Back to Contents of Issue: February 2000

It's time to start factoring Net taxes into your global ebiz strategy

by Tom Spargo

The WTO meeting in Seattle once again brought to light a subject near and dear to the hearts of most Netizens -- e-com taxation. On the table: a continuation of the WTO's 1998 moratorium on taxing sales over the Internet. The US, Japan, and other OECD countries are pushing for an 18 to 24 month extension of the tariff ban, which US officials say has already been agreed to -- in principle. However, most analysts agree that even if such an accord is reached, taxation of global e-commerce is inevitable. US and Japan Net companies beware: The time is now to start factoring Net taxes into your global e-business strategy.

Despite the lobbying efforts of US companies such as AOL, Microsoft, and AT&T for a permanent Net-tax ban, many countries are starting to show signs of resistance. One major group at the WTO expected to oppose such an accord are the developing countries -- for whom tariffs on trade amount to a substantial revenue stream. India, for example, gets 18 percent of its income from tariffs. Analysts estimate that e-commerce outside the US could grow to as much as $3 trillion by 2005 -- a tempting target for any Net-enabled jurisdiction. Even EU countries admit they are not ready to abandon trade tariffs. One proposal being circulated in the EU is to impose a "bit tax" -- a tax on individual pieces of information. Under such a plan, companies would be required to register and pay fees to conduct business in a certain country. The EU may also seek to classify e-commerce as a service, which, under the WTO, leads to stricter cultural trade rules. France, for example, could then limit competition from non-French Internet portals, much as it does today with foreign films to protect its culture.

In the US, where a Net-tax ban is in place under the Internet Tax Freedom Act until 2001, there is a high expectation that tax-free Internet days are numbered. The nation's 30,000 tax jurisdictions have mounted powerful opposition, arguing that such a ban hinders their right to raise revenues. Other lobby groups have suggested that an Internet tax ban creates a tax inequity, putting the nation's poor at a disadvantage due to limited Internet access. The Act's creation of a 19-member advisory commission to advise Congress on how to tax the Internet further suggests that the Act is simply a temporary measure and that new taxes are on the way.

Japanese netrepreneurs are finding that they face the same wait-and-see attitude from the Japanese government. In May of last year, the US and Japan signed the US-Japan Joint State-ment on Electronic Commerce. The agreement declared Japan's desire to remain a tax-free e-commerce country and adopted a "stand-still" with regard to Internet taxation. At the WTO meeting, Japan demonstrated support of a 20-month continuation of the global moratorium on Inter-net taxation. Yet analysts expect that Japan, like most OECD countries, will support the moratorium -- but afterwards, all bets are off. Technology players in Japan such as Softbank, Sony, and NEC may work hard to preserve the stand-still, but they simply lack the lobbying clout to maintain it indefinitely.

E-businesses interested in doing business with or from Japan are probably not in danger of being taxed in the short term. Two years from now, however, the landscape will change completely and staying competitive will rest on such key questions as, "Where does your server reside?" or "Where is your Web host?" According to Net Accountants (, "Merely placing a server in a foreign country might lead to overseas tax being due, if that server is capable of processing orders and effecting delivery of goods or services." The good news is that many tax accountants are not waiting for a decision from the WTO. The Big Five accounting firms, for example, already have e-commerce tax experts in place to deal with future e-taxes.

One good way to begin preparing for e-taxation is to start comparing current sales and customs tax rates between Japan and other countries. After the WTO moratorium ends, Japan will be obliged to erect a set of Net taxes that are consistent with the current tax structure. Such consistency will be demanded by physical world businesses calling for protection from their virtual world rivals.

Tom Spargo is president of (, a San Francisco-based venture that assists e-businesses with globalization.

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