Introduction

Along with the traditional categories of clothing, footwear, jewellery and fashion accessories, the authors of the 2012 research expected a growth in food/groceries and alcohol. Online shoppers in New Zealand would, on average, spend NZD 1,659 online. The key statistics from this research are given in the following table:[7]

Table 1: Key E-commerce Statistics for Australia and New Zealand

This research was further updated by Frost & Sullivan in 2013.[8] In subsequent research published in July 2013, the authors forecast that online shopping would account for seven per cent of retail sales, and predicted that total online spending would reach NZD 3.65 billion in 2013.

Similarly, PricewaterhouseCoopers has also stated in a further publication released in 2013:[9]

Through the proliferation of the internet – retail is now borderless. Research highlights that 54% of Australian consumers make purchases from offshore sites, spending nearly [NZD] 1 billion a year internationally. Once separated from the rest of the world due to geography, New Zealand consumers can and do purchase from international retailers that offer lower prices, a wider variety of goods and free shipping.

PricewaterhouseCoopers has also noted that Frost & Sullivan now predicts that online shopping expenditure will reach NZD 6 billion by 2017, and that 85 per cent of New Zealand online shoppers are expecting to maintain or increase their online shopping expenditure.[10]

More recent information provided by <eCommerce.org.nz> in 2013 also states that consumers in New Zealand spent over NZD 3.2 billion online in 2013, and it is predicted that this figure will reach NZD 5.4 billion by 2016.[11]

The Organisation for Economic Co-operation and Development (OECD) Forum on Tax Administration in 2010 provided a list of available statistics on the take-up of the electronic retail (“web-shops”) sectors of e-commerce:[12]

• In the United States, web-shopping will account for eight per cent of total retail sales by 2014.[13]
• In Western Europe, the value of online sales will rise from EUR 68 billion in 2009 to EUR 114 billion in 2014, reflecting an annual growth rate of 11 per cent.[14]
• Western Europeans spent an annual average of EUR 483 per person in 2009, and this amount will grow to EUR 601 in 2014.[15]

According to a report from Statistics Canada, the agency that conducts the country’s census and collects economic data, in 2010 “online shoppers in Canada … spent [CAD] 15.30 billion on goods and services purchased over the Internet … the agency previously reported [CAD] 12.8 billion in e-commerce spending in 2007.”[16] On average, Canadian consumers made 10 web orders during 2010, with an average total order value of CAD 1,362 per consumer. Statistics Canada has further reported that online spending for goods and services in Canada reached CAD 18.9 billion in 2012 (an average spend of CAD 1,450), an increase of 24 per cent from the previous survey in 2010.[17]

In the United Kingdom, the IMRG Capgemini e-Retail Sales Index found that:[18]

British shoppers spent 34.9 billion pounds ([USD] 54.2 billion) online in the first half of the year, up 12.58% from 31 billion pounds ([USD] 48.1 billion) in the first six months of 2011 … That double-digit growth in online sales is remarkable given that the UK’s gross domestic product has fallen in five of the last seven quarters. Total retail sales were up only 1.6% year over year in June, and the country’s economy shrunk by 0.7% in the second quarter, according to the UK Office of National Statistics.

But UK consumers continue to spend more online, meaning they’re moving more of their purchases from stores to the web. In June, online shoppers spent an estimated 6 billion pounds ([USD] 9.3 billion)–an average of 117 pounds ([USD] 181) per person–up 13% from June 2011 … Sales via mobile devices, such as tablets and smartphones, continued to rise in June, with m-commerce sales leaping 356% year over year.

Similarly, subsequent data released in the IMRG Capgemini e-Retail Sales Index in November 2013 predicted an overall 15 per cent increase in online sales in the United Kingdom in 2013 compared to 2012, following an estimate that British shoppers would spend over GBP 10 billion online in December 2013.[19]

More Europeans are going online to make purchases, according to research from Eurostat, the European Union’s statistical bureau:[20]

… 43% of individuals in the 27 EU member countries aged 16 to 74 bought something via the Internet in 2011, marking a year-on-year rise of three percentage points. By comparison, 53% of US consumers made a purchase online in 2011, according to Forrester Research Inc.

The UK and Sweden jointly led the field among European countries, each with 71% of survey participants purchasing products online, while Germany and France followed with 64% and 53%, respectively.

A subsequent report from Germany in 2013 showed an expected 70.5 per cent increase in annual European web retail sales by 2017.[21] Forrester Research in the United States also forecast that in Western Europe, e-commerce spending would reach EUR 128 billion in 2013, and EUR 191 billion in 2017.[22]

In an analysis of trends in the monthly retail sales figures released by the United States Census Bureau, Forrester Research forecast in March 2013 that e-commerce spending in the United States would hit approximately USD 262 billion in 2013 (up 13.4 per cent from USD 231 billion in 2012).[23] Online spending is predicted to reach USD 370 billion in 2017, which represents a nearly 10 per cent compound annual growth rate from 2012. Forrester also forecast that in 2017 e-commerce will account for 10 per cent of all United States retail sales, compared with eight per cent in both 2012 and 2013.

Taken as a whole, this series of articles explains that although tax laws may need to change, the basic principles of a desirable taxation system will still apply. As the taxation environment becomes more complex and intricate, more emphasis must be given to the adherence of these principles. In the following paragraphs, the four principles of Adam Smith have been remodelled and expanded, and four examples are studied in order to provide a basis for the study of the taxation of internet transactions.

The second article of this series will summarise some of the New Zealand tax laws that apply to internet transactions. The third article in the series discusses planning objectives and an alternative approach to income tax and goods and services tax (GST), and then goes on to evaluate the audit risks for e-commerce. The third article then summarises the tax treatment of internet transactions in the United States and Sweden. This includes cyberspace and the virtual worlds, and audit and discovery technologies such as Xenon and ECEyes. The third and final article also considers the necessary public and professional education, and the need to be proactive in finding methods of stemming the loss of tax revenue by the use of the internet. The final article also comments on how the need for tax revenue to meet the future demands of government expenditure relates to increased monitoring of new forms of internet business transactions. The article concludes by examining some of the planning options available to the New Zealand tax authorities, in order to meet the changing demands of the internet and e-commerce.

This series of articles asks the question: “Can New Zealand continue to apply old laws to the rapidly developing internet transactions while other jurisdictions throughout the world are creating a new focus and making considerable changes in government funding and laws, to avoid a tax revenue leakage?”

Principles of Desirable Taxation Systems

While changes will be required to the current taxation regimes and possibly new taxes introduced, the overall principles by which the taxation system should be developed and enforced remain. If the development and changes to encompass internet transactions are to apply efficiently and effectively, then they must where applicable adhere to these principles. As the taxation environment becomes more complex and intricate, more emphasis must be given to the adherence of these principles. It is therefore constructive to restate these sets of principles.

In 1776, Adam Smith in The Wealth of Nations outlined four principles of an ideal tax system. These principles are: equity, certainty, convenience and economy.[24] If the number of times they are quoted is a reliable guide, then they are still relevant in today’s tax environment. These principles are important to the creation of tax policy, because it is only when these principles are upheld that effective taxes are implemented in a manner that satisfies the purposes of a tax system.

These four principles, in a remodelled and expanded form, were restated in the report of the Victoria University of Wellington Tax Working Group (TWG).[25] Alley and Bentley[26] also combine the principles set out by the OECD[27] and the American Institute of Certified Public Accountants (AICPA).[28] The OECD principles were developed to assist in a study on the taxation of electronic commerce.

A summary of the principles listed by the TWG and the equivalent or related principles of Alley and Bentley is set out in the following table.

Alley and Bentley recommended that their principles in the table above be adopted with the accompanying definitions. They suggest that where there are more detailed goals that legislators, policymakers and administrators wish to see achieved in any reform or change process, they are better included not as additional principles but within the ambit of the existing principles:[29]

For example … economy in collection and convenience of payment both relate to efficiency of compliance and administration costs and should be assessed under the same heading of efficiency. Simplicity, transparency and visibility are usually seen as important elements in ensuring certainty. There should be neutrality of the tax system so that economic growth and productive capacity of the economy will not be impeded. Effectiveness extends to minimising the tax gap and ensuring appropriate government revenues.[30]

These principles will always compete and overlap with each other. Perhaps it is not of great concern that lists of principles are different as long as the concepts which they represent are all considered. In some situations, different principles may be complementary ways of looking at the same concept.

The art of taxation design is to balance the principles most effectively to achieve the intended purpose. For example, vertical equity (where people who have a greater ability to pay taxes should pay more) is often sacrificed to achieve other principles. Some of the objectives are in conflict, in the sense that movement toward one goal may be to the detriment of another. A simultaneous realisation of all the goals in some degree will constitute success if the appropriate compromises adequately reflect the (informed) consensus. However, the detail will always remain the subject of debate, disagreement and ultimately negotiation between the different influencers of tax system design.

E-Commerce and the Principles of Taxation

As demonstrated in the discussion above, most reports making recommendations for the reform or design of tax systems adopt a variation of Smith’s principles. As taxation law and the environment it exists in becomes more detailed and complex, it will be useful to return to a common starting point, most importantly because this will also provide the basis for analysis of a wide range of international rules, including those relating to the taxation of electronic commerce. The principles recommended in this article reflect commonly applied principles, but are drawn together using widely accepted and understood terminology.

Those who favour taxation of e-commerce cite concerns of lower government revenues due to increasing e-commerce sales, the resulting decrease in public good provision and issues regarding equity. The concern is for potential revenue loss and the uncertainties created for tax authorities. Concerns have been expressed that e-commerce could result in the erosion of tax bases:[31]

Consumption taxes are levied on the principle of taxation at the place of consumption and according to [the] rates set in individual countries … E-commerce, however, has the potential to undermine the application of domestic and national tax rules. Tax planning for an e-business differs from tax planning for a traditional bricks-and-mortar company. Historically, the generation of income depended on the physical presence of assets and activities. This physical presence, or permanent establishment, [is] generally determined by which jurisdiction had the primary right to tax the income generated. Because of the growth of electronic commerce, new e-business models (including digital marketplaces, online catalogues, virtual communities, subscription based information services, online auctions, and portals) have emerged. Each allows taxpayers to conduct business and generate income in a country with little or no physical presence in that country. The separation of assets and activities from the source of the income represents a significant departure from historic business models. This change creates new tax planning challenges and opportunities.

The e-commerce tax debate gives rise to issues in relation to direct and indirect taxation. Basu states in this regard that “the main concern is how to enforce taxes in the digital environment and how to apply the traditional concepts of taxation to a new environment.”[32] He cites three kinds of problem: enforcement problems; application problems; and principle problems.

Basu suggests that the enforcement problems are those most urgently needing to be solved. The application problems also need their due share of attention. The problems concerning the fundamental principles and assumptions of tax law, Basu states, “have not been thoroughly analysed. In fact they are not recognised as problems.”[33]

The principle problems are more alarming than those of enforcement and application; however, they are often overshadowed by more superficial and readily apparent issues. Basu continues:[34]

This conservative approach may be justified from the point of view that one should not jump to conclusions. In the long run, however, it will not be tenable. The strain on traditional tax concepts will eventually result in the breakdown of the tax system. If we do not address the fundamental questions, but wait and see, we may wake up one day and find that the tax system has been so alienated from the economic and technological reality, that applying the rules is not just hard but downright impossible. The tax system will lose its legitimacy, which will benefit nobody. Such a breakdown could be avoided if the problems are recognised as problems and included in discussions among legislators.

The priority of businesses should be with markets, growth and profit and not conforming to tax law. Solutions need to balance the need to maintain the revenue yield without placing unrealistic compliance burdens on the taxpayer or collector. It is crucial for the online entrepreneur to be aware of and fully understand the application of the tax law. Without workable rules, there will be a stronger incentive, particularly for smaller businesses, to simply ignore the tax requirements. No tax is completely enforced and collected. There is always the competitive distortion caused by choosing to trade in the black economy.[35]

If a country desires a competitive taxation regime and an adequate level of services (both social and economic), then it needs a balanced taxation base to sustain it. The current trend worldwide is to level a greater proportion of tax revenue onto the indirect tax base and to reduce the burden on direct tax (that is, predominantly income tax (for individual, business and company tax)). Bird suggests: “An interesting irony of e-commerce, in fact, is that both consumption and income taxation seem to be equally threatened.”[36] Tax regimes must be examined so that where there is or should be a relationship with internet transactions, this is recorded (including, where possible, an estimate of the volume of transactions), studied and evaluated for adequacy and need of change.

The second article of this series, to be published in the next issue of Taxation Today , will summarise some of the New Zealand direct and indirect tax laws that apply to internet transactions, and some of the issues that currently arise in considering whether current taxation provisions adequately cover those transactions.