Whereas Europe and United States were the main beneficiaries of the industrial revolution, there are clear indications that India along with United States and China would be the major beneficiaries of the EC Revolution. The huge pool of technological manpower is at the basis of this indication.

The development of EC modifies the way of doing business. For centuries, traditional business around the world has been based on two concepts:-
1. Physical presence; and 2. Physical delivery of goods and services.

Today physical presence is no longer necessary to perform activities (i.e., commercial transactions are no longer defined by geographical boundaries) and physical transactions are replaced by bytes of data. Since EC can be conducted virtually instantaneously around the globe and around the clock, the question where the profits should be taxed becomes crucial. Taxing the Internet is a topic that makes global headlines, everyday. The lure of setting out national tariffs for every byte of data that follows and taxing every product traded hopes to herald a new economy for the taxman. Most governments are alarmed at the extreme growth of the internet, and they should be, as the Net is the largest free information system the world has ever seen.

The task of taxing commerce on the Net is daunting, since the data flowing through the vast annals of the Internet is intangible and the network on which it is built is spread over the space of the Earth. The peculiarity of Net stems from the kind of “traffic” that flows through it- World Wide Web (WWW) pages, e-mail, internet relay chat, video conferencing, internet telephony, streaming audio and video file transfer and so on— and each of this data is just a meaningless string of zeros and ones.

The Need To Tax
The development of EC has revolutionized the way business operates. It has also challenged the adequacy and fundamental validity of principles of international taxation such as physical presence, place of establishment etc. that has formed the basis of asserting tax liability.

Business conducted through the internet caters to globally located customers. This raises cross border legal issues. Transactions that may be legal and valid in one jurisdiction may not be enforceable in others. Creation of wealth through cyber space would also entail the use of “offshore” financial institutions to store this wealth. This would constitute an elaborate and often untraceable form of tax avoidance. This is not only a threat to national sovereignty but also overrides traditional principles of taxation- a transgression of traditional notion of political and monetary autonomy. As wealth is generated through the means of cyber space, accounting mechanisms and monetary control would become difficult. Taxes on cyberspace would be one method of getting some amount of monetary control.

The allocation of taxing rights must be based on mutually agreed principles and a common man understanding of how these principles should be applied. In addition to the need for consensus between governments and business, a need for co-operation between them has also been identified.

Aspects Of Internet Electronic Commerce Relevant For Tax Policy Makers
Changes in the business practice due to the advent of the EC will affect taxation in the following ways: -

(i) Lack of any user control to the location of activity: As the physical location of an activity becomes less important, it becomes more difficult to determine where an activity is carried out and hence the source of income.

(ii) No means of identification of users: In general, proof of identity requirements for Internet use is very weak. The pieces of an internet address (or domain name) only indicate who is responsible for maintaining that name. It has no relationship with the computer or user corresponding to that address or even where the machine is located.

(iii) Reduced use of information reporting and withholding institutions: Traditionally taxing statutes have imposed reporting and withholding requirements on financial institutions that are easy to identity. In contrast, one of the greatest commercial advantages of EC is that it often eliminates the need for intermediary institutions. The potential loss of these intermediary functions poses a problem for the tax administration.

Some of the fundamental tax related issues raised by the evolution of EC transactions may be summarized as follows: -
* Whether international trading by an enterprise through EC will result in the enterprise creating a taxable PE in other countries in which customers are located?
* Is there a need to create new definition and meaning of permanent establishment (Hereinafter referred to as “PE”)?
* Is there a need to change the basis of taxation (for example, residence based taxation)?
* While considering taxation of EC transactions, should principles of tax neutrality be adhered to?
* If it is determined that an enterprise does have a PE in another country, another important issue than arises: How to attribute profits to PE?

EC also gives rise to new issues concerning the characterization of payments under the double tax treaties. Moreover, though EC does not give rise to any fundamentally new issues relating to transfer pricing, there may be some difficulties in applying traditional transaction methods, establishing comparability, deciding the tax treatment of integrated businesses and complying with documentation and information reporting requirements. Unless these issues are addressed, an erosion of the tax base may result, especially for developing and under developed countries.

International Taxation – Treaty Law Regime
Fundamental Principles: A taxpayer is generally taxed on its worldwide income in the country of its residence (residence based taxation). In the case of a company, this is usually the place where the company is incorporated, registered, or has its place of central management and control.

The company may also be taxed in another country if it has a recognized source of income there (source based taxation). Generally tax treaties restrict the use of domestic source rules by requiring a minimum nexus to allow taxation in that jurisdiction. Thus, taxation of business income on the basis of the source rule requires the presence, in the country of source, of a PE of the enterprise sought to be taxed.

Where the income or capital is taxed in the country of source, the country of residence has the obligation to give relief from double taxation. Such relief is granted either by exempting such income from taxation in the country of residence or by giving credit for taxes paid in the country of source.

Permanent Establishment: Under the tax treaties based on OECD Tax Convention, an enterprise providing services abroad is taxable in the country where it conducts business only if it has PE there. For most tax treaty purposes, a ‘PE’ is a “fixed place of business through which an enterprise carries on business. A PE presupposes ‘a fixed place of business’ (the basic rule of PE) which may include premises, facilities or installations . The characteristic ‘fixed’ demands a specific fixed long-term connection between the place of business and a specific part of the earth’s surface.

Secondly, if the services provided are the part of a construction or installation project that lasts for more than a particular period of time, a PE may be constituted under article 5(3), i.e., construction PE.

The third element of PE is article 5(5) and (6) under which an ‘Agency PE’ may be constituted. This is the case if a provider of services in a country has a dependant agent there who involves his principal in business by regularly concluding contracts on behalf of the principal. Typically, however, tax treaties exclude from the definition of a fixed place of business any offices and facilities that are used merely for promotional activities or for the storage, display or delivery of goods and facilities.

Background To E-Commerce
Electronic commerce is a broad concept that covers any commercial transaction that is effected via electronic means and would include such means as facsimile, telex, EDI, Internet and telephone. For the purposes of this report the term is limited to those trade and commercial transactions involving computer-to-computer communications whether utilising an open or closed network.

In addition it has also been said that:
Electronic commerce could be said to comprise commercial transactions, whether between private individuals or commercial entities, which take place in or over electronic networks. The matters dealt with in the transactions could be intangibles, data products or tangible goods. The only important factor is that the communication transactions take place over an electronic medium

With the rapid growth of the Internet, the process by which EC is conducted has magnified. An understanding as to the mechanisms involved in the operation of the Internet is necessary. All machines connected to a Network are generally identified by their Internet Protocol (IP) numbers. Devices communicate with each other through this IP number system, acting much like two conventional telephones. Further, specific IP numbers denoting a computer is given a domain name. The communication takes place in the form of packets which can traverse through several networks before reaching their destinations. Data packets are of specific size and if their content exceeds this size, it is split up and transmitted. The data portion of the packet can be encrypted for better security.

The Constraints
International tax issues in the area of e-commerce are manifold and include nexus of the vendor and tax enforcement agencies. Taxing authorities may have great difficulty collecting revenue form vendors conducting commerce through foreign Internet addresses. The foremost problem associated with Internet based commerce is fixing the place of transaction. The place where a web-server is located, the place where the user initializes the transaction and the server where payment is collected may be different. Electronic transfer of funds heightens the risk of money being sent to tax havens. Further, many jurisdictions rely on the taxpayer to voluntarily identify himself, herself or itself as falling within its tax system. Tax authorities may not be able to effectively enforce their rights to collect tax in such an environment, especially if a business does not consider itself to be within a tax jurisdiction and simply choose not to disclose its activities to the relevant authority.

Underlying any discussions as to whether a website, server, telecommunication equipment, local access numbers, etc. constitute a permanent establishment or not is the source or residency based taxation.

Not surprisingly, certain technology exporting countries are in favour of a move away from a source-based tax. The United States made a clear statement to this effect in the treasury paper. Treasury maintains that it is difficult to apply traditional concepts of source to link an electronic transaction with a particular country. This view has been re-affirmed by the USD and supported by Japan at the G8 meetings in Birmigham.

Importing countries will not necessarily take the same view and here is a danger that in the absence of clear guidelines that are universally accepted we will find some jurisdictions ‘straining’ the traditional concept of permanent establishment to catch electronic trade and preserve local taxing rights or (and potentially more alarming) seeking to apply ‘royalty’ treatment especially where treaties allow for a withholding tax on gross receipts.

Permanent Establishments
Where a foreign enterprise is considered to be carrying on business in a particular country, it will generally be subject to tax in that country on that source of business income. However, it may be exempted from tax on the business income in the particular country if certain provisions are in a bilateral tax treaty. Tax treaties will generally restrict the ability of a country to tax a non-resident on its business income sourced to that country unless the income is attributable to a “permanent establishment” in that country. Thus, a foreign corporation that is resident in a country with which its home country has a double tax treaty is liable for tax in the former only if it has a permanent establishment there.

OECD definition of a permanent establishment
Business profits are taxable in the State of the residence of the enterprise even if the business is carried on in the State of source, unless they are attributable to a permanent establishment is generally defined as ‘a fixed place of business through which the affairs of an enterprise are carried on’ .
This definition contains the following conditions:-
* The existence of a ‘place of business’, i.e., a facility such as premises or, in certain cases, machinery or equipment;
* The place must be fixed, i.e., it must be established at a distinct place with a certain degree of permanence;
* The carrying on of the business of the enterprise through this fixed place of business.

The conduct of a business usually implies that certain persons run the enterprise’s affairs from the fixed place. However, the OECD comments concerning automatic equipment make it clear that it is not necessary for personnel or any other human being to be present performing particular activities in order for there to be a PE.

A PE will also be deemed to exist ‘where a person other than an agent of an independent status is acting on behalf of the enterprise and has, and habitually exercises an authority to conclude contracts in the name of the enterprise .
Most treaties list a number of business activities which are not considered as PE. The common feature of these activities is that they are, in general, preparatory or auxiliary in nature.

What constitutes PE for the purposes of electronic commerce?
EC may pose problems for the definition of permanent establishments that existing tax treaties do not address. While as yet unforeseen questions are bound to arise, the current debate over what constitutes PE can be broadly summarized in the following questions:
* Whether a mere accessibility of a website from within a particular jurisdiction subjects the site-owners to income tax in that jurisdiction?
* Whether the presence of a server would constitute a PE?
* Whether a consumer’s computer constitutes a PE?
*  Whether the provision of services by an Internet Service Provider (ISP) would constitute a PE?
Treaty negotiators will have to examine these questions to see how treaty concepts can be applied to new ways of doing business.

A web – Site
The most obvious question concusses the ability to access a website from within a particular taxing jurisdiction. In OECD countries, a mere existence of technical equipment is insufficient for creating a PE. Article 7 of the OECD Model Treaty provides that an enterprise of a contracting state is generally exempt from tax on its profits derived from business carried on in the other contracting state unless these profits are attributable to a PE located in that other contracting State. Article 5 defines a PE. The Model Treaty also lists business premises which constitute PE and if we were to characterize these examples, it is likely that we would conclude that a physical presence of some permanence is common to all. Does a website or home page have a physical presence of some permanence?

A website has no actual physical presence, but rather is highly mobile, borrowing only the presence of the server where it happens to reside at the moment. No employees need be present in the country to maintain the site. To the extent that advertising and ordering functions are perforated, the website is analogous to mail order catalogue or a television advertisement, infomercial or home shopping channel. Mere solicitation, without more, does not create a PE under existing principles, and it should not, when effectuated through EC. To the extent that a customer can view stack or data, the website is analogous to a location being maintained solely for the purposes of storage, display or delivery.
Moreover under existing principles, electronic content that resides on a server only temporarily should not be a PE. For example, the construction rules reflect this concept of duration and require the presence of project activities, including he presence of a workforce, in-country for twelve consecutive months .

So does the fact that consumers can place orders through a foreign firm’s website subject that firm to income taxes in the country where the customer lives? The answer to that question, in my opinion, is certainly “no”. To say that the ability to access a website, without some other more substantial contact, is sufficient to constitute a PE is to say that online businesses are liable for income taxes in every country where their customers happen to reside. A website cannot be considered as a PE and such a principle is also virtually unenforceable.

It would be more useful to tie the presence of a homepage to some physical equipment, namely its host computer. And that takes us to the second debate, namely whether a serer constitutes a PE.

Servers
A second, more complex, question arises regarding the location of computer file servers: should the mere presence of a server in a particular taxing jurisdiction be considered sufficient contact to constitute a PE? In most cases, the existence of a foreign owned server does not require employees to be present in the host country – traditionally a prerequisite for PE. This issue can be analyzed under four sets of circumstances:
* Where a server is used merely for advertising.
* Where the server is used for advertising and taking orders.
* Where the server is used for advertising taking orders and accepting payment; and
* Where the server is used for advertising, taking orders and accepting payments and for digitized delivery of goods.

In the first case, a server will not be held to be a PE. Exception 5(4)(a) of the OECD MC will be attracted in this case where the use of a facility solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise will not amount t the existence of a PE. It could also be exempt under Article 5(4)(c) of the OECD MC, which exempts the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any activity of a preparatory or auxiliary character from the ambit of PE. In the second and third case, it may possibly be held that the server is a PE. In the last case, there is an even stronger cause to hold the server to be a PE. However, an attempt to tax the server as PE will not serve any purpose as it is very easy to shift the server to a tax haven or to a low tax country. Further, difficulty will arise where a number of mirror websites on different servers located in different countries are used so that a customer can be directed to any one of these sites. Yahoo, for example, uses a number of mirror sites so that the users can have better access to its very heavily visited site.

The User’s Computer As Pe
A view could be taken that the location of a computer who initiates the contract from his computer would constitute a PE for the non-resident. However, that place is only a location from which one logs on and is unlikely to be fixed. For example, a customer may access a web site through a mobile computer. This may even be outside the country.
Thus, the question of whether by simply accessing a website, a computer transforms itself into a PE of the owner of the website, is unlikely to be answered in the affirmative. It would lead to a situation where everyone with a web page would have a PE in every country. Further, the question of enforcement would remain unanswered.

Can The Services Of An Isp Constitute A Pe?
Agency issues may also be clarified as they relate to the conduct of e-commerce. For example, some national governments will likely argue that a domestic ISP, by connecting consumers to a foreign business’s website, acts as an agent for the purposes of determining the existence of PE.

The ISP merely acts an intermediary between a non-resident seller and the customers in the source country. Therefore, the ISP will not qualify as the agent of the non-resident seller. Since the ISP acts on behalf of several website owners, even if it is treated as an agent, it would be an independent agent. Therefore, it will not constitute a PE. Even if it acts for only one website owner, it does not have the authority to conclude contracts on behalf of the website owner, which is an essential pre-requisite before it can be considered to be the owner’s PE.

Conclusion
The phenomenal rate of the Internet will force us redefine our concepts of the world and recreate the rules and regulations that apply it. Because conducting business through EC is fast becoming the norm of the day, the rate of knots at which the international institutions and families of nations are evolving strategies to catch up with the challenges posed by EC is too slow.

The existing canons of income tax based on source rules seem to be getting outdated. There is an immediate need for international institutions, such as OECD and International Fiscal Association, to evolve more equitable tenets for cross-border EC transactions so that there can be more equitable distribution of tax revenues among nations. Countries that are feeling an erosion of the taxes shouldn’t be forced to adopt desperate measures that may be short term and hence, likely to adversely affect the growth EC economy.

EC has rendered geological precincts redundant and converted the world into a global community. Procedural and administrative hurdles must not interrupt the development of EC. Of particular importance is the avoidance of dissonance among nations on sharing the proceeds of taxation of EC transactions. Nations must make a coordinated effort to evolve principles of taxation of these activities through a body comprising of representatives of all nations.
This is the challenge for the future.