Taxing E-Commerce in Ghana: How Realistic Is a “BIT Tax”?

INTRODUCTION

The rapid growth of electronic commerce has led to increased interest and debate on whether, and how, e-commerce should be taxed. Opponents of Internet regulation and taxation argue that if Internet commerce is allowed to grow untaxed, it will bring even greater economic benefit in the end. Proponents of e-commerce taxation argue that it is unfair to traditional brick-and-mortar merchants for e-commerce not to be taxed. It is also viewed as a matter of survival for state and local governments, many of which depend on sales tax revenues for basic operating income. As more people rely on the Internet for shopping, governments stand to lose millions of dollars in sales tax revenues if e-commerce is not taxed.

In Europe a debate begun in 1996 about the possibility of a tax on the flow of information passing over the internet – called “BIT “ tax (Cordell and Ide,1994; European Commission High Level Expert Group,1996). The idea of such a tax was however not supported and in April 1997 it was effectively removed from the agenda as a possibility for the short term future, although its advocates continue to present a case in its favour (Cordell,1998; Soete and Weel,1998).

I am going to attempt to explain the most effective means of taxing B2C (Business-to-Consumer)  e-commerce taking cognizance of the five most compelling arguments for and the five most compelling reasons against adopting a bit tax.

ISSUES

At the OECD Ottawa Conference in 1998, the conference endorsed 5 principles

relating to the future of taxation of e-commerce. Interestingly, it seems to me that the different schools of thought both for or against bit taxation somehow dwell on these same principles outlined below to argue their case.

 1. Neutrality

 Taxation of e-commerce should be compatible and equitable with

 taxation of conventional commerce; that business decisions should be motivated

 by economic rather than tax considerations.

 2. Efficiency

Compliance costs should be kept to a minimum.

 3. Certainty and Simplicity

Tax payers should know in advance what their liability will be, including where and how the tax is to be accounted.

 4. Effectiveness and Fairness

 The potential for evasion and avoidance should be minimised, but counteracting measures should be proportional to the risks involved.

 5. Flexibility

 Tax systems should be flexible and dynamic to ensure that they keep pace

 with technological and commercial developments.

CASE IN FAVOUR OF A BIT TAX

Fairness

It is unfair to tax traditional “bricks and mortar” businesses on their sales while exempting sales over the Internet from the same sales taxes. If I bought software from a shop on Oxford street, it will be taxed right? Now if I paid for a downloaded copy from an e-shop on the net, it is not likely to be taxed since the e-shop could be in London and once considered an export then the tax may have to be paid at the destination which is Ghana in my home. Not likely. Really not fair since the same product purchased on the Internet will be tax free.

Erosion of tax base due to growth of the internet

More and more economic activity is taking place through electronic transmission of bits. In other words if society is moving into the direction of an Information Society, the tax basis of society should also shift in that direction. 

An European Commission report reasons that the value of the average cyberspace transaction will increase as time goes by, resulting in fewer physical transactions.   The upshot, the report says, will be a shrinking government tax base. Use of the Internet to import goods and services electronically from outside the continent has allowed some Europeans to avoid payments under Europe's value-added-tax  (VAT) system. 

Progressive

Indeed, it may even be argued that the incidence of such a tax might be progressive to the extent there is a so-called digital divide, with the better-off in society making much more use of electronic commerce than the less fortunate.

Non-Neutrality

Not adjusting a nation’s tax basis will automatically imply a non-neutrality of different distribution or communication systems; the newest communication systems avoiding, either by accident or by design, the prevailing tax levying system.

CASE AGAINST A BIT TAX

Cost of collection

It is argued that though counting of bits is technically feasible the need for specialized software and additional hardware to aggregate the bits and determine their routing for accounting purposes adds a substantial and unwarranted cost. . Such a tax would be very difficult to monitor and police.

Fairness

It is also argued that if the communications activities on the Internet would be taxed in the same way of the communications services and equipments, then the bit tax would lead to double taxation. In this way the tax would be paid twice when the necessary equipment is purchased and when the phone call is made. It could be also argued that if we do not pay tax for other traditional ways of information transfer as for example a fax there should be no reasons in taxing Internet.

Deterrent to investment in e-commerce

A bit tax could hinder small businesses from gaining access to the technology they need to compete with larger companies. Schools, libraries and other educational and research institutions with limited budgets would also take a hit.

Discrimination

Having Internet-only taxes such as a bit tax with no offline analogue is argued to be discriminatory.

Certainty and Simplicity

It seems to me that it will be complex to know with certainty the total cost including the bit-tax of an electronic good being purchased by way of a download. Mostly in the e-contract, payment is expected to be made before download of goods is allowed. Also prices of goods including taxes are also expected to be quoted and brought to the notice of the consumer.

With a bit-tax, what happens if files are compressed before download making the actual number of bits downloaded smaller than the original. Will it amount tax invasion or avoidance?. What is the position if the packets of transmission has to go through different jurisdictions?

WAY FORWARD

For the way forward in taxing the internet I tend to favour the following for reasons stated below :

• Internet taxation at the source, or point of sale, instead of at the destination, or point of consumption.

The internet presents new challenges in identifying the consumer. It is nearly impossible to apply the destination principle, which is standard practice internationally. The obstacle to the implementation of the destination principle for online turnover (which states that the applicable tax rate is that of the country of end consumption) is that suppliers are often unable to identify in which country customers place their orders. The above is therefore likely to make the collection much easier.

• International definition of nexus which makes the billing address of the consumer the tax earning country.

Tax receipts to be transmitted electronically directly to the appropriate country through the use of standardized accounting software. The use of geo-location software should be employed. The above is to make the accounting of tax receipts much easier.

• Freedom for countries to choose their own tax rates and exemptions

If there is a bit tax in Ghana and anybody who purchases e-books from a company in Ghana would have to pay the tax, this eventually increases the cost of the e-books to the consumer. Now if another company offers the same e-books in a state in the U.S.A (Tennessee), where no bit tax is charged then ceteris paribus, I believe consumers would shift business to Tennessee, a tax haven.

Eventually, I believe countries losing business due to their high taxes may  ceteris paribus have to start marching the competition and in my opinion eventually the bit tax may be negligible if not eradicated.  

CONCLUSION

I really do appreciate the issues for and against the bit tax and I think it is something we need to start thinking about now since the future is a virtual world.

It will get to a time the internet will become an integral part of our lives to the extent that we have no choice but to use it and taxing it may not be an issue. Cars have now become a necessary part of our lives to the extent that I do not think we bother so much about paying road worthy tax.

I can envisage a time may be 20 years from now when businesses would wonder how the present generation coped with “paper-based transactions”. Now I somehow do agree that to increase the diffusion and deployment of e-technologies, taxing the internet might not be the best option for us in Ghana at this moment but cannot be avoided in the long run when the internet becomes the most cost efficient market place and medium of distant communication. What the present generation needs to do is continue debating to find a solution as to how best to tax and not whether to tax B2C internet transactions.