Recommendation 7.7: the UK shouldcontinue to seek internationalagreement on the application of the“permanent establishment” principleto Web sites by March 2000.Recommendation 7.8: the UK shouldcontinue to play a leading role inOECD work to review the applicationof transfer pricing rules to e-commerce and to develop rules forattributing income to permanentestablishments.Recommendation 7.9: the UK shouldidentify effective mechanisms forVAT collection in respect of consumerpurchases of on-line items fromoutside the EURecommendation 7.10: the taxauthorities need to remain vigilantin ensuring e-commerce does notlead to increased tax evasion andavoidance.Simplifying and thencommunicating the tax rulesfor e-commerce to businessRecommendation 7.11: the UK shouldwork with the EU, the WorldCustoms Organisation and otherinternational bodies to improve andstreamline procedures for thecollection of VAT and customs dutieson small consignments of imports.Recommendation 7.12: the InlandRevenue and Customs and Exciseshould publish improved guidancefor e-businesses, targeted at smalland medium sized enterprises,explaining their tax obligationsand how the tax system will treatcross-border transactions.International coherence andagreementRecommendation 7.13: the UK shouldcontinue to play a leading role in theOECD and in other internationalorganisations to achieve aninternationally agreedimplementation of the frameworkfor the taxation of e-commerceagreed at the 1998 OttawaMinisterial conference.Recommendation 7.14: the UK shouldseek an international examination ofthe implications of e-commercebetting and gaming for the tax yieldfrom this sector.Regulation:Recommendation 7.15: theimplications of the convergence oftelecommunications, broadcastingand information technologies forregulatory regimes and institutionsshould continue to be kept underreview by the DTI and DCMS.Recommendation 7.16: regulatoryregimes affecting other sectors ofthe economy need to be reviewedand reformed by the relevantdepartment responsible for eachsector to ensure they remain relevantto the changes in industrial andmarket structure and new businessopportunities brought about bye-commerce.Recommendation 7.17: the UK shouldpromote a co-ordinated and joinedupapproach to e-commerce acrossEurope and globally.Recommendation 7.18: the UK shouldcontinue to push for e-commerce tobe fully integrated within theframework of international trade.Background anddefinitions7.4 To exploit the opportunities and meetthe challenges offered by e-commerce, theUK needs a competitive and innovativeenvironment and to be part of aninternationally agreed tax and regulatoryenvironment.A competitive andinnovative environment7.5 A competitive and innovativeenvironment is defined in this report asan economic and social environmentcharacterised by:a stable macroeconomic frameworkdelivering sustained non-inflationarygrowth;E-<strong>commerce@its</strong>.<strong>best</strong>.<strong>uk</strong>31
E-<strong>commerce@its</strong>.<strong>best</strong>.<strong>uk</strong>an enterprise culture that encouragesentrepreneurship;a tax system that rewards enterprise andrisk-taking;efficient capital markets providing venturecapital and other funding for e-businesses;a flexible labour force with up-to-dateskills; andcompetitive markets that encourageinnovation and the adoption ofinternational <strong>best</strong> practice.7.6 These requirements are being addressedby the Government’s wider economic andindustrial policies and go beyond the scopeof this report. However, there are a numberof issues of particular relevance toe-commerce where the team believeschanges are necessary. Consistent with thethemes of the Competitiveness White Paper, 1these fall under the headings of:competition: early action is needed toidentify and tackle any emerging barriersto competition in electronic markets;collaboration: the need to make sure thereare no planning or other barriers to theemergence of clusters of e-commercebusinesses; andcapabilities: the need for industry-ledmentoring to raise the management skillsof start-up Internet businesses and forchanges to the employers’ nationalinsurance treatment of share options toensure they don’t drive start-up hightechnology businesses offshore.An internationallyagreed tax andregulatory environment7.7 E-commerce poses a number ofchallenges for tax policy and administration:updating the tax regime so it is relevant toa world of electronic as well as physicalmarkets. In the case of indirect taxes, suchas VAT, this means having internationallyagreed rules about, for example, the placeof taxation of products deliveredelectronically. In the case of direct taxes,it means having internationally agreedrules defining, for example, the taxjurisdiction in which income or profit hasbeen earned where the underlying activityconsists of services delivered on-line;designing a tax regime for e-commerce thatminimises losses of tax revenues whetherbecause transactions are more difficult totrace, particularly where the good orservice is delivered as well as orderedelectronically, or because it is difficult todetermine the country in which income orprofit has been earned and thus to assesswhich country should get the tax.ensuring tax rules do not act as a barrier toe-commerce and that their application toe-commerce is clear and understood bytaxpayers. The growth of e-commerce notonly requires an internationally agreed andenforceable tax regime but a regime thatcan be readily understood by taxpayers.7.8 There are three main requirements foraddressing the above challenges:a clear set of principles to underpin thetaxation of e-commerce;international agreement to theimplementation of those principles.Without international co-operation andagreement there is a risk of individualcountries taking unilateral action whichcould lead to double taxation orunintentional non-taxation. The resultingcompliance costs could damageinternational trade and UK business inparticular. This implies the UK should beplaying a leading role in securinginternational agreement. The keyinternational organisations are the OECDand, for VAT, the EU; andputting in place new arrangements forcollecting and enforcing taxes that keeppace with the change in technology.7.9 The principles the UK Government isapplying to the taxation of e-commerce 2 areshown in box 7.1. These principles are inaccord with principles agreed by Ministersfrom all OECD countries in Ottawa last year.7.10 Moving from taxation to regulation,chapter five made the case for co-regulationas the over-arching principle for theregulation of e-commerce. In a range ofother areas, e-commerce is already subject tothe existing body of legislation, such as thaton the sale of goods and services, advertisingand other consumer law. This contributes toconfidence in the market, but action must be1“Our Competitive Future Building the Knowledge Driven Economy”, Cm 4176, December 19982Set out in “Electronic Commerce: UK Taxation Policies”, Joint Policy Paper, Inland Revenue and H.M. Customs and Excise,6th October 199832