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What is E-commerce?

What is E-commerce?

E-commerce (Electronic commerce or EC) is the buying and selling of goods and services or transmitting funds or data over an electronic network, primarily the internet. These business transactions occur either business to business, business to consumer, consumer to consumer, or consumer to business.

This thesis is concerned with the impact of electronic commerce on international tax laws, specifically source-based taxation. Before looking specifically at the arguments and propositions to be advanced by the thesis, it is both instructive and necessary, to begin with, a discussion of what is meant by ‘electronic commerce’. Discussions relating to electronic commerce normally begin with a pronouncement that it represents a fundamental and revolutionary development in communications that is likely to dramatically change the way business is conducted. This is usually followed by highly variable, speculative, and often mind-numbing estimates of the expected growth of the Internet. In this regard, Doernberg et al have noted that providing figures to document the growth of the Internet and electronic commerce is simply stating the obvious – their summation that ‘[e]lectronic commerce is here; it is growing; and it poses new questions for all aspects of society’ is arguably all that can be usefully said regarding the present state of electronic commerce.

Much of the variance in the estimates of the predicted growth of the Internet and electronic commerce can be attributed to the lack of a universal definition of electronic commerce. Some definitions are very broad and seek to cover any commercial transaction that is effected via electronic means, including such means as facsimile, telex, electronic data interchange (EDI), the Internet, and the telephone. The Australian Taxation Office (ATO) on the other hand, has defined electronic commerce more narrowly as “the buying and selling of goods and services on the Internet.” For the purposes of this thesis, a more focused definition will be adopted whereby electronic commerce will be taken to mean commercial transactions involving the production, distribution, sale, and delivery of goods and services that are carried out over open networks like the Internet.

Though it is beyond the scope of this thesis to examine the history and operation of the Internet in detail, an examination of how electronic commerce may be conducted through the Internet is necessary in order to analyze the arguments that will be presented in relation to how electronic commerce may impact on existing international tax rules. A brief examination of how electronic commerce works will be presently undertaken, though a more detailed analysis of how electronic commerce operates will be deferred to applicable points of the analysis undertaken in subsequent chapters. 

Electronic commerce is conducted mainly through global computer networks. The architecture of the Internet, with its open, distributed network, a system of packet switching, and universal communications protocol have led to a worldwide network of networks, where the individuals and organizations that comprise it are independent of one another. There is no central, worldwide technical control point. Yet, by means of this system, a computer situated in one location can communicate with any other computer that is also connected to the network no matter where in the world it might be located, providing the illusion that all users are on the same network. Communication is made possible by the digitization of data, including text, sound, and visual images, which are then transmitted around the world via the Internet.

A popular way of conducting business on the Internet is through a website. Web sites are computer programs that reside on computers, known as servers, which are in turn connected to the Internet. These servers are commonly maintained by Internet Service Providers (ISPs) but this need not be the case as computer servers can sometimes be owned, operated, and maintained by businesses directly. They possess Internet Protocol (IP) numbers, which are somewhat like telephone numbers, identifying devices attached to the Internet. Every device connected to the Internet has an IP number that allows communications to occur with other devices connected to the Internet. This is achieved by one computer dialing the IP number of the device or computer sought to be contacted. Specialized protocols are available enabling secure communications to occur between clients and servers when, for example, online payments involving the transmission of credit card details are made by a customer.

Electronic commerce activity can be classified as either business-to-business or business-to-consumer electronic commerce. In business-to-business electronic commerce, businesses commonly use the Internet to integrate the value-added chain that can extend from the supplier of raw materials to the final consumer. Business-to-business electronic commerce dominates the total value of electronic commerce activity, accounting for about 80% at present, though more recent estimates place this figure at closer to 75%. The predominance of business-to-business electronic commerce partly reflects the fact that electronic links between businesses are not new and the advantages of businesses adopting electronic commerce are relatively obvious.

Although business-to-business electronic commerce represents the bulk of all electronic commerce, most attention has been directed on the business-to-consumer segment – that is, the retailing or ‘e-tailing’ segment as it has come to be known. And while much media attention has focused on online merchants selling books, wine, and computers, an increasing majority of products that are marketed electronically to consumers are intangibles such as travel and ticketing services, software, entertainment (on-line games, music, gambling), banking, insurance and brokerage services, information services, legal services, real estate services, and increased health-care, education and government services.

Generally, electronic commerce conducted through the Internet consists of three parties: the ISP, the trader, and the customer. The ISP will normally maintain a server located either in or outside the relevant country although bandwidth (capacity) restrictions may mean that local servers are necessary. A server fulfills the function of being a computer that physically hosts a Web site and which has access to the Internet. The Web site for a trader is in many ways similar to a mail-order catalog, providing details about the trader, his or her products, and their prices. The ISP typically charges the trader a fee for hosting the Web site, usually at a flat rate or on a time basis.

After logging on to the Internet through their ISP, a customer selects the Internet address of the trader, thereby accessing the trader’s Web site. The customer acquires a product or service listed on this site generally by entering his or her credit card information online. A transaction can be completed wholly on the Internet (called “online” or “direct electronic commerce”) with intangible products – for example, digital products such as music or software can both be purchased and delivered completely online through the Internet. However, with the purchase of tangible products, physical delivery is still necessary once the site registers the order on the merchant’s sales system (this is referred to as “offline” or “indirect electronic commerce”). Currently, advertising on Web sites (called banner advertisements) and the offline sale of goods and services constitute the two major sources of Internet-generated revenue in business­toconsumer transactions.

Having defined electronic commerce and briefly examined how it operates, the next part of the chapter is directed at presenting the central arguments and propositions of the thesis, along with how the thesis is organized.

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