The volatile electronic business is characterized by a seamless, borderless, and timeless marketplace. In this connection the internet is accelerating a number of trends that are laying the foundation for a new global economy, in which production and consumption become more mobile, dynamic, intangible, and multinational. The shift from a manufacturing-based economy to a service-based economy, working with etools and the dominance of information technology industry, knowledge man-agement and intangibles in ebusinesses will influence a revision of the current tradi-tional national-specific principles of accounting and taxation considering worldwide trade and commerce (”death of distance”).
The consequence of that globalization effects will be a challenge to the philosophy of traditional accounting and taxation and promote an acceleration of global harmoniza-tion of the principles of accounting and taxation.
The new business development and creation of innovative business planes in ebusi-nesses have to consider those certain properties and facilities of eManagement of resources in accounting and taxation.
The guideline will give some practical approaches and issues for planning ebusi-nesses considering the essential rules, directives, regulations and principles of ac-counting and taxation (“state of the art”).
Purpose of the project is to search in relevant German, U.S. and other references for relevant material about accounting and taxation of ebusinesses, summarize and structure the essentials to a practical guide for developing and planning ebusinesses.
Based on the relevant accounting principles for ebusinesses in German commercial law (HGB), International Accounting Standards (IAS) and US-General Accepted Ac-counting Principles (US-GAAP), sales and use tax, and income tax in Germany and US, the highlights of the content are web-based businesses, nexus based on server location, mobility of web-based businesses, web site expense deductions, acquisi-tions and dispositions of web-based businesses, valuation subjects and the relevant international recommended methods of transferpricing for multinational enterprises and tax administrations (OECD guidelines) corresponding to their certain cases of application.
Result of the project is a well-structured practical guide for developing and planning ebusinesses from accounting and taxation perspectives with implications for creation of business models and a lot of hints to further references.
Content
1. Introduction
1.1 Different Accounting Principles in the world
1.2 Properties and Essentials of eBusiness Models and their Implications to accounting and taxation
1.3 Creation opportunities of Legal entities and their Implications to Taxation
2. Accounting Aspects
2.1 German Commercial Law (HGB)
2.1.1 Capitalizing Web Sites In German Balance Sheets
2.2 International Accounting Standards (IAS)
2.2.1 Intangibles (IAS 38)
2.3 US-General Accepted Accounting Principles (US-GAAP)
2.3.1 U.S.-Perspective of Intangibles
2.4 Web Site Valuation
3. Taxation Aspects
3.1 Consumption Tax
3.1.1 Value added Tax (VAT) in Germany
3.1.2 VAT in Europe (EC directives and recommendations)
3.1.3 Sales and Use Tax in US
3.2 Income Tax
3.2.1 Income Tax in Germany
3.2.2 Income Tax in Europe
3.2.3 Multistate Income Tax in US
4. Transferpricing
4.1.1 Comparable Uncontrolled Price (CUP)
4.1.2 Resale Price Method (RPM)
4.1.3 Cost Plus
4.1.4 Comparable Profits Method (CPM)
4.1.5 Residual Profit Split (RPS)
4.1.6 Application of Transfer Pricing Methodologies (TPM) to eBusiness Transactions
4.2 Tax Authority and Law
4.2.1 Penalties
4.2.2 Defending a Transfer Price and Advanced Pricing Arrangements (APA)
5. Implications for creation of eBusiness Models
6. Development and Trends in Future
7. Appendix
8. References
Acronyms and Terms
Amortization: In general, the systematic allocation of the cost of a long-term asset its useful economic life; the term is also used specifically to define the allocation process for intangible assets.
Aggregators: Sites such as Accompany where either buyers or sellers combine to increase their market power.
Advanced Pricing Arrangements (APAs): Taxpayers that want certainty can enter into advance pricing arrangements with the tax authorities. Taxpayers entering into such arrangements provide documentation to the tax authorities and agree with the tax authorities on a transfer price before making transfers.
The difficulty for ebusiness companies is often that in the fast paced world of ebusiness, it may not be possible to conclude such arrangements in time to bring products or serves to market.
Auctions: Sites such as eBay, that allow thousands of individuals and businesses to sell goods or services to the highest bidder.
B2B: Business-to-business ; trade between merchants
B2C: Business-to-Consumer; trade of merchants to consumers
Cost Plus: Cost Plus Method (see Transferpricing)
CPM: Comparable Profit Method (see Transferpricing)
CUP: Comparable Uncontrolled Price (see Transferpricing)
CUT: Comparable Uncontrolled Transaction (see Transferpricing)
Depreciable amount: Cost of an asset or the other amount that has been substituted for cost, less the residual value of the asset.
Depreciation: Systematic and rational allocation of the depreciable amount of an asset over its economic life.
Development (IAS): The application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems, or services prior to commencement of commercial production or use. This should be contrasted to research.
Fair value (IAS): Amount that would be obtained for an asset in an arm’s-length exchange transaction between knowledgeable willing parties.
Goodwill (IAS): The excess of the cost of a business combination accounted for as an acquisition over the fair value of the net assets thereof, to be amortized over its useful economic life which, as a rebuttable presumption, is no greater than 20 years.
Impairment Loss (IAS): The excess of the carrying amount of an asset over its recoverable amount.
Inbound transactions: Refers to sales to domestic customers by nonresident aliens and foreign corporations (collectively, foreign persons). Foreign persons are often taxable a domestic country (e.g. U.S.) on both business and non-business income.
Infomediaries: Sites such as Autobytel that provide specialized or industry-specific information on product quality, prices, financing, and so on, on behalf of producers of goods and services and their potential customers.
Intangible assets (IAS): Non-monetary assets, without physical substance, held for use in the production or supply of goods or services or for rental to others, or for administrative purposes, which are identifiable and are controlled by the enterprise as a result of past events, and from which future economic benefits are expected to flow.
MNC: Multinational Company which means global company which has legal entities in distinguish countries in which can exist distinguish legal, accounting and taxation principles (e.g. Germany, Europe, U.S.A).
Nexus: Connection between liability to collect tax and physical presence in a country or state. When a company makes sales in several states, the company will be taxable (for income tax) in each state in which it has physical presence („nexus“). A retailer is not required to collect consumption tax (in U.S. sales and use tax) if the retailer does not have substantial physical presence in a state.
On-Line Catalogs: Sites where ”.com” retailers such as Amazon.com sell their products.
Portals: Sites such as Lycos or Yahoo! That offer a variety of services such as calendar, news, emails, search engines, content, and shopping malls.
Outbound transactions: Cross-border transactions of domestic corporations, citizens, and residents (collectively domestic taxpayer). Cross-border transactions include sales of products and services made by domestic taxpayers to customers in foreign countries.
Permanent Establishment (PE): Fixed place of business through which the business of an enterprise is wholly and partly carried on (e.g. office or factory for production). The OECD stated that the location of a web server can be a factor in determining whether there is a PE; however in OECD-model agreement a web-site alone is not a PE because there is no fixed business location (state 03/2001). However, the rules about the PE in the distinguish countries are be still distinguishing.
Research (IAS): The original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. This should be contrasted to development.
Residual Value (IAS): Estimated amount expected to be obtained on ultimate disposition of the asset after its useful life has ended, net of estimated costs of disposal.
Reverse Auctions: Sites such as priceline.com where buyers can name the price they are willing to pay for goods and services and try to be matched with a seller of such goods or services.
RPM: Resale Price Method (see Transferpricing)
RPS: Residual Profit Split Method
Subscription-based Services: Sites such as reuters online where information or some other product is sold based on a monthly subscription payment.
Transfer Price: The transfer Price is the price at which goods or services change hands between companies. A transfer price should reflect the true value of the goods or services transferred.
Useful life (IAS): Period over which an asset will be employed in a productive capacity, as measured either by the time over which it is expected to be used, or the number of production units expected to be obtained from the asset by the enterprise.
VAT: Value Added Tax is a primary source of revenue in most OECD countries. VAT is charged at each step of the value chain - that is each time taxable goods are transferred from one taxpayer to another, and each time taxable services are performed.
Virtual Communities: Sites that connect a targeted demographic, such as iVillage’s focus on women.
1 Introduction
At the dawn of the 21st century, the age of the internet is posing significant challenges to global accounting and taxation systems. The nations of the world are entering a promising volatile electronic-business (ebusiness) realm that is characterized by a seamless, borderless, and timeless marketplace.
In this connection the internet is accelerating a number of trends that are laying the foundation for a new global economy, in which production and consumption become more mobile, dynamic, intangible, and multinational.
The shift from manufacturing-based economy to a service-based economy, working with etools and the dominance of information technology industry, knowledge management and intangibles in ebusinesses will influence a revision of the current traditional national-specific principles of accounting and taxation considering world wide trade and commerce (”death of distance!).
The consequences of that globalization effects will be a challenge to the philosophy of traditional accounting and taxation and promote an acceleration of global harmonization of the principles of accounting and taxation.
1.1 Different Accounting Principles in the world
Despite the integration of world stock markets national differences in accounting philosophies and principles governing external reporting persist (see table 1). Accounting is a product of economic and political systems and for this reason accounting convergence is likely to follow rather than lead any wider convergence. The cultural reasons for differences between the national accounting standards and the hurdles to be overcome in defining acceptable international standards. Competition among national stock exchanges for new listings and the gulf between US and other regulatory regimes, have inspired a resurgence of interest in international standards and the work of the International Accounting Standards Committee (IASC). However, there is still a difference between US GAAP and the IAS but there are also calls for ”a concerted, co-operative effort”’ towards a set of core standards.[1]
illustration not visible in this excerpt
1.2 Properties and Essentials of eBusiness Models and their Implications to accounting and taxation
Internet B2B sales and B2C sales are likely to result in a fundamental transformation in how consumers buy and sell goods and services, leading a sharp decline in purely local business and a significant increase in multijurisdictional transactions and global trading. To a large degree, the local shopping mall will be supplanted by a virtual shopping mall that is open 24 hours a day, 7 days a week, and 52 weeks a year.
New electronic business models for connecting suppliers and consumers will be on the verge of revolutionizing both B2B and B2C sales. These models include on-line catalogs, virtual communities, portals, auctions, reverse auctions, subscription-based services, infomediaries, and aggregators.
However, the internet is characterized not just by remote selling but by a range of evolving business models such as on-line auctions, reverse auctions, virtual communities, infomediaries, aggregators, and brokers. Now traditional industries such as automobiles, clothing, book publishing and other manufacturers are being turned upside down by the potential of on-line retailing to replace conventional store purchases. Thus many manufacturers are being transformed into retailers; many conventional intermediaries such as wholesalers and distributors are disappearing or being replaced by new web-based intermediaries.
These new ebusiness models are significantly altering the landscape of interactions between suppliers, sellers, and buyers – creating many new accounting and tax issues.
In this connection is the essential implication of ebusiness to the complexity of taxation the reflection of five trends occurring within the increasing net economy. These five trends are
- the rise in borderless commerce,
- the emergence of digital commerce,
- the hollowing out of the corporation,
- the explosion of real-time transactions, and
- the revolution of new business models.[2]
These trends generate with the progressing IT at least six unique key aspects which make taxation of ebusiness difficult under existing rules:
1. Worldwide sales : Even the smallest ebusiness enterprise sells into a national and global marketplace.
2. Remote operation of a web server : The ability to operate an entire web-based company remotely.
3. Anonymity : A (global) marketplace where buyers and sellers do not see each other and don’t need to know anything about each other to open or close transactions.
4. Digital Products : Products that can be delivered electronically, including software, recorded music, videos, books, reports, and services.
5. Intangible : The creation and operation of businesses whose value rests primarily in software, data, and other intangibles.
6. Fast changing rules : The rules for taxation of ebusiness are in their infancy now, but the body of law in this area will grow quickly. [iv]
1.3 Creation opportunities of Legal entities and their Implication to Taxation
1.3.1 Germany
The commercial financial statements are the authoritative basis for tax accounts (this authoritative principle is almost unknown in other countries). Nevertheless the legal form of companies has essential impact to the income taxation of legal entities as the table below shows:
illustration not visible in this excerpt
As the table shows, sole proprietorships, GbR-companies and partnerships are subject of federal individual income tax (Einkommenssteuer) which is currently (2001) at the top 48,5% and at the minimum at 19,9% ( first-bracket rate of tax 14.000 DM) of income. But the corporations are subject of the federal corporation income tax (Körperschaftssteuer) which is since 2001 25% of corporation income. All enterprises (without the self-employed professionals and agriculture) are additional subject of a local Trade Tax which is variable by location. Since 2001 the local Trade Tax can be deducted at the federal income tax.
Since 2001 half of the dividends of stockholders are subject of the individual income taxation, thus have stockholders’ dividends a „mild double taxation“ which results to a 56,8% netto-dividend at the top tax rate (against 51,5% in the „old tax imputation system“).
1.3.2 United States (U.S.)
In U.S. the form of business entity matters for tax purposes. A regular corporation (referred to as a ”C” corporation because the tax rules governing it are in subchapter C of chapter 1 of subtitle A, Income Taxes, of the Internal Revenue Code) is taxed on its income and shareholders are also taxed on dividend income – a system of double taxation.
Corporations have their own tax rate schedule. Partnerships, limited liability companies, and S Corporations (a corporation with 75 or fewer non-corporate shareholders that elect S status) are passthrough entities where income is only taxed to the owners. Thus, the tax rate depends on the type of owner (individual, C corporation or trust).
A sole proprietor is also subject to only a single layer of tax computed using the individual tax rates and all income and deductions of the individual.[3]
[...]
[2] Karl A. Frieden; Cybertaxation ; The Taxation of E-Commerce; © 2000 Arthur Andersen LLP; 2000 CCH Incorporated, Chicago/USA
[3] Annette Nellen; Tax Reform in the United States in Fiscal Politics for Economic Enterprise : A Comparison between International Patterns; 1999 Conference Paper Montegridolfo, Italy (see http:// www.cob.sjsu.edu/facstaff/nellen_a/)
- Quote paper
- Paul-Jürgen Sparwasser (Author), 2001, Development-Guideline of eBusiness considering international accounting and taxation aspects, Munich, GRIN Verlag, https://www.grin.com/document/35315
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