Regulatory Collusion and the Internet
Mark Weller
The main reason that the Internet has developed so rapidly in the past few years has been the deregulation of the telecommunications sector. The development of electronic commerce has similarly thrived in this free market environment. However, though there is now ample evidence that deregulating telecommunications has led to substantial economic benefits, the tendency of governments to regulate this sector remains strong.
Often when I speak with people who are running web-based businesses, the topic of government regulation comes up. “What do you plan to do,” I ask, “when the regulatory environment changes?” “Not a problem,” comes the usual response. “In the digital era we can simply uproot our organization and set up a server in the Caymans.”
What many web-based businesses fail to realize, however, is that governments are quite aware that electronic commerce can be moved easily from jurisdiction to jurisdiction. This has raised, particularly among OECD members, a concern about tax avoidance and tax evasion. To this point, electronic commerce, or e-commerce, has been largely composed of niche businesses offering new services. Governments have so far only missed taxing new revenues. However, as e-commerce becomes more sophisticated and begins to transform existing businesses, governments could begin losing their existing revenue bases. Governments are not so much concerned about missing out on new tax dollars as in losing tax dollars they already receive.
Since any regulatory regime that attempts to address cross-jurisdictional tax avoidance would have to be implemented globally and at the same time, many e-commerce experts have suggested that the competition between governments will prevent any serious coordinated effort. However, governments have a powerful incentive to collude in this case, since the involvement of all governments in enforcing the rules of electronic commerce would protect each of them against a reduction in revenue.
The unregulated e-commerce environment is by no means guaranteed to continue. In Canada, a report was recently completed entitled Electronic Commerce and Canada’s Tax Administration: A Report to the Minister of National Revenue from the Minister’s Advisory Committee on Electronic Commerce. The report makes dozens of recommendations which include the following:
Recommendation 26.
Revenue Canada should be proactive, in cooperation with international tax administration organizations and Canadian financial institutions, in reviewing the legitimacy of transactions involving tax haven financial institutions.Recommendation 32.
Revenue Canada and the Department of Finance should seek to achieve more spontaneous exchange of information with foreign tax authorities in order to ensure that Canadian residents properly report their foreign source income.Recommendation 55.
Revenue Canada should promote the negotiation of international agreements regarding rights of inspection and audit for business records located in foreign jurisdictions as well as assistance in the case of suspected tax evasion.As well, the report recommends that Canada continue to work closely with international bodies working on tax compliance issues such as the OECD, the Asia-Pacific Group of Nations, and the G-7.
It is ironic that at a time when governments in Japan, the US and elsewhere have raised concerns about so-called “monopolies” in information technology, they are considering colluding to form a monopoly of their own to regulate on-line business. A much better solution would be for nation states to begin to compete with one another to provide the best environment for electronic commerce. For example, the proposal recently made by Steve Forbes for a five-year Internet tax holiday would be a tremendous way to encourage web-based business in the United States, and Canada should seriously consider a similar action. At the end of the day, no matter what technologies or regulations are involved, the most effective way to get businesses to comply with taxation is to keep the regimes simple and the rates low. This helps to stimulate economic activity which in turn is a good way to enhance government revenue.
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