d) E-commerce application and implications
E-commerce is simply defined as the conducting of commercial activities through electronic means. E-ecommerce has the following application and implication.

E-commerce challenges residence taxation by making it easier for corporations to decide where they want to be located for tax purposes. The residence of corporations is generally determined by the place of incorporation test or “the place of management and control” test. The “place of incorporation” test is subject to taxpayer manipulation because e-commerce can be conducted anywhere, as it is inexpensive to establish a company in a tax haven. Therefore, the test of place of incorporation basically allows taxpayers to decide whether they want to pay tax on the basis of residence or source of income.

Under the test of place of central management and control, a corporation is resident in the country in which the board of directors holds its meetings. As a result of technological communication devices such as videoconferencing and other electronic discussion groups that can be conducted over the Internet and related technologies, and the relatively accessible and inexpensive means of transportation available to senior managers and directors, the place of central management and control can be difficult to determine. Given the borderless nature of ecommerce, the death of distance and the lack of a physical presence required for corporations to engage in commercial activities, the ability to incorporate a business in Country A, while half of the directors reside in each of Country B and C, places a limit on the effectiveness of this test.

E-commerce makes it easy for corporations to relocate to tax havens. As geographical boundaries become irrelevant, moving the location of a business may mean no more than electronically transferring key files to a new computer. It will be easier than ever to “flee” jurisdictions with high tax rates and relocate in those with low ones.

E-commerce makes it difficult to determine the territorial source of income, especially business income, because the current source rule is based on the existence of a permanent establishment, and e-commerce often does not require the use of a permanent establishment.

E-commerce also blurs income categories and defies income characterization. Therefore, e-commerce allows taxpayers to manipulate the source of income to avoid source taxation.