The issue of taxation on the internet has worried governments ever since electronic business became a household phrase in the late 1990s. A shopper in Melbourne buys a book or CD from the US. The shopper has just managed to engage in international trade unimaginable a few years ago: not the act of having goods delivered internationally. That has been going on for centuries. But the internet has reduced all the complexities of international trade to a couple of line items on a credit card statement.
In the process, the shopper has also cut the federal and state governments out of the taxation equation: no sales tax, import duties probably skipped, no income tax on the workers in the record or book shop. As this example shows, in the e-business world many of the tax advantages are gained by the US government as the United States is the leading new economy.
The US government has put forward a neutral position, stating that no government should tax any internet activities as this would get in the way of market forces determining the future of this young area. Of course, being the beneficiary of much of the internet's commercial activity, the US government is laughing its way to the bank.
This arrangement was formalised by the Australian government when it signed a bilateral Cooperation on Electronic Commerce agreement with the US in December 1998. While this approach provides no benefit for the Australian government, it has been enthusiastic to be seen as closely aligned to the US in the internet legislation area.
European capitalist governments have been far less enthusiastic, but the character of the internet has placed them in a bind. If they tax internet-based businesses then these businesses simply move country: it makes no difference to what the consumer sees. If they tax consumer activity on the internet they may be cutting off their own e-business future opportunities for small short term gain. These are the traditional internet tax issues.
Now it emerges that there is a whole other side to internet taxation, that of the leading profiteers of the internet, Microsoft and Cisco. While most e-business companies such as bookseller Amazon.com have lost stupendous amounts of money, Microsoft and Cisco have been making a killing by selling the hardware and software that much of the internet and its users depend on.
Based on the work of forensic accountant Bill Parish and other sources, the Register (<www.theregister.co.uk>) ran two articles by Graham Lea last October explaining how Microsoft and internet infrastructure manufacturer Cisco manage to avoid paying tax on their billions of dollars profit. Microsoft is reported as running a complex set of financial activities based on paying employees in share certificates. The end result is that tax paid by employees who accepted these shares turns up as a tax rebate for Microsoft, to the tune of US$5.5 billion in its financial year 2000!
Cisco uses a system called pooling, by which it purchases literally dozens of smaller technologies (24 in its financial year 2000) in place of internal technology development. These purchases are paid for by printing share certificates, so don't show up on the company's books. This gives it the flexibility to show just about any tax result it wants. In 1999 for example it claimed gross profits of US$7 billion for the stock market while gaining a US$13 billion tax credit (and paying no federal US tax).
Don't think of it as corporate fraud. Microsoft and Cisco obviously just decided that the first step to a world of virtual reality was to replace real tax with a virtual alternative.
BY GREG HARRIS (gregharris_greenleft@hotmail.com)