The Philippine IT Law Journal

Overview of Selected Legal and Regulatory Issues in Electronic Commerce
Reprinted from E-Commerce and Development Report 2001 of the United Nations Conference on Trade and Development (UNCTAD) ^{[ * ]}

Finding global solutions to address global transactions

Ensuring users and consumers effective redress for disputes arising from transactions in the online environment is a key element in building trust. There is a widespread awareness of the potential legal barriers arising from recourse to courts in disputes resulting from cross-border online interactions. Which law applies? Which authority has jurisdiction in the dispute? Which forum is competent to hear the dispute? Is the decision enforceable? These are some of the questions that all too often arise and for which there is not yet a clear answer. Electronic commerce has increased the need to rely on party autonomy, the choiceof-court clauses becoming central to any discussion of court jurisdiction. Thus, it is essential that national legal systems clearly provide for rules on which parties can rely in order to ensure that their choice-of-court clauses will be deemed valid. Uncertainty in this respect is detrimental to the trust which private operators will have in the judicial and legal systems of a particular country. To assist States in their efforts to accommodate e-commerce, this chapter analyses a number of options for countries wishing to develop a set of choice-of-court rules. A difference is made in this regard within business-to-business (B2B) and business-to-consumer (B2C) contracts, as well as between (i) contracts concluded online and performed offline, and (ii) contracts concluded and performed online.

Disputes in cyberspace: online solutions needed for online problems

It is well known that public lawmaking is too rigid, too slow in responding to the need for immediate adjudication, and too slow adapting to changes to the social, technological and commercial customs of cyberspace. In contrast, private lawmaking and private adjudication are more flexible and readily adapt to the diverse evolving technological and social nature of cyberspace and its changing commercial practices. Given that traditional dispute settlement mechanisms may not provide effective redress in electronic commerce transactions for a large number of the small claims and low-value transactions arising from B2C online interactions, this chapter analyses the various alternative dispute resolution (ADR) mechanisms that would provide speedy, low-cost redress. When ADR takes place using computer-mediated communications in the online environment, it is often referred to as online dispute resolution (ODR). Both e-disputes and bricks-and-mortar disputes can be resolved using ODR. The system could be used in a variety of contexts, including within a particular online market place (e.g. mediation in online auction sites, arbitration in the domain name system and in the automated negotiation process for insurance disputes), as part of a trustmark or seal programme, or on an independent basis. These ODR mechanisms range from those which are fully automated - in that a computer program without human intervention generates outcomes - to most other ODR providers that offer dispute settlement with human intervention. Parties may contract for a range of ODR services from mediation, which aims at encouraging the parties to reach an amicable settlement of their disagreement, to binding arbitration, which imposes on the parties a legally enforceable arbitral award. As of December 2000, more than 40 ODR providers had been identified.

Jurisdiction: is your enterprise website regarded as a branch?

Concerning jurisdiction, two main questions are addressed: (i) can an Internet site be regarded as a branch or establishment for any legal purpose? and (ii) is the level of interactivity relevant? As regards the first question, it seems that the tendency is to consider that a website does not qualify as a branch or permanent establishment. Thus, the place of establishment of a company providing services via an Internet website is not the place at which the technology supporting its website is located or the place at which its website is accessible, but the place where it pursues its economic activity. The answer to the second question for a large number of countries is also clear: whatever the level of interactivity of the website, it will not change the answer to the first question. However, if a site is an interactive one, it may lead some countries, which apply a doing business concept for court jurisdiction to assert jurisdiction as long as the interactivity can be seen as a clear link with the State whose courts assert jurisdiction.

Applicable law: a new concept of consumer protection

As regards applicable law, an important difference has to be made between B2B and B2C contracts. Concerning B2B contracts, there is a renewed interest in codes of conduct. Thus, States are confronted with an ever-increasing duty to define carefully the limits of their public policy rules, since operators over the Internet often develop their own codes of conduct. Whether or not operators can include a choice-of-law clause in their contracts will be determined by the public policy of each State. In the case of B2C contracts, and for a large majority of countries where consumers are protected, the law applicable would be the one which is more favourable to the consumer. Therefore, if the law of the location of the consumer is more favourable, it will apply; but if, on the contrary, it is not, the law of the professional who supplied the service or the goods will apply. This is the main reason why Internet operators have been so keen to block all adoption of rules of the same nature for the Internet. This is one of the areas that would greatly benefit from an international agreement on common rules of protection for consumers. Concerning torts, most decisions which have been taken by national courts around the world apply the law of the place where the effect is felt, and not that of the country where the tort was committed. This rule needs to be reassessed against Internet specificity.

Data protection: convenience at the cost of privacy?

The question of privacy and data protection over the net is another important issue. It is well known that the value of many Internet corporations depends on the amount of data they are able to gather. Thus, personal data about consumer habits, tastes and the like are of great value to any corporation wishing to operate over the net. A consumer may want to limit the availability and use of each of these types of information and may make decisions about entering into a transaction_ based on the extent to which the information will be protected. The problem is not new, what is new is its scale. It is this dilemma - keeping our personal information private, while allowing use of that information to make our lives easier - that is the crux of the current data protection debate. The more legal protection and control individuals are provided with as regards their personal information, the more costly it becomes for companies to comply with those protections, and for Governments to investigate and prosecute violations of those rights. Removing legal barriers to the free flow of information, while allowing for more innovation, development, and more personalized service, will lessen legal protection of personal information. Although the unification of substantive law remains the best solution for international protection of privacy and personal data, in practice it is not always possible to unify all aspects of the law. Therefore, the question of applicable law (e.g. the law of the location of the person whose data are collected) is still pertinent in this context. However, when the conflict rule clashes with the economic needs of Internet operators, it must remain a default rule to be applied only if substantive unification is not possible.

Legal recognition of electronic signatures: the options

As regards encryption and electronic signatures, there seems to be a consensus that a mechanism for secure authentication of electronic communication is critical to the development of electronic commerce. Such a mechanism must provide for confidentiality, authentication (enabling each party in a transaction to ascertain with certainty the identity of the other party) and non-repudiation (ensuring that the parties to a transaction cannot subsequently deny their participation). This chapter provides a review of the basic approaches to electronic signature legislation together with some recent samples of regional legislation that might guide States wishing to prepare legislation on electronic signatures. Cybertaxation: No escape So far, businesses have enjoyed a largely tax-free e-commerce environment. In other words, goods and services transmitted electronically have not been subject to taxation. However, fears of revenue losses from uncollected taxes and duties on Internet transactions have prompted many Governments to work towards internationally agreeable solutions with regard to changing existing tax legislation to take account of e-commerce.

Who pays the VAT: buyer or seller?

At the centre of the e-commerce taxation debate are two issues: consumption and income taxation. As far as consumption taxes are concerned, the question arises whether the tax should be collected in the jurisdiction of the supplier or the consumer. Under current legislation foreign suppliers are often exempted from VAT This provides incentives for suppliers to locate abroad and gives an unfair competitive advantage to foreign suppliers. Therefore, there seems to be a growing tendency towards applying taxation in the place of consumption. Given the disappearance of intermediaries who previously collected the VAT, it is not clear yet who should collect the taxes now. The EU has proposed that the foreign supplier should register in a EU country for VAT purposes. The United States, being the largest exporter and a net exporter of e-commerce, tends towards an origin-based consumption tax. Furthermore, it has little interest in collecting VAT for European tax authorities on their e-commerce goods and services exports to the EU. Developing countries, which will be largely e-commerce importers in the short to medium run, would have an interest in not eroding their tax base by switching to an origin-based tax system.

Is my website a taxable business?

As far as income taxation is concerned, much of the debate has focused on the issue of the "permanent establishment" (PE) of a business. This will determine to what extent an Internet-based business will be subject to taxation. The definition of PE is important for countries that apply source-based income taxation (the majority of countries). Agreement has been reached at the OECD on the following issues: (i) a website by itself cannot constitute a PE; (ii) a web server hosted by an Internet service provider (ISP) cannot constitute a fixed place of business if the ISP does not carry on business through the server; (iii) a web server can constitute a fixed place of business and thus a PE if it is owned by a business that carries on business through the server; and (iv) ISPs cannot be PEs of the businesses whose websites they host. Developing countries, even if they are not part of an OECD agreement on Internet taxation, should use the agreed-upon rules as a basis for adjusting their own legislation. Since they are net importers of e-commerce, they will run a greater risk of losing revenues if traditional imports are replaced by online delivery, and should thus start to develop efficient tax collection systems for e-commerce.

No customs duties on digital goods: a fiscal concern?

In accordance with a WTO moratorium, no customs duties should be imposed on electronic transmissions. While a large number of (mainly developed) countries prefer to extend the moratorium, some developing countries have expressed concern about potential revenue losses resulting from uncollected border tariffs. The question of how to define digital goods (books, CDs, software, music etc.) - as goods or as services - has held up progress on e-commerce in the WTO. While border tariffs are normally collected on goods, they are not collected on services. Developing countries have therefore raised the question of potential fiscal implications if digital products are imported duty-free. UNCTAD calculations show a potential fiscal loss of approximately US$ 1 billion on border tariffs and US$ 8 billion if other import duties (including VAT) are taken into consideration. While these amounts are small relative to total government revenue, absolute losses from forgone tariff revenues are much higher in the developing countries, owing to their higher tariffs applied to digital products.