ELECTRONIC commerce is commerce carried on with the help of electronic means of communication, transfer of data and services provided from a distance. It mostly takes the form of international distance commerce like distance education. It is carried on by a resident of a developed country with the customers of a source country without any physical presence or installation of equipment in the latter country. This is done using high technology, with the help of sophisticated equipments stationed abroad. We see several kinds of electronic commerce carried on from abroad with the customers in India. There are merchandising entities like Amazon.com, which advertise, sell their goods to customers on the internet, collect the sale proceeds online and deliver the sold goods to the purchaser in India from abroad through a third party transporter. There are credit card companies like Visa and Master, which provide various customer authentication and creditworthiness verification services to its constituent banks in India from abroad to help the latter to provide credit card services to their customers in India. International satellite companies use transponders stationed in geostationary orbits in space to provide technical services of transmission of television signals to telecasting companies, which use such services for telecasting television programmes in different countries. Similarly, there are enterprises, which provide technical services from abroad through internet or other communication channels to customers in India. There are companies which provide international data transmission links through sub-sea cables to source State companies. A foreign company provides the use of servers located abroad to domestic companies to store data generated in India. There are central reservation system (CRS) companies, which provide the facility of online reservation of air line tickets and hotels to domestic tourists.

The prospect of taxation of profits from electronic commerce in the source countries has never been bright in any part of the world. After international electronic commerce took shape, in 1998, a report on electronic commerce was presented by the Committee on Fiscal Affairs of OECD to Finance Ministers of the member-countries at the OECD Ministerial Conference held in Ottawa. Ministers welcomed the report and endorsed the proposals on how to take forward the work as outlined within it. The report expressed the view that “taxation should seek to be neutral and equitable between forms of electronic commerce and conventional forms of commerce. Business decisions should be motivated by economic rather than tax considerations. Taxpayers in similar situations carrying out similar transactions should be subject to similar levels of taxation”. The report identified the broad taxation principles, which should apply to electronic commerce, and implementation issues, which should be further researched in future. The issues identified with regard to the OECD Model Tax Convention involved clarification as to how the concepts used in the Convention apply to electronic commerce, in particular: (a) to determination of taxing rights, such as the concepts of “permanent establishment” and the attribution of income; and (b) to classification of income for purposes of taxation, such as the concepts of intangible property royalties, and services, and in particular as regards digitized information. OECD set up a Technical Advisory Group (TAG) in 1999 with the general mandate - ‘to examine the characterization of various types of electronic commerce payments under tax conventions with a view to providing the necessary clarifications in the commentary'. TAG came out with its report in 2001. It reiterated the principle of neutrality enunciated in the CFA report and held that the age old bricks and mortar principle of ‘permanent establishment' for taxation of traditional business income of a nonresident in the source country should equally apply to electronic commerce. The Group throughout its work assumed that all payments made in connection with the typical e-commerce transactions that it identified were received in the course of carrying on a business, whether or not the payers were themselves carrying on any business. All these payments were capable of falling within article 7 dealing with business profits unless a payment is taken out of article 7 by any other article dealing with a particular type of income like royalty. The report mainly concentrated on royalty and fees for technical services payments falling under OECD and UN Models to distinguish between such payments and payments for supply of intellectual and digital products, which will not fall under the above categories. It accordingly proposed changes to OECD commentary on royalty, which were accepted. Later on in 2004, OECD committee on fiscal affairs set up a working group to analyze treatment of services including technical services under the provisions of OECD model convention and propose commentary changes under Article 5. The group came out with its report in 2006. The report reiterated that ‘the report of the Working Group (TAG) concluded that no changes should be made to the provisions of OECD model tax convention and that services should continue to be treated the same way as other types of business activities. Under the applicable rules of the OECD model, the profits from services performed in the territory of a contracting State by an enterprise of the other contracting State are not taxable in the first mentioned contracting State, if they are not attributable to a permanent establishment situated therein, as long as they are not covered by other articles of the convention that would allow such taxation'. The proposed changes to the commentary to on Article 5 were subsequently incorporated in the OECD commentary. The commentary on Article 5, updated till 2012,reiterates the OECD stand that profits from electronic commerce cannot be taxed in the source country in the absence of a permanent establishment situated therein. It only admitted that physical presence of computer servers or automated equipments at the disposal of a nonresident in the source country alone will constitute permanent establishment, provided such equipments are not used only for auxiliary or preparatory functions. The above concession was however of no significance as it is well known that international electronic commerce always avoids the pit falls of traditional international taxation. The group had sought to justify OECD stand with the observation - ‘it is indeed consistent with the principle of article 7 that until an enterprise of one state sets up a permanent establishment in another State, it should not be regarded as participating in the economic life of that State to such an extent that it comes within the taxing jurisdiction of the other State.'.

OECD avoided any discussion in its commentary on the crux of the matter whether a nonresident carrying on electronic commerce can in effect be construed as actually carrying on business in the source country through a virtual permanent establishment. It avoided the fact that at the time the Model Convention was drafted by it, such distance commerce with the help of sophisticated technology without requiring any physical presence in the source country was unheard of and instances of business of international exports were minimal. It held on to the view that participation in economic life of the source State, necessary for the acquisition of the right to tax by the source State, only takes place when the enterprise sets up a branch or a manufacturing or selling establishment in the source country. It does not discuss whether substantial exploitation of the market of the source country by the enterprise can qualify as participation in the economic life of the source State. It is to be remembered that in the last century it was not possible for a foreign enterprise to exploit the market of a source country without setting up a manufacturing or selling establishment in the source country. Now when we see before our eyes that electronic commerce can very well do that with the help of technology and sophisticated equipment, it is not logical to close our eyes and ignore that development for the purpose of taxation. Unfortunately commentary on UN Model Convention only reproduced the OECD Commentary on the issue without adding anything of consequence (paragraph 37). There were notes of dissent from several countries like Australia and India. But OECD for reasons best known to them did not relent.

But it does not seem that the last word in this matter has been spoken as yet. It is for the economists to take a final call whether substantial exploitation of the market of a source country by a foreign enterprise amounts to adequate participation in the economic life of the source country. In the present century the developed world is in possession of almost the whole of the technical know-how necessary for manufacture of sophisticated goods and provision of services. But in their own countries, the possibility of commercial exploitation of such technical know-how is minimal as the markets are saturated. They have to have access to emerging markets for their survival and gradually it has or would become their main stay. They however would not want to pay any tax in the source countries, if it is avoidable. OECD, the voice of the developed countries, seeks to cling to the taxation model of early twentieth century in spite of the radical changes in business processes, in order to achieve that purpose. It is of course another matter that the developed world has been paid back in the same coin by multinationals, as they shifted their residence and tax jurisdiction to tax havens. Developed countries have the advantage that all the double taxation avoidance agreements currently in force among countries of the world are based on OECD and UN Models and refusal to make any changes in the treaties achieves the purpose.

The developing world cannot either do without the technical know-how available with the enterprises of the developed world for the sake of industrial development in their own countries. They are afraid to upset the apple cart. But at the same time the developed countries cannot equally do without the emerging markets of the developing world, which are getting more and more lucrative with overall economic development. It is the test of who blinks first. Once in 1943, in the Mexico conference the resolutions of the working group of the League of Nation shad shown the way, though it died three years later in London. Subsequently some Latin American countries inspired by the Mexico endeavour developed the ANDEAN Model, which did not really take off as all the countries of the developing world did not rally behind it. It is high time for the countries of the developing world to get together under the banner of UN to come out of the shadows of OECD and question the theories of taxation imposed on them by the developed world since early twentieth century when the latter expanded their commerce to developing world to exploit their natural resources and markets. In the light of technological advances in business processes towards the end of the above century it has become imperative to develop a new UN Model Convention keeping in view the interests of the source countries. If all the countries of the developing world would threaten to terminate their existing bilateral agreements with the countries of the developed world unless these are revised in the light of the new Model, the countries of the developed world are likely to blink. Otherwise the prospect of garnering public revenues for the benefit of the public in the source countries looks dim. Electronic commerce by foreign enterprises from the developing world would gradually envelope the economic scene of the developing countries; may be cars will henceforth be sold online after virtual test drive by the customers. It will shrink the direct tax base of the developing countries to an alarming level. However, fiscal policy is only a part of the overall economic policy of a developing country. The government in power will have to weigh revenue issues against other issues and take a call.