This guide looks at taxation and tariffs, including internet
The government's share of online payment for goods and
services is a major question for electronic commerce.
Should you pay taxes for purchases and other transactions
on the web? Is the internet a GST-free zone? Will a 'byte'
tax be introduced? Can you evade tax by beaming your money
to the Cayman Islands or using a private digital currency?
What is the most appropriate way to tax global enterprises?
Does the 'new economy' require new taxes or a need to
redesign old ones?
in this guide
following pages cover -
- government, industry and academic studies of what,
where and how to tax
tax - taxing data, not the value of transactions,
and other mechanisms for extracting revenue from the
- Australian legislation, reports and industry studies
about online payments, contracts and other matters
- global frameworks
- overseas developments
- a discussion of key terms and concepts in taxation
- personal income taxation
- taxation of commercial and other entities in the global
VAT - consumption taxation
schemes, including Australia's GST
- taxes on production
- electronic filing, payment and monitoring
- offshore financial centres and other havens
landmarks - major
inflection points in the development of offline and
internet taxation regimes
you want expert tax advice we strongly recommend that
you consult accountants and lawyers.
state, community and revenue
Taxation of income, assets and transactions is an
integral feature of contemporary advanced societies. It
is predicated on a consensus that the individuals and
organisations form part of a community, receive benefits
from and in turn owe obligations to a particular nation
government business operations over the past 20 years,
highlighted elsewhere on this site, has deprived governments
of source of funds and - with the salient exception of
the US - large-scale borrowing to fund expenditure has
become increasingly untenable in an era where currencies
float freely. Taxation-based revenue has thus become more
important without becoming more popular.
Ubiquitous taxation of income in many countries is little
more than a century old. However, since at least the time
of Hobbes there has been an expectation that the state
will appropriately demand financial contributions from
the community as the foundation for public services such
as defence and administration of justice. Changing visions
of the state - and of the community - have been reflected
in differing views of the role of taxation rather than
just an expansion of how government revenue is allocated.
Government expenditure necessarily embodies a political
program and community perceptions of the roles, rights
and responsibilities of a range of stakeholders.
Taxation has thus come to be recognised as a mechanism
pervasive 'social intervention' through the provision
of health, education and other services
to stimulate or reduce private consumption and investment
community values (eg in Australia a bias towards investment
in housing rather than in risk
capital and commercial innovation)
market volatility, in
line with attempts at macro-economic management
social equity through redistribution from wealthier
to poorer members of the community
iterative, with ongoing amendment of legislation (and
the appearance and eventual demise of specific taxes)
rather than comprehensive reform.
of the contemporary tax system in Europe, Canada, New
Zealand and Australia has been inextricably entwined with
the emergence of the modern territorial state, politics
and economic development. Expansion of government responsibilities
- whether through nation building initiatives such as
rail and telecommunication
infrastructure or underpinning the social compact - resulted
in financial demands that fostered a shift to general
direct and indirect taxation, in particular -
personal income, often on a progressive basis (ie higher
rates for those on higher incomes, a delight to tax
officials as inflation floated taxpayers into higher
brackets) and using pay-as-you-earn (PAYE) arrangements
corporate income and
or goods-&-services taxation, ie indirect taxation.
- la taxe sur la valeur ajoutée - was introduced
in France in 1954, with adoption by the European Union
in 1967 and other parts of the globe thereafter. PAYE
had been introduced in Australia in 1944.
Although the Civil War resulted in a significant growth
of US federal financial powers, a stable constitutional
basis for federal income tax dates from as late as 1913.
Most federal revenue prior to that time related to excise
and asset sales. Despite a rhetoric of antifiscalism,
US involvement in the 1914-18 War, 1939-45 War, Cold War
and 1930s Depression drove development of a progressive
and redistributive tax regime that increasingly converged
with that of the major European states.
In Australia - discussed in more detail below - federation
was followed by an expansion of federal revenue powers
(notably through a monopoly on income tax from the mid-1940s
onwards) that enabled the national government to operate
with state agreement outside the narrow bounds of the
At an international level efforts to minimise regulatory
arbitrage and tp address concerns about double taxation
and barriers date from before last century, with for example
the 1860s German Zollverein a distant precursor of contemporary
developments such as NAFTA and the US-Australia FTA.
Initial efforts at a global tax regime were similar to
those regarding intellectual property, with a patchwork
of bilateral treaties.
In 1921 a report for the League of Nations unsurprisingly
concluded that double taxation inhibited "economic
intercourse and the free flow of capital", preventing
"equitable distribution of burdens among taxpayers".
The League's model treaties regarding cross-border transactions
and income were reflected in the 1963 OECD Model Income
Tax Convention that has underpinned most substantive discussion
about global agreements.
tensions in a globalising economy
Traditional taxation regimes came under pressure from
several directions during the final quarter of last century.
One was the neoconservative zeitgeist, marked by privatisation
or closure of many state enterprises, deregulation of
markets and the 'middle class tax revolt' that saw demands
for significant reduction of both tax rates and compliance
Critics characterised tax policy as a dance of the zombies
- clever legal and accounting people exploiting loopholes
which are then fixed by tax authorities in a way that
results in new areas for interpretation and exploitation,
a regime of bewildering complexity in which the bold,
skilled or merely lucky had scope to evade social burdens.
That characterisation fuelled calls for nostrums such
as a simple flat tax (accompanied by significant reduction
of expenditure other than on sacred cows such as national
security) or a move away from personal and corporate income
tax to consumption tax schemes. However, tax revenue from
personal and corporate income taxes rose strongly in most
OECD countries during the late 1990s. As of 1997 the OECD
average ratio of total tax revenue to GDP was 37.0%. The
share in GDP of taxes on specific goods and services (such
as taxes on tobacco, alcohol and fuel) fell to an OECD
average of 4.1% in 1998, reflecting increased reliance
on use of general sales taxes.
A second pressure was ongoing globalisation, with an interaction
(and competition) between national tax systems.
Globalisation saw removal of barriers to the flow of goods/services
and capital across borders. It also saw acceleration of
the movement to multinational markets and enterprises.
National revenue regimes for most of last century were
predicated on highly regulated capital markets, exchange
controls, little large-scale B2C activity across borders
and operation of enterprises within a particular jurisdiction
(meaning that it was usually possible to identify an enterprise's
performance and harvest the corresponding revenue).
As the OECD
notes, while corporations globalise amid market liberalisation,
tax authorities have largely remained constrained by national
frontiers and susceptible to phenomena such as transfer
pricing and exploitation of corporate tax havens (particularly
by enterprises operating across several jurisdictions).
It has been suggested that governments can respond to
globalisation by retreating behind national frontiers
(with an 'isolationist' stance on global tax issues),
seek harmonisation of the international tax system (at
its most ambitious through a US-based tax code administrated
by a global tax authority) or instead extend existing
cooperation about information sharing.
Global capital flows mean that even the US cannot ignore
the international concerns about fiscal reforms. Moves
towards harmonisation, as highlighted later in this guide,
have been inhibited by disagreements about the shape of
a global system and its benefits. Contrary to fashionable
chatter about the death of the state, national governments
have not acknowledged a need for or indeed ability to
surrender tax responsibilities.
Administration of those responsibilities - what one OECD
writer articulated as "the right to tax in a way
that best suits the political realities, economic needs
and social and cultural values within each country"
- is indeed one definition of a national government.
International discussions since the 1963 OECD Model Income
Tax Convention in 1963 have essentially sought to accommodate
two approaches in dealing with cross-border income. Various
bilateral agreements embody a 'residence principle' (ie
each nation has the right to tax income of entities that
reside within its borders) and - more contentiously, given
the potential for double taxation and disputes about extraterritoriality
- an acceptance that states can tax income arising from
sources in that state, irrespective of whether participants
in the transaction are residents).
The current global regime is aspirational rather than
tightly prescriptive. In principle there is no requirement
that states implement OECD guidelines, no global enforcement
of state behavior - although major states such as the
US have been persuasive in dealing with 'renegades' such
as the Cayman Islands - and no global mechanism such as
the WTO for resolving international disputes.
The OECD has suggested that states can tax income on a
source and residence basis, addressing concerns about
double taxation through credits for taxes paid to other
governments. It has also suggested that residency may
be deemed as that to which the organisation or individual
has the strongest "personal and economic links",
with nonresidents taxed on the basis of any "permanent
establishment" (eg a branch or facility) in the taxing
Perhaps more importantly, the OECD has encouraged information
sharing about taxation policies/techniques and about taxpayers.
A third pressure was the emergence of the 'information'
economy, with ICT providing
mechanisms for both revenue collectors and the tax-averse.
taxation in the information economy
All tax regimes have grappled with problems of information,
in particular the difficulty of identifying tax liabilities
and securing payments without inappropriate administrative
costs or impacts on society as a whole.
Early tax schemes centred on identification of fixed assets
such as land and buildings (eg the English tax on windows,
a precursor of contemporary bed or toilet taxes in some
Australian states) and a handful of commodities, particularly
high value commodities - such as tea or silver - that
passed through choke points such as customs posts. Governments
lacked the resources - and, as importantly, the legitimacy
- to comprehensively track income and consumption in a
largely paperless society.
That changed with the adoption of new technologies and
business models over the past two hundred years. Participants
in the economy were increasingly coopted into collection
(and verification) of information about earnings and expenditure
as part of processes highlighted by Chandler,
Coase and Weber. It
is difficult to envisage the contemporary state without
tools such as personal bank accounts, insurance policies,
a comprehensive government census and corporate reporting
to capital markets.
At the global level the current regime is primarily concerned
with direct taxation - because of its national importance
and cross-border impact - and has largely ignored questions
about indirect taxes. That may change.
Roland Paris has suggested that international e-commerce
qualitatively new form of commerce that defies many
of the assumptions upon which existing tax systems are
based, including the notion that transactions can be
located in physical space
that will foster international coordination of tax policy
because states will not allow international digital commerce
to escape taxation and cannot effectively tax it unless
there is close cooperation with other states.
Prior to Federation most tax revenue for Australian colonial
governments came from customs duties and excises - which
accounted for around 75% of all revenue. The colonies
imposed a variety of other taxes, including stamp duty,
livestock taxes, land taxes (eg Victoria's Land Tax
Act 1877, aimed at generating revenue and breaking
up large pastoral holdings), taxes on the income of high
earners and on the property of deceased persons (first
introduced in NSW in 1851).
In 1901, as noted
in a supplementary profile, the Constitution gave the
new national government a monopoly of customs duties and
excises, with the power to levy other taxes concurrently
with the states. All states had established income taxation
by 1907 (which by 1914 accounted for 78% of Australian
tax revenue) and there were recurrent attempts to establish
sales taxes, rejected by the High Court as excises.
Demands on the new government saw introduction of new
taxes. A federal land tax was introduced in 1910, ostensibly
to fund the national old age pension promised at Federation,
federal income taxes on individuals and enterprises were
introduced in 1915 to offset the decline in customs revenue
during the 1914-18 War, the Entertainments Tax Act
1916 dealt with theatres and federal sales taxes
appeared in 1930 following the slump in customs revenue
during the Great Depression. The Pay-roll Tax Act
1941 was introduced to fund the new federal child
In 1942 federal legislation envisaged that the states
would cease to levy income tax during the war, being compensated
with a share of Commonwealth revenue. The High Court ruled
that the legislation was valid and the Commonwealth unsurprisingly
chose to extend the uniform income tax scheme after 1946.
States were free to impose their own income taxes on top
of the federal tax but would not receive compensation
if they did so.
That was of crucial importance as federal income tax rates
inhibited states from raising sufficient offsetting revenue
and because the 1927 intergovernmental financial agreement,
reflected in amendment of the Constitution and creation
of the Australian Loan Council, restricted state borrowing.
As in other advanced economies, income tax proved to be
a river of gold, allowing the federal government to abandon
Commonwealth land taxes in 1952 and death and gift duties
in the 1970s. It retained a number of specific excises.
State governments have necessarily relied on Commonwealth
general and specific-purpose grants (ie a share of federal
revenue), supplemented by taxes specific to each jurisdiction.
Those taxes include stamp duties, payroll taxes, motor
vehicle taxes and gambling levies; land taxes and municipal
rates remain a primary source of revenue for provision
of local government services.
Use of large-scale specific-purpose grants (eg for infrastructure
development, health and education programs) has ensured
federal involvement in matters for which the states have
formally responsibility under the Constitution. Federalism
has come to be characterised as a dichotomy: the national
government taxes, the states spend (using money provided
by Canberra and often allocated within a national framework).
By the mid-1980s the federal government collected over
80% of all tax revenue, with the states accounting for
about 15% and local government for 4%. In 2000 the federal
government introduced a national Goods & Services
tax (GST), a broad consumption tax similar to value added
tax (VAT) schemes found overseas and replacing a wholesale
The GST - a rate of 10% - was a belated response to recommendations
in the 1975 Commonwealth Taxation Review Committee report
and proposals at the 1985 National Tax Summit.
The GST is in addition to federal income tax collection.
The 1999 Intergovernmental Agreement on Principles for
the Reform of Commonwealth-State Financial Relations (IGA)
provides that each government receives a share of GST
revenue based on its population share adjusted by a relativity
factor reflecting per capita financial needs.
The IGA requires state governments to end or adjust a
range of taxes (eg cease bed taxes, debit taxes, financial
institutions duties and stamp duties on marketable securities.
The Commonwealth has not attempted to establish taxes
that are specific to the internet.
Commonwealth Government taxation revenue in 2000-01 totalled
$177,237 million, over 81% of total taxation revenue.
Aggregate state/territory and local government taxation
revenue totalled $40,002 million, some 18.4% of total
Income taxes continue to be the largest component of federal
taxation revenue (accounting for 67.2% of the Commonwealth's
total taxation revenue in 2001-02), with around $31,782
million from enterprises and $87,250 million from individuals.
Property taxes are the largest component of state/territory
and local government taxation revenue, accounting for
48.0% of their total tax take in 2001-02.
taxes accounted for $3,707 million (compared to $2,836
million on insurance and $4,291 million on vehicles).
State stamp duty and other capital transfer taxes amounted
to $9,672 million. Federal crude oil & liquid petroleum
gas levies amounted to $12,793 million.
An historical overview is provided by Carolyn Webber &
Aaron Wildavsky's A History of Taxation and Expenditure
in the Western World (New York: Simon & Schuster
1986). For an introduction to contemporary developments
see Public Spending in the 20th Century - A Global
Perspective (Cambridge: Cambridge Uni Press 2000)
edited by Vito Tanzi & Ludger Schuknecht, The
Tax System in Industrialized Countries (Oxford: Oxford
Uni Press 1998) edited by Ken Messere and Taxation
and democracy: Swedish, British & American approaches
to financing the modern state (New Haven: Yale Uni
Press 1993) by Sven Steinmo.
For the UK see in particular Martin Daunton's excellent
Trusting Leviathan: The Politics of Taxation in Britain,
1799-1914 (Cambridge: Cambridge Uni Press 2001) and
Just Taxes: The Politics of Taxation in Britain, 1914-1979
(Cambridge: Cambridge Uni Press 2003) and Richard
Whiting's The Labour Party and Taxation: Party Identity
and Political Purpose in Twentieth-Century Britain
(Cambridge: Cambridge Uni Press 2001). For earlier periods
see Braddick's The Nerves of State: Taxation and the
Financing of the English State, 1558-1714 (Manchester:
Manchester Uni Press 1996) and Basil Sabine's A History
of Income Tax (London: Allen & Unwin 1966).
There is a more uneven coverage of the US in The Federal
Taxation in America: A Short History (Cambridge:
Cambridge Uni Press 1996) and Funding the Modern American
State, 1941-1995 (Cambridge: Cambridge Uni Press
1996), both edited by W. Elliot Brownlee, and The
Great Tax Wars: From Lincoln to TR to Wilson: How the
Income Tax Transformed America (New York: Simon &
Schuster 2003) by Steven Weismann. Charles Adams' For
Good & Evil: The Impact of Taxes on the Course of
Civilization (Totowa: Rowman & Littlefield 2001)
offers a brisk but for us decidedly unconvincing libertarian
R. Rudy Higgens-Evenson's The Price of Progress: Public
Services, Taxation & the American Corporate State,
1877 to 1929: Reconfiguring American Political History
(Baltimore: Johns Hopkins Uni Press 2003), Richard Joseph's
Origins of the American Income Tax: The Revenue Act
of 1894 and Its Aftermath (Syracuse: Syracuse Uni
Press 2004), John Witte's The Politics and Development
of the Federal Income Tax (Madison: Uni of Wisconsin
Press 1985), Mark Leff's The Limits of Symbolic Reform:
The New Deal and Taxation, 1933-1939 (Cambridge:
Cambridge Uni Press 1984), Death By A Thousand Cuts:
The Fight Over Taxing Inherited Wealth ((Princeton:
Princeton Uni Press 2005) by Michael Graetz & Ian
Shapiro and James Grant's Money of the Mind: Borrowing
& Lending in America from the Civil War to Michael
Milken (New York: Farrar Straus Giroux 1992) question
For Australia see Julie Smith's Taxing Popularity:
The Story of Taxation in Australia (Canberra: Federalism
Research Centre, ANU 1993), The Long And Winding Road:
A Century Of Centralisation In Australian Tax (PDF)
by Rodney Fisher & Jacqueline McManus, Australian
Taxation & Ethics: Colonisation to Costellorisation
by Paul Kenny and Marian Sawer's The Ethical State:
Social Liberalism In Australia (Carlton South: Melbourne
University Press 2004). Specific taxes are discussed in
the 2001 History of fuel taxation in Australia
and Denis James's 1996 paper
Beer and Cigs Up!': A Recent History of Excise in
There is a persuasive study of social spending in Peter
Lindert's revisionist Growing Public: Social Spending
& Economic Growth Since the 18th Century (Cambridge:
Cambridge Uni Press 2004). Layna Mosley's Global Capital
& National Governments (Cambridge: Cambridge
Uni Press 2003) questions received wisdom about public
borrowing, taxation and global capital markets.
Debate about e-commerce and globalisation features in
Philipp Genschel's 2001 paper
Globalization, Tax Competition, and the Fiscal Viability
of the Welfare State and Roland Paris' 2003
The Globalization of Taxation? Electronic Commerce
and the Transformation of the State (PDF).
Multinationals and Transfer Pricing (London:
Croom Helm 1985) edited by Alan Rugman & Lorraine
Eden remains of value.
Insights about antecedents of the information economy
- or its latest manifestation - are provided by James
Beninger's Control Revolution: Technological &
Economic Origins of the Information Society (Cambridge:
Harvard Uni Press 1989), Alfred Chandler's The Visible
Hand: The Managerial Revolution in American Business (Cambridge:
Harvard Uni Press 1977), Margaret Levenstein's Accounting
for Growth: Information Systems and the Creation of the
Large Corporation (Stanford: Stanford Uni Press 1998)
and JoAnne Yates' Control Through Communication: The
Rise of System In American Management (Baltimore:
Johns Hopkins Uni Press 1993).
Tax systems in democracies are underpinned by a consensus
about equity and efficiency: who should pay and how revenue
should be collected.
In April 2004 the US federal General Accounting Office
reported that around 123 million people in the US filed
tax returns in 1999 and paid an aggregate US$1 trillion.
That was roughly half of all federal revenue, with the
remainder coming primarily from payroll, corporate and
The GAO's Tax Administration: Comparison of the Reported
Tax Liabilities of Foreign & US Controlled Corporations,
1996-2000 report indicates an average of six in ten
US corporations reported no tax liabilities on domestic
income for the five years from 1996 through 2000. 71%
of foreign corporations operating in the US reported no
tax liabilities for each of those years.
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