The recent decision by the World Trade Organisation (WTO) to keep Internet trade in software and intangibles tax-free for another year was warmly welcomed by champions of free trade across the globe - but has it just deferred the issue rather than solving it?
As the Internet has matured, governments have become more anxious about the degree of control they are able to exert over it - evidenced recently by the dispute over how to administer domain names. On the surface, governments are committed to a tariff-free Internet at present, but is a one-year moratorium simply delaying the inevitable? Can governments afford to let the Internet become a special economic zone when some estimates put global ecommerce at $1 trillion by 2001?
Since they presently dominate global Internet trade, it is worth starting with the US position. The official federal government line is that it does not want to see any new taxes of any description on the Internet - ever. Addressing the WTO in Geneva last week, President Clinton told delegates from 132 countries: ?We cannot allow discriminatory barriers to stunt the development of the most promising new economic opportunity in decades.?
The WTO?s final decision was in fact a partial climbdown for the US, which had pushed for a permanent ban. Following the ruling, Clinton?s Internet policy guru Ira Magaziner said the US government would continue to press for a ?permanently duty free Internet".
But some observers regard this view as idealistic. ?Few governments would allow themselves to be excluded from this type of trade and even the US federal government is fighting a losing battle with the States over this,? said Tim Kelly, head of operations analysis at the International Telecommunications Union in Geneva.
Kelly believes the WTO?s discussion was a "north versus south debate", claiming its decision was more about appeasing developing economic nations than heralding a new era of free trade.
?Put yourself in the position of a country like India, which has one of the world?s largest and fastest growing software industries. India also has a highly regulated economy. Why, Indian bureaucrats might ask, should software be treated any differently from other goods and services? If they want to develop they may want to use import duties as a sort of infant industry protection. If their domestic market is flooded with low cost American information services, from which they derive no benefit, then they fear a domestic market may never develop,? he argued.
It could be said that the "most promising new economic opportunity in decades" looks to benefit the US and the developed world rather more than those countries whose IT industry is in infancy.
?The US is a net exporter, and so stands to benefit from lower priced goods,? said Ovum group Internet analyst Heather Stark. ?Also, consumption tax is not levied in many areas of the States, so the thought of some form of VAT on ecommerce is even more unpleasant for them.?
In the UK and most of Europe however, consumption taxes are a crucial revenue source for governments. So how are the existing tax laws applied to Internet trade?
At present in the EU, all physical goods bought and sold over the Internet are subject to VAT at the rate of the country of despatch - they are treated the same as goods bought via mail order because the EU is a tariff-free zone. If goods are bought from outside the EU, the VAT is added at the place of despatch and a common EU tariff is payable. In the UK, this takes the form of a customs declaration when the goods are collected from the post office.
But services and other ?invisibles? bought and sold across the Internet are the big grey areas. Customs and Excise in the UK use the ?reverse charge procedure? to apply VAT at the buyer?s, rather than the seller?s, end. Though C&E claims that this system works, some Internet service providers (ISPs) claim inequalities exist.
Roy Bliss, the newly installed head of ISP Demon Internet, complains that while his customers pay VAT on the monthly charge, America Online?s customers in the UK pay nothing.
?AOL is not accountable for VAT because it is not a UK based company,? he said. ?Before the government thinks about new ways to tax the Internet it should sort out the existing system.?
This illustrates the first stumbling block of taxing Internet commerce. Economics scholars are aware that taxes should be applied uniformly and easy to collect. David Kennedy, chief executive of the ISPA, the national association representing ISPs in the UK, is opposed to any new tax on these fundamental grounds.
?Whichever country decides to go ahead first (with a new Internet tax) will lose out, because in the global economy it is too easy to go somewhere else,? he said. ?Clearly, the government needs to look at how to enforce present laws because they don?t want to lose revenue. But there is nothing inevitable about a new tax because there aren?t enough good reasons to have one, and it would be very hard to police trading in electronic goods.?
The difficulty in keeping track of trade conducted entirely in cyberspace is perhaps the biggest weapon of those who favour the laissez-faire approach. Some argue that the one-year moratorium was applied because governments do want to tax the Internet, but don?t yet know how a system would work.
A spokesperson for HM Customs and Excise admitted that there were concerns about specific areas of ecommerce, namely video and voice transactions that are expected to be a huge growth area in the near future as the bandwidth becomes available to carry such data to a mass market.
?The problem is in determining the place of supply. At present there is VAT on telephone time, so it is kind of taxed,? said the spokesperson. ?But if people are buying software electronically, for example, we don?t tax it because we can?t.?
?However, any changes in this area are more likely to come from the EC than from a national level,? he added.
This sentiment is echoed by Jim Dixon, president of EuroISPA, the association representing European ISPs.
?The EC is certainly very keen to do it. They are trying to get a handle on it in various ways, and they are trying very hard,? he said. ?If governments don?t figure out how to tax (the Internet) they will lose a lot of power. So far they just haven?t figured out how to do it.?
So while on the surface governments appear in favour of preserving the Internet as an entity free of barriers, it is apparent that each has its own agenda, and crucially, these agendas differ from country to country.
As far as the future of Internet governance is concerned, this would make any multilateral agreement very difficult to achieve. A tax system is used by governments not only to finance the treasury but also to exercise control and protect the national economy.
In the UK at least, the present tax system is showing signs that it will struggle to cope with a mass electronic transactions market. The WTO?s meeting a year from now is likely to see further pressure on the US to agree a fiscal framework for Internet regulation.
J1043+2408 was observed for more than 10 years, and its radio light curve exhibited a periodic signal repeating in about 563 days
Success of Unity's test flight means Virgin Galactic is now close to taking its first paying tourist into space
V3 puts the pro-level football GPS tracker through its paces, and asks if it's more than a gimmick
Finding refutes many earlier studies that suggest that galaxies don't have much dark matter at the time of their birth