January 15, 2009 - 9:42am
Many innovations in the history of the mankind often outpaced the general development of the society as long as they were in breach of the commonly accepted standards and principles. It took years before society could treat the new phenomenon as an ordinary part of the everyday life. Even though such things as online shopping, Internet transactions and electronic commerce are an integral part of our modern life there are still a great number of discords in how these should be treated especially from the point of legislation. Today in the U.S. there is no act or bill that clearly specifies the law aspect of Internet trading as well as its taxation, but there is a stir around the issue. Some states in their quest for filling the drying budgets are actively advocating the adoption of the corresponding bills to regulate and tax ecommerce players. And while there is no distinctly formulated regulation introduced in the United States so far we will try to look in on our far but still rather powerful neighbors. Perhaps, we can learn something.
International efforts needed
Russian economists and experts are still in perplexity about how ecommerce should be treated and there are still no exact explanations as to what should be included into the concept of ‘ecommerce’. Reading the articles of Russian specialists in the economy field we find that they are trying to at least pattern from foreign experience but they face a number of problems like irrelevance of the same schemes in Russia or absolute absence of any patterns at all, which is the case in America. Thus we can see only verbose discourses on how the issue can be, could be and would be approached while, as Russian writer Krylov says in his fable story, “the cart still didn’t move”.
One author explains the problem of legislation and taxation by these factors: the trade often takes place between the persons not living in the same country, most of online merchants have no brick-and-mortar stores and privacy protection guaranteed to the participants of online deals makes its difficult to determine if these are subject to taxation rules.
As we know today almost any individual living in one place can buy anything via online store that will ship the item from the other part of the world. Such economy deals are said to be complicated by the ‘foreign element’. In this case taxation subjects are not clearly identified. As long as taxation subjects include the participants of the economy deal and the state structure, when the subject of taxation originates from another country public boards of several states can have a claim on its role.
Previously in terms of taxes imposed on the revenue of foreign entities there was a concept of ‘permanent representative’ that allowed the state that appeared to be the source of the profit to impose income tax on the companies regularly getting their revenue out of their activity led on the territory of that particular country, and economy activity could not be possible without permanent representative. The ‘permanent representative’ included either a branch office, or other place for the company activity or a permanent agent that was the resident of the foreign state and could make deals on behalf of the company. Ecommerce eliminated the relevance of permanent representative inasmuch as economy activity could now be performed without it. And while it is no longer actual in many western countries Russia still keeps to the term though it has no accurate definition of the concept in respect to ecommerce.
Privacy of transactions adds to the general jumble. Often authorities cannot determine the residence country of the contractor that made their deal via electronic data interchange on the cyber space. It is even more difficult when the payment was made not with the bank card but through the online payment system. It may turn out that the state agency would apply for the role of the taxation subject while this role was already taken by the public body of another state.
Thus, Russian analysts come to a conclusion that the legislation base created within their country will not do much good as long as the Internet commerce is of international nature and that is why the issues related to ecommerce should be solved on a global basis with the unified approach developed for all states around the world.
Common taxation, simplified or single taxation?
While the state structures are rattling on who is the subject of taxation in ecommerce relationship some Russian advisors make more or less specific offers. Though in fact these also make little sense. So, the advisors say that online store taxation does not depend on its business form and e-shop can select the suitable taxation method out of the three:
• Common (conventional) method
• Simplified taxation system (STS)
• Single tax on imputed earnings (STIE)
STIE is introduced by the subject of the Russian Federation and is mandatory for all businesses subject to it. The system covers, in particular, retail trade performed through the brick-and-mortar stores or kiosks with the square of 150 m2 at the most per every object of the trade arrangement (paragraph 6, article 346.26 The Tax Code of The Russian Federation).
Well, the offer remains just an offer because online stores are not subject to this taxation system as it was clarified by the Department of Finances:
“Inasmuch as the world wide web does not correspond with the definitions of the trade object specified by the State Standard of the Russian Federation ?51303-99 “The Trade. Terms and Definitions”, taxpayers making their profits by selling the goods via the international computer network of Internet are not subject to the single tax on imputed earnings.” S.V. Razgulin, Deputy director, agency of taxation and customs-rate policy at the Department of Finances of the Russian Federation.
Thus, the Russian advisors suggest using the simplified taxation system (STS) where a taxpayer can choose to pay either 6% of the turnover or 15% of the earnings (returns with the costs deducted).
In case the Internet shop operates as a ‘stall’ for the offline store (or corporate chain) the STS can be applied only to the online shop which was registered as an independent entity being a part of offline holding company. The size of the STS will depend on the shop turnover. It is applied to the regions with the STIE specified for the retail trading.
If the profits exceed costs 40% it would be reasonable to select 6% rate rather than 15%. Thus, when a business puts a 50% extra or more on the item they had better choose the rate of 6% of the interest (usually these are exclusive goods and various services). In case the extra is relatively small (for example, on most of the electronics), it would be more convenient to pay 15% of the shop profit. Yet, in this case the accountability gets more complicated because of the need to track the entity expenses. In addition, if a business selects STS their Internet store is not considered as a VAT payer. This means that there is no reimbursement for the corporate consumers.
Businesses select the taxation system when they register at the taxation board. If the business neither chose the STS nor they are subject to STIE, then the common method is applied to them.
In the end
Last year the group ‘Single Russia’ passed the concept of the bill to tax Internet stores. The concept implies the introduction of the single tax on the imputed assets and profits from the ecommerce activity. On the first stage the group offers to introduce the single tax to replace the VAT, income tax and property tax, with the progressive scale.
While the benefits of such approach are not clear Internet subscribers in Russia expressed their concerns about the new taxation system that can lead to high prices and low quality of the equipment used to render the services.
International efforts needed
Russian economists and experts are still in perplexity about how ecommerce should be treated and there are still no exact explanations as to what should be included into the concept of ‘ecommerce’. Reading the articles of Russian specialists in the economy field we find that they are trying to at least pattern from foreign experience but they face a number of problems like irrelevance of the same schemes in Russia or absolute absence of any patterns at all, which is the case in America. Thus we can see only verbose discourses on how the issue can be, could be and would be approached while, as Russian writer Krylov says in his fable story, “the cart still didn’t move”.
One author explains the problem of legislation and taxation by these factors: the trade often takes place between the persons not living in the same country, most of online merchants have no brick-and-mortar stores and privacy protection guaranteed to the participants of online deals makes its difficult to determine if these are subject to taxation rules.
As we know today almost any individual living in one place can buy anything via online store that will ship the item from the other part of the world. Such economy deals are said to be complicated by the ‘foreign element’. In this case taxation subjects are not clearly identified. As long as taxation subjects include the participants of the economy deal and the state structure, when the subject of taxation originates from another country public boards of several states can have a claim on its role.
Previously in terms of taxes imposed on the revenue of foreign entities there was a concept of ‘permanent representative’ that allowed the state that appeared to be the source of the profit to impose income tax on the companies regularly getting their revenue out of their activity led on the territory of that particular country, and economy activity could not be possible without permanent representative. The ‘permanent representative’ included either a branch office, or other place for the company activity or a permanent agent that was the resident of the foreign state and could make deals on behalf of the company. Ecommerce eliminated the relevance of permanent representative inasmuch as economy activity could now be performed without it. And while it is no longer actual in many western countries Russia still keeps to the term though it has no accurate definition of the concept in respect to ecommerce.
Privacy of transactions adds to the general jumble. Often authorities cannot determine the residence country of the contractor that made their deal via electronic data interchange on the cyber space. It is even more difficult when the payment was made not with the bank card but through the online payment system. It may turn out that the state agency would apply for the role of the taxation subject while this role was already taken by the public body of another state.
Thus, Russian analysts come to a conclusion that the legislation base created within their country will not do much good as long as the Internet commerce is of international nature and that is why the issues related to ecommerce should be solved on a global basis with the unified approach developed for all states around the world.
Common taxation, simplified or single taxation?
While the state structures are rattling on who is the subject of taxation in ecommerce relationship some Russian advisors make more or less specific offers. Though in fact these also make little sense. So, the advisors say that online store taxation does not depend on its business form and e-shop can select the suitable taxation method out of the three:
• Common (conventional) method
• Simplified taxation system (STS)
• Single tax on imputed earnings (STIE)
STIE is introduced by the subject of the Russian Federation and is mandatory for all businesses subject to it. The system covers, in particular, retail trade performed through the brick-and-mortar stores or kiosks with the square of 150 m2 at the most per every object of the trade arrangement (paragraph 6, article 346.26 The Tax Code of The Russian Federation).
Well, the offer remains just an offer because online stores are not subject to this taxation system as it was clarified by the Department of Finances:
“Inasmuch as the world wide web does not correspond with the definitions of the trade object specified by the State Standard of the Russian Federation ?51303-99 “The Trade. Terms and Definitions”, taxpayers making their profits by selling the goods via the international computer network of Internet are not subject to the single tax on imputed earnings.” S.V. Razgulin, Deputy director, agency of taxation and customs-rate policy at the Department of Finances of the Russian Federation.
Thus, the Russian advisors suggest using the simplified taxation system (STS) where a taxpayer can choose to pay either 6% of the turnover or 15% of the earnings (returns with the costs deducted).
In case the Internet shop operates as a ‘stall’ for the offline store (or corporate chain) the STS can be applied only to the online shop which was registered as an independent entity being a part of offline holding company. The size of the STS will depend on the shop turnover. It is applied to the regions with the STIE specified for the retail trading.
If the profits exceed costs 40% it would be reasonable to select 6% rate rather than 15%. Thus, when a business puts a 50% extra or more on the item they had better choose the rate of 6% of the interest (usually these are exclusive goods and various services). In case the extra is relatively small (for example, on most of the electronics), it would be more convenient to pay 15% of the shop profit. Yet, in this case the accountability gets more complicated because of the need to track the entity expenses. In addition, if a business selects STS their Internet store is not considered as a VAT payer. This means that there is no reimbursement for the corporate consumers.
Businesses select the taxation system when they register at the taxation board. If the business neither chose the STS nor they are subject to STIE, then the common method is applied to them.
In the end
Last year the group ‘Single Russia’ passed the concept of the bill to tax Internet stores. The concept implies the introduction of the single tax on the imputed assets and profits from the ecommerce activity. On the first stage the group offers to introduce the single tax to replace the VAT, income tax and property tax, with the progressive scale.
While the benefits of such approach are not clear Internet subscribers in Russia expressed their concerns about the new taxation system that can lead to high prices and low quality of the equipment used to render the services.