55
[61] US v.Aluminium Co of America, 148 F.2d 416(1945).
[62] Andrew Lymer,and John Hasseldine, ‘Introduction to Taxation in an International Context’ in The International Taxation System, Kluwer Academic Publishers,2002 at p. 5.
[63] Asif Qureshi, The Public International Law of Taxation: Texts, Cases and Materials,Graham&Trotman/Martinus Nijhoff, Lodon ,1994 at p. 22.
[64] ibid
[65] Bjorn Westberg, Cross border Taxation of E-commerce, International Bureau of Fiscal Documentation, Amsterdam, 2002 at p. 89.
[66] Richard L.Doernberg and others, Electronic Commerce and Multijurisdictional Taxation, Kluwer Law International, London, 2001 at 165; Asif Qureshi, The Public International Law of Taxation: Texts, Cases and Materials, Graham&Trotman/Martinus Nijhoff, Lodon ,1994 at p. 23;
[67] Article 53 of the Vienna Convention on the Law of Treaties,1969.
[68] supra, Doernberg at p. 165.
[69] Sometimes called personal attachment.
[70] Source of income here includes dividends, interests, remuneration, pensions, annuities, royalties and the like.
[71] Presence is not necessarily physical, it suffices if a person has assets such as real estate, permanent establishment, etc, which are located in the territory of the tax claiming community.
[72] Rifat Azam, E-commerce Taxation and Cyberspace Law: The Integrative Adaptation Model, summer 2007, Virginia Journal of Law and Technology, Vol.12, No.5 available at http://www.vjolt.net/
[73] OECD, Taxation and Electronic Commerce: Implementing the OTTAWA Taxation Framework Conditions; The 2003 Report, available at http://www.oecd.org/
[74] Reuven S.Avi-Yonah, International Taxation of Electronic Commerce, 52 Tax Law Review 502(1997).
[75] International Taxation in the Age of Electronic Commerce: A Comparative Study (2003,) cited in Rifat Azam, E-commerce Taxation and Cyberspace Law: The Integrative Adaptation Model, summer 2007, Virginia Journal of Law and Technology, Vol.12,No.5 available at http://www.vjolt.net/
[76] Ibid at p. 14.
[77] Ibid at p. 14.
[78] Office of Tax Policy, US Department of Treasury, Selected Tax Implications of Global Electronic Commerce 22. Available at http//www.treas.gov./offices/taxpolicy/library/internet.pdf accessed on 17/72008.
[79] International Taxation in the Age of Electronic Commerce: A Comparative Study (2003), cited in Rifat Azam, E-commerce Taxation and Cyberspace Law: The Integrative Adaptation Model, summer 2007,at p. 15, Virginia Journal of Law and Technology, Vol.12, No.5, available at http://www.vjolt.net/
[80] Bensusan Restaurant Corp. v. King, 126 F.3d 25 (2d Cir. 1997); Hearst Corp. v. Goldberger, 1997 WL 97097 (S.D.N.Y. 1997).

[81] Panavision International, 141 F3d at 1321 citing Cybersell Inc v.Cybersell Inc, 130 F3d 414,418(9th Cir.1997)
[82] Electronic Commerce and Multijurisdictional Taxation, Kluwer Law International, London, 2001 at p. 169.
[83] Brian J.Anorld and Michael J.McIntyre, International Tax Primer, second edition, Kluwer Law International at p. 15.
[84] See chapter 2.
[85] E-commerce Taxation and Cyberspace Law: The Integrative Adaptation Model, summer 2007,at 15, Virginia Journal of Law and Technology, Vol.12, No. 5, available at http://www.vjolt.net/

[86] Klaus Vogel, “Worldwide vs. Source Taxation of Income-A Review and Re-evaluation of Arguments (PART III)”(1998)11 Intertax 393,394(Vogel-Part III).
[87] Charles E. McLure, Jr., ”Source based Taxation and alternatives to the Concept of Permanent Establishment”, in Canadian Tax Foundation(ed), 2000 World Tax Conference Report(2000),6:4.
[88] Dale Pinto, E-Commerce and Source based taxation, International Bureau of Fiscal Documentation,2002 at 17;Rifat Azam, E-commerce Taxation and Cyberspace Law: The Integrative Adaptation Model, summer 2007,at 15, Virginia Journal of Law and Technology, Vol.12,No.5 available at http://www.vjolt.net/; Richard Doernberg, Electronic Commerce and Multijurisdictional Taxation, Kluwer Law International,London,2001.
[89] See also Reuven S.Avi-Yonah, International Taxation of Electronic Commerce, 52 Tax Law Review 502(1997, at 507,520.
[90] Stephen M.Mutula and Others, Contradictions of Tanzania Government Policies on Internet Service Provision: A Case Study of Dar-es-salaam City, Library Hi Tech, Vol.20,No.3,2002 at 359-369(Emerald)
[91] For instance Wi-Lan
[92] Very Small Aperture Terminal Satellite technology.
[93] Klaus Vogel, “Worldwide vs. Source Taxation of Income-A Review and Re-evaluation of Arguments (PART III)” (1998) 11 Intertax 393,394(Vogel-Part III) at 398.
[94] Rifat Azam, E-commerce Taxation and Cyberspace Law: The Integrative Adaptation Model, summer 2007,at 15, Virginia Journal of Law and Technology, Vol.12, No. 5, available at http://www.vjolt.net/; Brian J. Anorld and Michael J. McIntyre, International Tax Primer, second edition, Kluwer Law International at 15; Richard L. Doernberg and others, Electronic Commerce and Multijurisdictional Taxation, Kluwer Law International,London,2001; Asif Qureshi, The Public International Law of Taxation: Texts, Cases and Materials, Graham&Trotman/Martinus Nijhoff, London ,1994; Bjorn Westberg, Cross border Taxation of E-commerce, International Bureau of Fiscal Documentation, Amsterdam, 2002.

[95] See also Rifat Azam, E-commerce Taxation and Cyberspace Law: The Integrative Adaptation Model, summer 2007,at p. 15, Virginia Journal of Law and Technology, Vol.12, No. 5, available at http://www.vjolt.net/
[96] International Taxation of Electronic Commerce, 52 Tax Law Review 502(1997)at p. 590.
[97] E-commerce Taxation and Cyberspace Law: The Integrative Adaptation Model, summer 2007,at 15, Virginia Journal of Law and Technology, Vol.12,No.5 available at http://www.vjolt.net/ at 14.

[98] A good example is UCP 600 and e-UCP 600, which supplement each other. The other example can be taken from the way the electronic bill of lading and the traditional bill of lading work towards each other.
[99] Amit M. Sachdeva,” International Jurisdiction In Cyberspace: A Comparative Perspective”, C.T.L.R. 2007, 13(8), pp. 245-258.
[100] David Johnson and David Post, “Law and Borders- The rise of Law in Cyberspace”, 48STAN.L.Rev.1367, 1368-78, (1996).
[101] Supra note 47 above.
[102] Rifat Azam, E-commerce Taxation and Cyberspace Law: “The Integrative Adaptation Model”, summer 2007,at p. 15, Virginia Journal of Law and Technology, Vol.12,No.5 available at http://www.vjolt.net/ at 30.
[103] Ibid, at 30.
[104] Catherine Pilkington and Sue Farron, ‘International Direct Taxation of E-commerce: Developing a New Conceptual Model from Marketing Principles’ in The Journal of Applied Accounting Research, Vol.6, Issue 1, (2000) 85 at 103.
[105] See also Edward Alder, Jurisdiction in Internet Transactions, available at http://www.hk-lawyer.com/2000-12/Dec00-cover.htm
[106] Cited in Edward Alder’s article above.
[107] Article 4 of the OECD Model Tax Convention, 2003 and 2005, condensed version.
[108] Commentary to article 4 of the OECD Model Tax Convention, 2005.
[109] Supra fnote.102.
[110] Catherine Pilkington and Sue Farron, “International Direct Taxation of E-commerce: Developing a New Conceptual Model from Marketing Principles” in The Journal of Applied Accounting Research, Vol.6, Issue 1,(2000) 85 at 90.
[111] Supra, fnote.102.
[112] “Looking for an Appropriate Jurisdiction Framework for Source-State Taxation of International Electronic Commerce in the 21st Century”, Intertax 1998, Vol.26 PT 6-7,pp 192-200.
[113] However, his view is already overtaken by events as countries such as the US are already taxing non-residents on the basis of personal jurisdiction and effects theory.
[114] 18th July 2008.
[115] Paragraph 24 of the commentary to article in the Model Tax Convention, 2005.
[116] The 2008 Update to the Model Tax Convention, passed on 18 July 2008, available at http://www.oecd.org/
[117] ibid
[118] OECD, A Discussion Paper on Impacts of the Communication Revolution of the Application of “Place of Effective Management” as a “Tie Breaker Rule”1997.
[119] Ibid, p. 90.
[120] International Shoe Co. vs. Washington, 326 US,310,316(1945) in By the Muddy Waters of Internet Jurisdiction, April 10,2007, available at http://www.cybertelecom.org/notes/juris.htm
[121] Panavision International, 141 F3d at 1321 citing Cybersell Inc v.Cybersell Inc, 130 F3d 414,418(9th Cir.1997)
[122] Sometimes called the Calder test, or sliding scale test.
[123] 141 F3d at 1321 citing Cybersell Inc v.Cybersell Inc, 130 F3d 414,418(9th Cir.1997)
[124] Zippo Manufacturing Co. vs. Zippo Dot com, Inc 952F,Supp.1119(W.D.P,1997)
[125] Available at www.cyber-rights.org/documents/yahoo.ya.pdf
[126] (1906) Tax Cases 198.
[127] See Turku Discussion Paper, Electronic Commerce: The Challenges to Tax Authorities and Tax Payers, An Informal Round Table Discussion between Business and Governments at para 114, available at www.oecd.org/daf/fa/e_com/turku.htm accessed on 11/july/2008.
[128] Commonly abbreviated as PE.
[129] OECD Model Tax Convention, 2007.
[130] Article 5 of the OECD Model Tax Convention, 2007.
[131] Article 5(3)
[132] The same explanations are also available at http://umling.tripod.com/id17.html accessed on 11/7/08
[133] Benjamin Hoffart, Permanent Establishment in the Digital Age: Improving and stimulating Debate through an Access to Market Proxy Approach, North-western Journal of Technology and Intellectual Property (NJTIP), Vol.6, Issue 1, Fall, 2007 available at www.law.northwestern.edu/journals/njtip/v6/n1/6.
[134] Dale Pinto, E-commerce and Source Based Income Taxation, IBFD, 2006;Benjamin Hoffart, Permanent Establishment in the Digital Age: Improving and stimulating Debate Through an Access to Market Proxy Approach, North-western Journal of Technology and Intellectual Property (NJTIP), Vol.6, Issue 1, Fall,2007 available at www.law.northwestern.edu/journals/njtip/v6/n1/6; Richard L. Doernberg and others, Electronic Commerce and Multijurisdictional Taxation, Kluwer Law International,London,2001; Nozomi Kato, Electronic Commerce and International Direct Taxation Issues[2001] ESSEX LLM(Dissertation); A.A. Skaar, Permanent Establishment: Erosion of a Tax Treaty Principle (1991).
[135] Ibid
[136] International Chamber of Commerce.
[137] League of Nations Report to Group Economists, 1923 and the Draft Convention, 1927 and 1946 London Model.
[138] Dale Pinto, E-commerce and Source Based Income Taxation, IBFD, 2006 at p. 77.
[139] See also Michael J.Graetz and Michael M.O’Hear, “The Original Intent of US International Taxation”, (1997),46 Duke Law Journal, P.1021; John Huston, and Lee Williams, Permanent establishment: A Planning Primer (1993),pp 1-10; Arthur J. Cockfield, “Balancing National Interests in the Taxation of Electronic Commerce Business Profits” (1999), 74 Tulane Law Review, pp.133,135-36 and 144-48; Luc Hinnekens, “Looking for an Appropriate Jurisdictional Framework for Source State Taxation of International Electronic Commerce in the 21st Century”, (1998), Intertax 26(6-7),pp.192-196.
[140] Dale Pinto, E-commerce and Source Based Income Taxation, IBFD, 2006 at 78.
[141] Luc Hinnekens, “Looking for an Appropriate Jurisdictional Framework for Source State Taxation of International Electronic Commerce in the 21st Century”, (1998), Intertax 26(6-7), pp.196.

[142] Report of the High Powered Committee on (Indian) Electronic Commerce and Taxation, p.60 available at http:www.laws4india.com/indiantaxlaws/notification/ecomchapter2.pdf (September, 12, 2001). Last visited 18/08/2008
[143] Chishty, M.M., Placement of Computer Equipment like Servers and Routers in India By Foreign Entity: Does it Amount to Permanent Establishment of the Foreign Entity in India? (January 2007).
Available at SSRN: http://ssrn.com/abstract=1028937
[144] Dale Pinto, E-commerce and Source Based Income Taxation, IBFD, 2006;Benjamin Hoffart, Permanent Establishment in the Digital Age: Improving and stimulating Debate Through an Access to Market Proxy Approach, North-western Journal of Technology and Intellectual Property (NJTIP), Vol.6, Issue 1, Fall, 2007 available atwww.law.northwestern.edu/journals/njtip/v6/n1/6; Richard L. Doernberg and others, Electronic Commerce and Multijurisdictional Taxation, Kluwer Law International,London,2001; Nozomi Kato, Electronic Commerce and International Direct Taxation Issues[2001] ESSEX LLM(Dissertation); A.A. Skaar, Permanent Establishment: Erosion of a Tax Treaty Principle (1991); Rifat Azam, E-commerce Taxation and Cyberspace Law: The Integrative Adaptation Model, summer 2007,at 15, Virginia Journal of Law and Technology, Vol.12,No.5 available at http://www.vjolt.net/; Catherine L. Mann, ‘Balancing Issues and Overlapping Jurisdictions in the global Electronic Market Place: The UCITA Example, 8 Wash.U.J.L.& POL’Y 215,(2002); Catherine Pilkington and Sue Farron, ‘International Direct Taxation of E-commerce: Developing a New Conceptual Model from Marketing Principles’ in The Journal of Applied Accounting Research, Vol.6, Issue 1,(2000) 85; Reuven S. Avi-Yonah, International Taxation of Electronic Commerce, 52 Tax Law Review 502(1997);Charles Kingston, Taxing the Future, 51 Tax Law Review,641,653-56(1996); Barret Schaefer, International Taxation of Electronic Commerce Income: A Proposal to Utilise Software Agents for Source Based Taxation, 16 Computer & High Tech.L.J.111,124-40(1999); Kyrie Thorpe, International Taxation of Electronic Commerce: Is the Internet Age Rendering the Concept or Permanent Establishment Obsolete?, 11 EMORY Int’l L.Rev.633(1997);Jean-Phillipe Chetcuti, The Challenges of E-commerce to the Definition of a Permanent Establishment: The OECD Response available at www.inter-lawyer.com/lex-e-scripta/articles/e-commerce-pe.htm accessed on 30 July 2008;Walter Hellerstein, ‘State Taxation of Electronic Commerce’, 52 Tax L.Rev.425(1997).

[145] See Benjamin Hoffart, Permanent Establishment in the Digital Age: Improving and stimulating Debate Through an Access to Market Proxy Approach, North-western Journal of Technology and Intellectual Property (NJTIP), Vol.6, Issue 1, Fall, 2007 available at www.law.northwestern.edu/journals/njtip/v6/n1/6
[146] See OECD MTC, art.5,7 (1),also Gary D. Sprague and Rachel Hersey, Permanent Establishment and Internet Enabled Enterprises: The Physical Presence and Contract Concluding Dependent Agent Tests, 38 GA.L.Rev.299(2003) at pp. 311-322.
[147] OECD Commentaries to article 5 at p.103; Clarification on the application of Permanent Establishment Definition in E-commerce, Changes to the Commentary on the Model Tax Convention on Article 5,OECD, 22/12/2000 para 6; See also Benjamin Hoffart, Permanent Establishment in the Digital Age: Improving and stimulating Debate Through an Access to Market Proxy Approach, North-western Journal of Technology and Intellectual Property (NJTIP), Vol.6, Issue 1, Fall,2007 available at www.law.northwestern.edu/journals/njtip/v6/n1/6

[148] Jean-Phillipe Chetcuti, The Challenges of E-commerce to the Definition of a Permanent Establishment: The OECD Response available at www.inter-lawyer.com/lex-e-scripta/articles/e-commerce-pe.htm, accessed on 30 July 2008.
[149] See chapter 2 of this work.
[150] Ibid.
[151] Catherine Pilkington and Sue Farron, ‘International Direct Taxation of E-commerce: Developing a New Conceptual Model from Marketing Principles’ in The Journal of Applied Accounting Research, Vol.6, Issue 1,(2000) at p. 100.
[152] T. Godwin, “Measuring the Effectiveness of Online Marketing”, The Journal of the Market Research Society, Vol.41, No.4, 1999, pp.403-406.
[153] Luc Hinnekens, “Looking for an Appropriate Jurisdictional Framework for Source State Taxation of International Electronic Commerce in the 21st Century”, (1998), Intertax 26(6-7), pp.196
[154] Hinnekens, at p. 192.
[155] Dale Pinto, E-commerce and Source Based Income Taxation, IBFD, 2006 at 175.
[156] Dale Pinto, E-commerce and Source Based Income Taxation, IBFD, 2006 at 192; A.A. Skaar, Permanent Establishment: Erosion of a Tax Treaty Principle (1991) at 573,574.
[157] Luc Hinnekens, “Looking for an Appropriate Jurisdictional Framework for Source State Taxation of International Electronic Commerce in the 21st Century”, (1998), Intertax 26(6-7), pp.197
[158] Dale Pinto, E-commerce and Source Based Income Taxation, IBFD, 2006 at 193; also Skaar, supra at 599.
[159] Rifat Azam, E-commerce Taxation and Cyberspace Law: The Integrative Adaptation Model, summer 2007,at 15, Virginia Journal of Law and Technology, Vol.12, No.5 available at http://www.vjolt.net/ at 31.
[160] Richard L. Doernberg, Electronic Commerce and International Tax Sharing, 26 Tax Notes International 1013(1998).
[161] See Benjamin Hoffart, Permanent Establishment in the Digital Age: Improving and stimulating Debate Through an Access to Market Proxy Approach, North-western Journal of Technology and Intellectual Property (NJTIP), Vol.6, Issue 1, Fall, 2007.
[162] Report of the High Powered Committee on (Indian) Electronic Commerce and Taxation, 77-78 at http://www.laws4india.com/indiantaxlaws/notification/ecomchapter2.pdf (September, 12, 2001). Last visited 18/08/2008.
[163] Page 53 of the report.
[164] Arthur J.Cockfield, “Designing Tax Policy for the Digital Biosphere: How Internet is Changing Tax Laws”, 34 CONN.L.Rev.333 (2002) at 396.
[165] This view was stated within Press Release 84/00 published on 11 April 2000, available at http://www.hmrc.gov.uk/manuals/intmanual/INTM266100.htm;

[166] See Ministerial reply 56961, Official Gazette of 22 January 2001, as reported in Mbwa-
Mboma, M.N.: France, OECD Take Different Views of Unstaffed Servers as Permanent
Establishments, WTD, 102--5 (2002) cited in Parrilli, Davide,Grid and Taxation: The Server as Permanent Establishment in International Grids. GECON 2008, LNCS 5206, J. Altmann, D. Neumann, T. Fahringer, eds., pp. 89-102, © Springer-Verlag Berlin Heidelberg 2008
Available at SSRN: http://ssrn.com/abstract=1246582
[167] Parrilli, Davide., Grid and Taxation: The Server as Permanent Establishment in International Grids. GECON 2008, LNCS 5206, J. Altmann, D. Neumann, T. Fahringer, eds., pp. 89-102, © Springer-Verlag Berlin Heidelberg 2008, Available at SSRN: http://ssrn.com/abstract=1246582
[168] Cockfield, A.J.:”The Rise of the OECD as Informal ‘World Tax Organization’ Through
National Responses to E-Commerce Tax Challenges”. YJoLT 8, 136–187 (2006)
[169] In Subhajit Bassu, E-commerce Taxation without representation, School of Law, Queens University, Belfast, at http://works.bepress.com/cgi/viewcontent.cgi?article=1041&context=subhajitbasu; Fox and Bruce estimate the total 2008 revenue loss for state and local governments will range between $21.5 billion and $33.7 billion. They reduced their earlier estimate of loss by between $6.3 billion and $9.3 billion. Fox said the estimate is lower because e-commerce has been a less robust means of doing transactions than he and Bruce anticipated in an earlier report released in 2000. Also, businesses have increasingly complied with the use tax.
[170] Market Forecast Report,” Jupiter Media Matrix, January 2002, p. 6
[171] ibid
[172] “The Changing Market Economy: Vertical Industry & Demographic Profile of the Small Business Market” Caners In-Stat, July 2002

[173] Ibid page 2.
[174] OECD Committee on Consumer policy, Business to Consumer e-commerce Statistics, consumers in the online marketplace. OECD workshop on the guidelines: one year later, Berlin, 13-14 march 2001 at http://www.oecd.org/dataoecd/34/36/1864439.pdf
[175] Chishty, M.M.,Placement of Computer Equipment Like Servers and Routers in India By Foreign Entity: Does it Amount to Permanent Establishment of the Foreign Entity in India?(January 2007); Bellia, Berman and Post, Cyber Law: Problem of Policy and Jurisdiction in the IT age, 2nd ed., St. Paul: Thomson West, 2004, p.122.
[176] David Johnson and David Post, Law and Borders- The rise of Law in Cyberspace, 48STAN.L.Rev.1367,1368-78,(1996).

[177] Catherine Pilkington and Sue Farron, ‘International Direct Taxation of E-commerce: Developing a New Conceptual Model from Marketing Principles’ in The Journal of Applied Accounting Research, Vol.6, Issue 1,(2000) 85 at 90.
[178] Brian J. Anorld and M.J.McIntyre, International Tax Primer, 2nd ed.2002at 156.
[179] Chishty, M.M.,Placement of Computer Equipment Like Servers and Routers in India By Foreign Entity: Does it Amount to Permanent Establishment of the Foreign Entity in India?(January 2007).
Available at SSRN: http://ssrn.com/abstract=1028937
[180] Rifat Azam, E-commerce Taxation and Cyberspace Law: The Integrative Adaptation Model, summer 2007,at 15, Virginia Journal of Law and Technology, Vol.12, No. 5 available at http://www.vjolt.net/ at p. 30.
[181]The Computer Misuse Act, 2002; the Fraud Act, 2006, http://www.uk-legislation.hmso.gov.uk/acts/acts2006/pdf/ukpga_20060035_en.pdf.
[182] Directive 2000/31/EC on certain legal aspects of information society, art.5(1) and 6.
[183] Directive 2000/31/EC on Electronic Commece, art.2 and Directive 1998/34/EC art.1 (2) as amended by Directive 1998/48/EC.
[184] Beale and Griffiths (2002) L.M.C.L.Q. 472; “Electronic Commerce: Formal Requirements in Commercial Transactions” (2001) available in full at http://www.lawcom.gov.uk/
[185] Also Electronic Communications Act, 2000 and Electronic Signatures Regulations, 2002, Implementing article 9(1) of the European Directive on Electronic Commerce, 2000, and, Electronic Signatures Directive, 1999, section 7(c) of the Uniform Electronic Transactions Act.

[186] Article 6 of UNCITRAL Model Law, on Electronic Commerce.
[187] See the same ideas in Amit M. Sachdeva, International Jurisdiction In Cyberspace: A Comparative Perspective, C.T.L.R. 2007, 13(8), pp. 245-258.
[188] Andrew Jacobs, China eases Internet restrictions for foreign journalists, available at http://www.iht.com/articles/2008/08/01/asia/beijing.php, Internet censorship in China, at http://en.wikipedia.org/wiki/Internet_censorship_in_the_People , Esther Pan, China’s New Internet Restrictions at http://business.timesonline.co.uk/tol/business/markets/china/article721120.ece

[189] http://www.nointernettax.org/default.asp?Page=NewsFlash

[190] (http://www.jmm.com/xp/jmm/press/industryProjections.xml) (US only), also at Goecart at http://www.goecart.com/ecommerce_solutions_facts.asp