CONTEMPORARY ISSUES IN TAXATION TAX 724 GROUP ASSIGNMENT IMPLICATION OF GLOBALIZATION ON TAXATION SYSTEM, COMPARING SOUTHEAST ASIA COUNTRIES

WITH DEVELOPING COUNTRIES

Prepared by: Azera binti Mohd Nor Juliati binti Jusoh Nur Diyana binti Ismail Nor Saiedatul Akma binti Nor Amanshah Zuraida binti Mohamad Noor 2011303423 2011117243 2011975609 2011158687 2011742613

Table of Contents
Table of Contents................................................................................................... 2 1.0 Introduction..................................................................................................... 3 2.0 The issue of international mobility and the resulting distribution of tax burden between mobile versus immobile factors .............................................................3 3.0 Impact of globalization on efficiency of taxation in multiple jurisdictions .......6 4.0 Tax competition............................................................................................... 8 4.1 Foreign Direct Investment (FDI)....................................................................8 4.2 Professional and technical manpower........................................................10 5.0 Impact of globalization on indirect taxation ..................................................11 6.0 Tax implication of the internet and e-commerce...........................................13 7.0 Conclusion..................................................................................................... 16 8.0 References..................................................................................................... 16 APPENDIX1........................................................................................................... 17 APPENDIX 2.......................................................................................................... 19

1.0 Introduction Globalization is a broad concept casually used to describe a variety of phenomena that reflect increased economic interdependence of countries. Such phenomena include flows of goods and services across borders, reductions in policy and transport barriers to trade, international capital flows, multinational activity, foreign direct investment, outsourcing, increased exposure to exchange rate volatility, and immigration. These movements of goods, services, capital, firms, and people are believed to contribute to the spread of technology, knowledge, culture and information across borders. Meanwhile, OECD (1994) defined globalization as a development of the structure of business companies cross-frontier activities, in the areas of investment, trade and cooperation in the development of products, production and supplies, as well as marketing. This movement is based on businesses desire to exploit competitive advantages at an international level, to take advantage of local opportunities in terms of production resources and infrastructures and to place themselves in their final markets. These strategies are linked to the falling cost of communications and transport and the increasing costs of R&D, the macro-economic evolution and exchange rate fluctuations, as well as the liberalization of trade, investment and capital flows. Furthermore, it is also said to have radically changed and limited the power of national governments, particular in the field of taxation, in a world of highly mobile capital and flexible transnational corporations generally in developing countries with particular reference to Southeast Asia.

2.0 The issue of international mobility and the resulting distribution of tax burden between mobile versus immobile factors Mobility means the ability to move or be moved freely and easily. Capital mobility means the ability of the private funds to move across national boundaries in pursuit of higher returns. This mobility depends on the absence of currency restriction on the inflows and outflows of capital. Labour mobility means extent to which the workers are able or willing to move between different jobs, occupations and geographical areas. It is called horizontal mobility if it does not result in a change in the worker's grading or status and vertical mobility if it does. Skilled workers have low occupational mobility but high geographical mobility; low-skilled or unskilled workers have high degrees of both types of mobility. Low labor-mobility
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causes structural

unemployment

and governments try

to

avoid

it

by

worker

retraining schemes and by encouraging establishment of new industries in the affected areas. However, labour is typically less mobile than capital, though certain types of professional and technical human resources have not only become moderately mobile but have also become more sensitive to cross-border differentials in tax burdens. A common perception is that globalization implies that governments lose their ability to choose tax policies independently of other jurisdictions. Tax competition in which overall tax collections decline as national governments compete to attract or retain their tax bases. Hence, tax competition may be increased by vanishing the taxpayer and the tax harmonization may be increased as well. Standard argument is that if factors of production can move easily from one location to another, then the ability of a government to tax these factors is greatly diminished, Bovenberg (1994), Gordon and Bovenberg (1996), Frenkel, Razin, and Yuen (1996). Governments can impose taxes on consumption, labor, and capital. Government revenue declines but the government retains the ability to collect taxes. The increasing of factor mobility does in fact increase the response of tax bases to tax rates, in turn reducing the ability of the government to collect taxes. But the government retains the ability to collect significant revenue even in the face of increasing globalization. There are two factors mobility as a response to globalization. (1) Direct mobility is to compare no factor mobility to mobile factors. (2) Indirect mobility is changing the elasticity of substitution of factors used in production. Based on an article by Neumann, Holman & Alm (2003), globalization is thought to reduce the ability of governments to collect taxes. If labor and capital can move between jurisdictions, then attempts to tax these factors will lead to a vanishing taxpayer as factors flee from high to low tax regions. In the presence of mobile tax bases, a single governments choice of tax policies will have effects beyond its own borders and will be affected by the actions of other jurisdictions. The composition of taxes could also change as a result of increased difficulty in taxing mobile tax bases. The overall tax burden from income taxes on mobile tax bases like capital and skilled labor will likely decline across governments, while taxes on immobile tax bases will likely increase. In the face of tax competition, national governments may attempt to harmonize or at least coordinate their tax systems in an attempt to reduce the negative fiscal externalities that one governments decisions impose on other governments. Such harmonization implies that there should be some convergence in tax rates across governments and in the definitions of tax bases. Some also argue that neither a race to
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the bottom nor international tax convergence are universal outcomes of increased globalization. Due to that, the composition of taxes could change likes tax burden on mobile factors should fall (capital and skilled labor) and tax burden on immobile factors should rise (unskilled labor, physical capital, property). However, some analysis suggests that greater factor mobility is likely to lead to lower, more regressive, and less variable tax rates such as vanishing taxpayer. Suppose that increased globalization leads to greater factor mobility across countries. Increased factor mobility may occur due to reduced transportation costs, reduced barriers to mobility, increased information flows and improved technology advances. Assume that each countrys government imposes both factor taxes and consumption taxes using source-based taxation, so that factor income is taxed at the source regardless of residence. Thus the home country levies taxes on production at home, taxing home and foreign capital used in domestic production and home and foreign labor used in domestic production. The home-country government also receives revenue from taxes imposed on domestic consumption. The foreign-country government imposes similar taxes in the foreign country. In addition to comparing factor immobility to factor mobility, we also examine the revenue effects of partial factor mobility. Many would argue that capital is becoming increasingly globalizes as it may be more easily moved across national borders than labor. Capital may be more mobile internationally due to differences in the cost of transportation or due to the greater substitutability of capital across countries. Thus, we examine partial factor mobility by allowing capital to move freely across the two countries while holding labor fixed. We define globalization as increased factor mobility across countries. We attempt to model explicitly and analyze numerically the effects of cross-country tax differentials under varying degrees of globalization. It is clear that factors do respond to tax differentials, as taxed factors move between countries to escape domestic tax burdens. As a result, government revenue declines as factor mobility and factor substitution increases. Nonetheless, it is also clear that the factor movements are less than extreme, so that a government retains the ability to collect taxes even in the face of increasing globalization: the taxpayer does not completely vanish. Perhaps surprisingly, the amount of taxes generated is largely the same at least in some circumstances, regardless of factors mobility. Our revenue neutral tax experiments also reveal that a government must approximately double its tax rates to achieve an equivalent amount of revenue when factors are mobile relative to when they are immobile.
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3.0 Impact of globalization on efficiency of taxation in multiple jurisdictions Globalization also has impact on efficiency of taxation system especially for Multinational Companies (MNCs). Transfer pricing in MNCs is endless issues in economic environment. Borderless world enable factors of production flows across the world which reduced efficiency of taxation. Globalization has created opportunity and space for MNCs for manipulating transfer pricing among subsidiaries in multiple jurisdiction to minimize tax liabilities. The fact that the tax based or known as tax rate are differ between jurisdictions in which the lower tax based will win the tax competition among countries. Companies tend to move the profits from high tax rate country to lower tax rate country that result loss in tax revenue of higher tax rate country. There should be a harmonize tax based between the countries tax rate to be fair to each other. There are two types of tax based principle discussed by Asher M.G. and Rajan R.S, (2001) which are Source (territorial) principle and residence principle. Authors stated that, in Southeast Asia, all countries have adopted source principle for income tax similar to France, German and Netherlands but in contrast with Japan, Canada, US and UK that used residence principle. Source principle means that any income derives from the country will be taxed regardless of the status of residency of earners. While residence principle means of each people with residence status of a country will be taxes regardless of where the income are earned. In my opinion, the reason of Southeast Asia countries and other developing countries used source principle because the residence people does not have a high ability to pay taxes compared to developed and advanced country where their people earned income world wide in huge amount. Technology advancement is one way to increase efficiency in a system. However, high technology has positive relationship with human behavior of tax evasion and tax avoidance. With the impact of globalization and technology advancement, we afraid that the system unable to control those unethical behavior and resulting a loss on revenue for the country. Basically, factors of production have been traded internationally will be taxed twice in host and home country. One of objectives of DTAs is to prevent evasion and avoidance of tax where DTAs act as giving incentives to investor to relief from being taxed twice. As at 21 January 2012, Malaysia has DTAs with 22 countries as per appendix 1. Direct tax revenue from corporation still became primary revenue sources of developing countries. With globalization, these developing countries have opportunity to develop and strengthen their economic environment. We can see that countries have enter to variety of trade agreements such as bilateral agreements and multilateral agreements which
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subsequently ventures to tax treaty in order to make international tax system that equally fair and produce harmonized tax based for among countries. OECD guidelines are used to minimize revenue losses due to manipulating transfer pricing by MNCs. Arms Length Prices (ALP) principle is used in determining the transfer price between subsidiaries under MNCs. There are five methods of ALP which are; 1) Comparable uncontrolled price method, 2) Resale price method, 3) Cost plus method, 4) Profit split method and 5) Transactional net margin method. The first three methods known as traditional transactional method and method 4 and 5 known as transactional profit methods which only allowed to use when traditional transactional methods not reliable to applied (LHDN Malaysia, transfer pricing guidelines 2012). This guidelines in result from the application of law, section 140 Income Tax Act on the issues of transfer pricing and controlled transaction. The objectives of the guidelines as follow: The purpose of the Transfer Pricing Guidelines is to replace the IRBM Transfer Pricing Guidelines issued on 2 July 2003, in line with the introduction of transfer pricing legislation in 2009 under section 140A of the Act, and the Income Tax (Transfer Pricing) Rules 2012 (hereinafter referred to as the Rules). The Guidelines are concerned with the application of the law on controlled transactions. They provide guidance for persons involved in transfer pricing arrangements to operate in accordance with the methods and manner as provided in the Rules, as well as comply with administrative requirements of the IRBM on the types of records and documentations to maintain. Advance Pricing Arrangements (APAs) been implemented in transfer pricing practices. APAs is agreement between tax payer and the tax authority in regards of appropriate transfer pricing. Refer to Appendix 2, some Southeast Asia countries such as Malaysia, Singapore, and Thailand have use APAs and in Japan, APAs is an extensive activity in transfer pricing. However, other Southeast Asia Countries such as Philippines and Indonesia does not have APAs. There are several benefits outline in Advance Pricing Arrangements guidelines (LHDN, Malaysia 2012) as follows: 1. APAs provide certainty because it increased the predictability of tax treatment.

2. Reduce and avoid double taxation through bilateral or multilateral APA. 3. Reduce cost on audit, litigation and save time during examination of transfer pricing practices. 4. Tax payer who able to predict own costs and expenses including tax liabilities. 5. Complete documentation records keep in advance according to transfer pricing method (TPM) applied.

4.0 Tax competition The globalization has given an impact to the taxation system in developing countries as well as Southeast Asia countries. Globalisation has increased the mobility of capital, so that investors can change the location of their investments very easily. As other barriers to international capital movements have fallen, differences in how countries tax the income from capital investments have become more important. This has engendered what is called tax competition. In order to retain and attract capital investments, countries have to offer attractive tax regimes, that is to say lower effective tax rates. Therefore, the tax competition among various jurisdictions would be discussed to attract Foreign Direct Investment (FDI) as well as Professional and technical manpower. 4.1 Foreign Direct Investment (FDI) Foreign Direct Investment (FDI) has an increasingly important role in the development of capital deficient developing countries. This is because it is not only a stable source of foreign inflows but it also help in technological transfer and employment generation (Mottaleb and Kalirajan, 2010). The recognition of the importance of FDI for overall economic growth (Athukorala and Hill, 1999) implies that countries have and will increasingly compete with each other to attract investments by offering tax incentives. Relating to the issue of a global efficiency and protection of legitimate tax base essentially that countries do not engage in what the OECD has called harmful tax competition (1998). The OECDs (1998) report distinguishes between simple tax heavens and more sophisticated fiscal incentive regimes in certain sectors of non-tax heaven countries. Regimes of the countries engaging in harmful tax competition are not structured to attract FDI, but contain predatory measures which may result in a shift of part of the tax base
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of another country. The OECD has been putting pressure on its member countries to address such practices, including attempting to persuade tax-heavens governed by its members to change their behaviour in this regard. For the tax heaven countries and some financial centres, OECDs effort has also centred on addressing the issue of money laundering, and bank secrecy laws. Protection of the tax base of OECD countries is an important motivation, and the organization is not averse to levying sanctions on those tax jurisdictions which do not address these issues satisfactorily. The OECD has had very limited success so far in moderating harmful tax practices. Many East Asian countries, such as Singapore and Malaysia have made extensive use of preferential tax treatment and other implicit and explicit subsidies to attract multinational enterprises (MNEs) to build their countries. The list of such incentives in Southeast Asia is growing and so are the agencies authorised to grant and administer them (Asher, 2001) Econometric investigation by Chen et al (1999) provides some empirical confirmation of the potential tax competition during the 1972-1980 period between certain East Asian countries (viz. Hong Kong, Malaysia, Singapore and Taiwan) for FDI from the major industrialized countries (viz. Germany, Japan, UK and US) between 1972 and 1980. In fact, Chia and Whalley (1995) suggest the existence of a sort of Stackelberg competition 13among Southeast Asian countries, with the rest of the countries emulating or responding to the tax incentives provided by Singapore. The variation in tax rules and regulations defining the tax base for businesses and individuals, complete tax harmonization is neither desirable nor feasible in developing and developed countries, including those in Southeast Asia. Malaysia has been one of the most successful Southeast Asian countries in attracting FDI. It has always endeavoured to maintain the competitiveness of FDI determinants like legal infrastructure. Many policy instruments have been set up. The Malaysian government has improved the value of the present determinants and is considering new strategies to attract FDI. Malaysia was rather stable during the crisis globalization in comparison to other forms of foreign investment such as portfolio investment and foreign loan which decreased significantly during the globalization. FDI statistics are used by policy makers as a tool to devise foreign investment policy. A joint survey between Department of Statistic, Malaysia and Bank Negara Malaysia is performed to further improve the capability in giving detailed analysis. Thus, this is show the importance of FDI for the economy.

4.2 Professional and technical manpower Generally, tax competition for developed countries are relatively clear, because such countries have an elaborate social insurance safety net that requires a high level of government expenditure and that is threatened by tax competition (Leibfritz and others, 1995). However, the issue about how does tax competition affect developing countries? It should be pointed out that developing countries need the revenues at least as much as developed countries do, if not more. A common misperception is that only OECD member countries are confronted by a fiscal crisis as a result of the increasing numbers of elderly people in the population. In fact, the increase in dependency ratios (the ratio of the elderly to the working population) is expected to take place in other geographic areas as well, as fertility rates go down and health care improves (World Bank, 1994). Outside OECD and the transition economies, the dependency ratio starts in the single digits in the 1990s, but rises to just below 30% by 2100 (McLure, 1996). Moreover, while outside OECD and the transition economies direct spending on social insurance is much lower, other forms of government spending (e.g., government employment) effectively fulfil a social insurance role. For the developing countries, the migration of skilled labor has been a major issue (so-called brain drain). Jagdish Bhagwati had proposed a brain drain tax (or emigration rents) for developing countries to benefit from the higher incomes earned by their migrants who work abroad (see for instance, collection of Bhagwatis papers in Irwin, ed., 1991). Such a tax is particularly defensible, since most have benefited from highly subsidized higher education in their home country (India is a prime example in this regard). While a similar result could conceptually be attained by a residence tax, the problems involved in administering the tax also hamper the implementation of this proposal in the absence of tax cooperation. Further, even if effectively administered, if the home country tax rates are significantly higher than what the migrant pays in the host country, there is always the possibility of tax avoidance through a change in citizenship.

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5.0 Impact of globalization on indirect taxation According to a common experience of developing and transition countries, indirect taxes prevail over direct ones. The exceptions are, of course, Japan (but not S. Korea) and more surprisingly, Malaysia. Corporation taxs revenue usually stays higher than personal income tax (PIT), despite the flood of incentives allowed for corporations. On the contrary, PIT is still in its primary stages everywhere except in Japan. Value Added Tax (VAT) is well established in China, Japan, and S. Korea, where it prevails on excise duties and has just been introduced in April 2005 in India. Custom duties, entirely on imports, are still present in India, China, and Thailand. A relevant consequence of such a prevailing tax structure is the particular ranking of the implicit tax rates. It is only in Japan and Korea that labour income is more heavily taxed than capital and consumption, while the opposite happens in Malaysia and Thailand. In addition, the same may be said for China and India. A low tax wedge on labour (due to the limited role played by PIT and the absence or the irrelevance of social contributions) improves the efficiency by inducing both supply and demand of labour. Moreover, the heavy burden on consumption lessens the equity, as the taxes affect the prices in a regressive way. In terms of welfare (consumers surplus) the excess burden increases. Besides that, the exposure of developing countries to international markets as measured by the degree of trade protection, the share of imports and/or exports in GDP, the magnitude of capital flows - foreign direct investment in particular and exchange rate fluctuations has increased substantially in recent years. In addition, while inequality has many different dimensions, all existing measures for inequality in developing countries seem to point to an increase in inequality, which in some cases (e.g., pre-NAFTA Mexico, Argentina in the 1990s) is severe. Around the world there has been a substantial growth in common markets, customs union and free trade areas. Also in the Asian area there are two blocs of countries where the economic cooperation and integration has been strengthened during the past few years. The first bloc is represented by the Association of Southeast Asian Nations (ASEAN) that recently implemented the ASEAN Free Trade Area (AFTA), making significant progresses in trade and investment liberalization by the lowering of tariffs in intra-regional trade. At present a second bloc is represented by the South Asian Free Trade Area (SAFTA), comprised of India and six other countries, where tariffs on internal trade are going to be eliminated. SAFTA was agreed to between the seven South Asian countries that form the

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South Asian Association for Regional Cooperation (SAARC). SAFTA will come into effect in 2006. Furthermore, developing countries and emerging markets still rely on trade taxes. For different reasons, trade taxes on imports have been often introduced to protect domestic production and those on exports reflect in part the export of primary products over which the country has some monopolistic power. Meanwhile, standard economic theory suggests that taxes on international trade have a major distorting effect and that efficiency gains deriving from their reduction far outweigh the loss of such revenue sources. The reduction of taxes on import trade often runs into serious political opposition, due to the pressure of domestic producers. Moreover, one of the most important constraints to trade reform in such countries is the conflict between tariff reforms and macro-stabilization goals. The adverse revenue impact of tariff reductions could be addressed in the short run by reducing existing exemptions, by removing highly restrictive non-tariff barriers and by relying on the expected import volume growth. But in the long run it will require the implementation of compensatory revenue measures. In the field of indirect taxation the two countries feature important differences. In China the main indirect tax is the Value Added Tax, which recently has been widely updated. In India until 2004 VAT was absent. From April, 1, 2005 VAT has been finally introduced. This reform is expected to be welfare improving, since VAT will substitute for a huge, complex and distortionary amount of sales tax and excise duties. In practice, however, such a large reform will have to get over some difficult challenges, as the taxation of services, the adequacy of the tax administration and concerning the complex structure of intergovernmental tax-relationships. The system of public finance is now, after the reforms of the 1990s, more centralized in China, and most taxes are charged by the central government which transfers part of the revenue to the inferior layers. The system can be powerful to per equate fiscal capacities among provinces, while weakening their fiscal responsibility. Hence now it is under reform, to avoid harmful fiscal imbalances of the lower layers and in order to increase their budget transparency and fiscal effort. In addition, favoring indirect taxes, like value added tax, helps to broaden the tax base, reduces overall tax rates, and thus lightens individual tax burdens and distortions. By resorting more to multilateral tax agreements, countries can efficiently reduce the likelihood of double taxation and tax competition among different tax administrations. Besides that, to prevent multinational corporations from avoiding taxes by manipulating transfer prices, tax authorities should adopt a form of the arms-length-pricing principle, such as that used by the
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OECD. Essentially, this is one example of a legal reform designed to prevent taxpayers from avoiding taxes by manipulating difference in tax rates among different countries. Then, developing countries that have not already done so should replace turnover sales tax with value added tax. Because VAT is broad-based, governments can lower the tax rate and thereby reduce the overall excess burden. In addition, developing countries must implement effective good governance and anticorruption programs in the realm of tax administration in order to reduce tax leakages. 6.0 Tax implication of the internet and e-commerce Progressively, in the 20th century, the evolution of business became more global. The whole world became enthusiastic about the new mode of conducting business the internet. Today the use of the Internet is widespread particularly, now that it is a public medium. Businesses see tremendous opportunities for cost saving, revenue generation, marketing and market access, and most importantly improving customer service through direct links that facilitate speedy enquiry and feedback. However, the growth of the Internet, web-based companies and online business transactions has raised many concerns about various issues relating to electronic commerce (e-commerce). As one of the unique features provided by the internet, e-commerce introduced the world with a new mechanism of commerce which is faster and easier. According to OECD (1997,p.1): e-commerce refers generally to commercial transaction, involving both organizations and individuals, that are based upon the processing and transmission of digitalized data, including text, sound and visual image and that are carried out over open networks (like the Internet) or closed networksthat have a gateway onto an open network. This transformation from the conventional to an electronic means of conducting business has been adopted worldwide. This rapid growth of e-commerce is hailed as a revolution in global retail trade that is opening up new consumer markets across borders and continents. In 2010, the United Kingdom had the biggest e-commerce market in the world and the internet economy in the UK was expected to grow by 10% between 2010 to 2015. Amongst emerging economy, Chinas e-commerce presence continuous to expand. In Malaysia, e-commerce started in the mid-nineties, but until now, it is considered at the stage of development . The government of Malaysia played an important role to develop and facilitate the growth of ecommerce in Malaysia. To facilitate e-commerce growth, government established Multimedia Super Corridor (MSC) in 1996 and Malaysian Communications and Multimedia
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Commission (MCMC) in 1998 to provide the facilities and technical skills for local and foreign businesses as well as to encourage the broadcasting, telecommunications and internet services. In the line with this development, the Electronic Commerce Act 2006 was enacted and came into force on 19th October 2006 . As good as it may seem, this new evolution of business mode has triggered the important aspects of taxing profitable income. There are mix views to the implication of ecommerce. Some opined that e-commerce improves tax systems, while others belief that tax systems was designed in the era where e-commerce does not exists, thus created problems to the tax systems. This is because e-commerce has created a cyberspace trading whereby the businesses are engaged in a trade without having a physical presence which has disturbed the manifesto of conventional tax principle, which is identification of physical presence. As tax is the major source of revenue for the government, difficulty in charging tax would means difficulty in getting revenue. This has led the government in many countries to face a new challenge of tax problems . Generally, many believed that e-commerce would unquestionably stir the laws of taxation . They pointed that the existing tax rules governing transactions was designed for conventional commerce where the physical presence can be easily identified therefore; the same principles cannot be applied on e-commerce transactions. Apart from that, there are also other important tax issues such as double taxation, and source-based nature of existing tax principles which could lead to tax avoidance, double taxation and tax free . From the ASEAN region perspectives, there are potential international problems posed by the e-commerce. In Hong Kong, a study conducted by Davis & Chan (2000) found that e-commerce poses tax problems, in areas such as tax administration, double taxation, tax evasion, tax avoidance and tax free to the tax authority. In addition, the study revealed that tax avoidance is the highest-ranked potential tax problem identified in respect of ecommerce. Considering the impact of e-commerce to the tax authority, the Hong Kong Society of Accountants (HKSA) has established a Tax System Review Committee in order to examine matters related to its tax system. The committee is set up to identify the related tax area that would be affected by e-commerce; how e-commerce transactions should be taxed and how to establish a permanent establishment (PE) whether the existing tax legislation is strong and wide enough to bring the electronic based revenue to a tax net in order to avoid loss of tax revenues . India, on the other hand, has also moved in the same path as Hong Kong, in respect of the taxing e-commerce issue. The committee has taken a step forward in modifying its PE concept because they believed that the concept that is normally used would affect their tax revenue. Singapore which is poised to become the forerunner in the Asian
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region in regards to the adoption of e-commerce has issued a guideline on E-Commerce Tax in 2001 through its tax authority, Singapores Inland Revenue Authority . The aim is to assist businesses in understanding the income tax treatment on e-commerce as the guideline provides various situations that could be adapted by the taxpayer. For Malaysia, regrettably, to date there is no specific guidelines/provisions issued by the IRB with regards to ecommerce taxation. However, there are no specific provisions under the Malaysian Income Tax Act (ITA) 1967, which address e-commerce business. Therefore, e-commerce will be treated under the same general provisions and interpretations of the ITA 1967 . Developing countries perspective - Acknowledging the importance of the issue related with taxing e-commerce, developed countries such as United States, United Kingdom, France, Germany and Australia for example, have published e-commerce policy statement in the late 20th century . Naturally, the developed countries have recognized the impact of ecommerce to the tax regime hence has taken ways and means to safeguard their tax revenue collection. The policy adopted by these countries slightly differs from each other taken into consideration the social, political and ideology of the countries. Recognizing the commotion, the OECD has initiated a tax model for e-commerce in 1997, which is now used as a benchmark for many countries including Malaysia . According to , the OECD has prescribed certain guidelines that they feel governments should adhere to while formulating new provisions regulating taxation of e-commerce transactions, which are summarized as follows: 1) the taxation principles that guide governments in relation to conventional commerce should quite properly guide governments in relation to e-commerce: those principles being neutrality; efficiency; certainty and simplicity; effectiveness and fairness; and flexibility; 2) those principles can be implemented for e-commerce through existing tax rules, albeit with some adaptation of the latter; 3) there should be no discriminatory tax treatment of e-commerce; 4) application of these principles should maintain fiscal sovereignty of countries, ensure a fair sharing of the tax base between countries, and avoid double and unintentional non-taxation; 5) the process of putting flesh on these principles should involve intensified cooperation and consultation with economies outside of the OECD area, with business and with non-business taxpayer groups; and 6) When required, government intervention should be proportionate, transparent, consistent, and predictable, as well as technologically neutral.
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7.0 Conclusion The globalization process making taxation system is more difficult in full range of economic activities. Globalization implies that governments lose their ability to choose tax policies independently of other jurisdictions. Tax competition in which overall tax collections decline as national governments compete to attract or retain their tax bases. Globalization also has impact on efficiency of taxation system especially for Multinational Companies (MNCs). Transfer pricing in MNCs is endless issues in economic environment. Borderless world enable factors of production flows across the world which reduced efficiency of taxation. Globalization has created opportunity and space for MNCs for manipulating transfer pricing among subsidiaries in multiple jurisdiction to minimize tax liabilities. Besides, many issues have been pointed and debated in respect of e-commerce in relation to the field of taxation and there is no specific solution until today. Most of the scholars opined that tax systems was designed in the era where e-commerce does not exists, thus creating problems to the tax systems like tax evasion, tax avoidance, double taxation and tax free. The increases in trade volumes from e-commerce activities must be monitored. Therefore, Malaysia should initiate a set of tax system which is equitably fair to the government and taxpayers and accommodate the present tax system with the technology change in order to avoid loss of revenue.

8.0 References
Borkowski, S. (2002). Electronic commerce, transnational taxation and transfer pricing: Issues and practices. International Tax Journal, 28(2), 1-36. Cheung, D. (2001). Debate on the Hong Kong tax based - Its criteria, principles and problems. The International Tax Journal, 27(2), 57-83. Electronic Commerce Act 2006 (2006). Foley, P., and Fang Khoo,L. (2000). International policies of e-commerce. European Business Review, 12(4). Hajah Mustafa Mohd Hanefah, H. H., Zaleha Othman,. (2008). E-commerce Implications-Potential and Challenges in Malaysia. International Business Research, 1(1), 43-57. Inland Revenue Authority of Singapore. (2001). Income Tax Guide on E-commerce (23 February 2001 ed.). Kanokpan Lao-Araya, Emerging Tax Issues: Implication of Globalization and Technology, ERD Policy Brief No. 16, 2003. Lembaga Hasil Dalam Negeri. (2011) E-commerce : Taxation Challenges and Legal Issues Malaysia. Luigi Bernardi, Laura Fumagalli and Luca Gandullia, Tax Systems and Tax Reforms in South and East Asia: Overview of Tax Systems and Main Policy Issues. Munich Personal RePEc Archive (2005), pp: 1-35. Mukul G. Asher and Ramkishen S. Rajan, Globalization and Tax Systems: Implications for Developing Countries with Particular Reference to Southeast Asia , ASEAN Economics Bulletin (2001), pp. 119139.

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Philippe Pochet, Globalisation: The Communitys Response Employment, Income, Taxation, DWP 97.01.02 (E), pp: 3-49 Pinelopi Koujianou Goldberg and Nina Pavcnik, Distributional Effects of Globalization in Developing Countries. NBER Working Paper 12885. National Bureau Of Economic Research, 2007. Scally, A. (2002). Update to OECD model tax convention. Retrieved from Vohra, R. (2004). Taxing e-commerce problems and possible solution. Retrieved from http://www/asianlaws.org Rebecca Neumann, jill Holman and Jim Alm, Globalization and Tax Policy , Andrew Young School of Policy Studies, Georgia State University, January 2003.

WEB REFERENCES AND PDF PricewaterhouseCoopers (PWC), Transfer Pricing Perspectives , Asian Edition, 2007, access on 5 November 2012. http://www.pwc.com/gx/en/tax/transfer-pricing/managementstrategy/assets/tp_perspectives_asia.pdf PricewaterhouseCoopers (PWC), Winds of change: transfer pricing perspectives, 2011, access on5 November 2012. http://www.pwc.com/en_GX/gx/transfer-pricing-management-strategy/pdf/tp-perspectives-mar2011.pdf LHDN Malaysia, Transfer Pricing Guidelines, 2012, access on 5 November 2012. http://www.hasil.gov.my/pdf/pdfam/MalaysianTransferPricingGuidelines2012.pdf LHDN Malaysia, Advance Pricing Arrangements guidelines, 2012, access on 5 November 2012. http://www.hasil.gov.my/pdf/pdfam/MalaysianAPAGuidelines2012.pdf FDI in Malaysia, 2012, access on 8 November 2012. http://www.tradechakra.com/economy/fdi-in-malaysian

APPENDIX1

lbania Argentina* Australia Austria Bahrain Bangladesh Belgium

Ireland Italy Japan Jordan Kazakhstan Korea, Republic Kuwait

Qatar Romania Russia San Marino Saudi Arabia Seychelles Singapore

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Canada China Chile Croatia Czech Republic Denmark Egypt Fiji Finland France Germany Hungary India Indonesia Iran

Kyrgyz, Republic Laos Lebanon Luxembourg Malta Mauritius Mongolia Morocco Myanmar Namibia Netherlands New Zealand Norway Pakistan Papua New Guinea Philippines Poland

South Africa South Korea Spain Sri Lanka Sudan Sweden Switzerland Syria Thailand Turkey Turkmenistan United Arab Emirates United Kingdom United States of America* Uzbekistan Vietnam Venezuela

http://www.mida.gov.my/env3/index.php?page=double-taxation-agreement

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APPENDIX 2

http://www.pwc.com/gx/en/tax/transferpricing/managementstrategy/assets/tp_perspectives_as ia.pdf

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