Impact of E-Commerce on Allocation of Tax Revenue between Developed and Developing Countries

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Lee, Chang Hee

Issue Date
BK 21 law
Journal of Korean Law, Vol.4 No.1, pp. 19-50
The advent of digital technology increases productivity, and will, as a whole, make the world better off.

Nevertheless, advanced countries have suggested an increase of their share in inter-jurisdictional allocation of revenue, justifying their position with the rhetoric of tax neutrality and residence jurisdiction. Indeed these suggestions can be hardly justified in that the economic and legal assumptions underpinning the existing norm of inter-jurisdictional revenue allocation are not valid in a digital era. Tax neutrality will rather justify a new order that would assign more revenue to the developing countries. Maintaining the existing international tax order and fixing it in a make-shift way will not lead to this new order of international taxation, however, because digital technology enables a taxpayer to circumvent any such attempt.

Creating an entirely new norm and imposing it on developed countries appears to be beyond the reach of developing countries, judging from the past experiences of bargaining between developed and developing countries, which may have no other choice but to acquiesce to these changes. Despite this pessimism, the United Nations may consider revising the UN Model to the interest of developing countries, because the very role of the UN Model is to provide bargaining leverage for a developing country in negotiating a real world treaty. Proposed changes to the UN Model are as follows:

1. Add a paragraph to article 7 (business profits) that permits a host country to impose

withholding tax to all payments to a non-resident e-supplier in general, or upon the host countrys election, to a payment to an e-supplier from a domestic business that can deduct the payment.

2. Change article 7(4) to permit a host country to adopt a formula apportionment if an esupplier has a permanent establishment in the host country or if sales by a non-resident esupplier exceeds a certain sum of money.
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College of Law/Law School (법과대학/대학원)The Law Research Institute (법학연구소) Journal of Korean Law (JKL)Journal of Korean Law Volume 04 Number 1/2 (2004)
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