The UK's leading tax body warned recently that the government faces the loss of billions of pounds in revenue as the result of international computer trading creating a fiscal "black hole in cyberspace". The Chartered Institute of Taxation urged the Inland Revenue, at a special conference in Lincoln, to endorse a joint strategy to secure tax receipts threatened by the growth in Internet transactions. The findings of recent research suggest that 60% of financial services companies will use the Internet for deals by 1999 compared with only 13% today. Computer trading could easily rob the UK of tax on both personal and corporate transactions. It was noted that this tax would either go to other countries or not be paid at all. The institute proposed a joint working party to avoid what it called a "massive leakage of tax" and it stressed the importance of putting a strategy in place before cyberspace trading "gets out of hand."
Companies could use programmed computers to buy and sell commodities in the cyberspace market so that decisions and contracts previously made in the UK are made abroad and as a result, the UK Revenue loses out on corporation tax. This allocation of profit to the different tax regimes in which multinational companies operate is known as transfer pricing. It is recognized as an area in which many companies already seek to avoid tax. On a personal tax level a consumer can use a PC linked to the Internet to purchase certain goods from a supplier located in a tax haven such as Bermuda, and so Customs & Excise loses VAT (value added tax).
Many countries are already engaged in efforts to secure their tax bases against leakage across borders due to increased use of computers and the Internet in international transactions. There are also fears that total global tax receipts could fall with the increasing use of tax havens through cyberspace. Through the increased use of the Internet the consumer wins and the government loses. Only a government can complain about this outcome.
About the Author Marc M. Harris is the President of The Harris Organisation, a financial planning and investment management firm with a staff of 150 people in Panama. The Tax Library has reprinted this article from The Marc M Harris Analysis with permission of the publisher.
Copyright © 1997 by Marc M. Harris
The Tax Library has reprinted this article with the permission of the author.
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