Chapter 1. Understanding E-Commerce
While new opportunities have arisen for e-commerce to boost growth and consumer welfare, unlocking this potential requires an understanding of what e-commerce is today, how it can be measured and which policies are best suited to support further innovations in the e-commerce marketplace. This chapter introduces the concept of e-commerce and the way it is defined and measured, and discusses the range of policy areas that affect e-commerce, with a particular focus on consumer policy, taxation, competition, cross-border trade and the environment. The chapter concludes by identifying key areas for policy action.
The rise of the Internet in the 1990s fuelled the growth of e-commerce and put it on the agenda of policy makers worldwide (OECD, 1997[1]).1 In the early days of e-commerce, a number of likely benefits from e-commerce were identified, such as increasing efficiency in transaction management, including with respect to inventory, supply chain management and customer service (OECD, 1997[1]; OECD, 1999[2]). For consumers, analysts predicted that e-commerce would improve access to information and enable active participation in core business functions like the product design process (OECD, 1998[3]; OECD, 1999[2]). Researchers also saw the shrinking distance between producers and consumers as an important advantage because it cuts out some intermediaries, including traditional retailers and wholesalers, reducing costs and barriers to entry.
Nevertheless, widespread “disintermediation” was seen as unlikely as new intermediaries were required to establish trust in e-commerce transactions by providing mechanisms of authentication and certification. Analysts suggested that customer information would become an important determinant of competitiveness, involving potential privacy risks. They also predicted that network externalities and increasing returns to scale might limit competition and stifle innovation (OECD, 1998[3]; OECD, 1999[2]).
On the other hand, hopes were high that scalability through electronic networks would offer smaller firms, including niche players, many of the advantages enjoyed by their larger counterparts. In a similar vein, analysts hoped that e-commerce would help firms access new markets, including by eroding the barriers separating one industry from another (OECD, 1998[3]; OECD, 1999[2]; Hawkins, 1998[4]).
Nevertheless, even in the early days of e-commerce, analysts recognised that increasingly decentralised commercial interactions across geographical and political boundaries would create fundamental policy challenges, exacerbated by the intangible nature of emerging products that would make it increasingly difficult to distinguish between domestic and foreign transactions. Four specific areas in which government policies were considered potentially restrictive to e-commerce were related to access, trust, regulatory uncertainty and logistical problems (OECD, 1997[1]; OECD, 1998[3]).
E-commerce analysts also suggested that the Internet could lower the costs of buyer and seller co-ordination in business-to-business (B2B) transactions by increasing the efficiency of existing business processes and reducing the costs of matching buyers and sellers (Garicano and Kaplan, 2001[5]). On the other hand, they suggested that information asymmetries could become more important if buyers could not physically evaluate merchandise before the purchase.
As digital transformation has accelerated, the expectations and predictions of analysts have largely proven true. At the same time, most of those early e-commerce analysts would neither have expected the rapid pace at which digital transformation has progressed nor the dynamism of the e-commerce landscape today. While new opportunities have arisen to unlock the potential of e-commerce to boost growth and consumer welfare, realising such benefits requires understanding what e-commerce is today, how it is measured and which policies support further innovations in the e-commerce marketplace.
What is e-commerce?
E-commerce takes place through a range of different commercial relationships, involving any possible pairing of consumers (C), businesses (B) or governments (G). These include classical B2B transactions, which still account for the lion’s share of turnover resulting from private sector e-commerce, as well as business-to-government (B2G) transactions (e.g. government procurement). E-commerce transactions increasingly involve consumers directly, most notably business-to-consumer (B2C) transactions. Additionally, emerging business models involve consumer-to-business (C2B) and peer-to-peer relationships, which take place between two or more individuals.
This report defines e-commerce as the sale or purchase of goods or services, conducted over computer networks by methods specifically designed for the purpose of receiving or placing orders, in line with the OECD definition established in 2001 and revised in 2009 (OECD, 2011[6]).2 Accordingly, whether a commercial transaction qualifies as e-commerce is determined by the ordering method rather than the characteristics of the product purchased, the parties involved, the mode of payment or the delivery channel.
At the same time, this understanding of e-commerce is not universal, and the usage of the term varies in different contexts. With respect to the evidence presented in Chapter 2 on e-commerce trends, it is particularly important to underscore that the underlying data comes from distinct sources that often rest on slightly different and sometimes vague definitions of e-commerce. Some examples of alternative definitions are discussed in Box 1.1.
Most sources used in this report rely on definitions of e-commerce that are consistent with the OECD definition, particularly with respect to the focus on the ordering process as the defining characteristic, the coverage of both goods and services, and the wide range of network types considered. The Eurostat Methodological Manual for Statistics on the Information Society (Eurostat, 2017[8]) outlines how information and communication technology (ICT) usage surveys should be conducted and explicitly recommends that the OECD definition of e-commerce should be used to ensure the broadest international comparability of e-commerce statistics. The United Nations Conference on Trade and Development (UNCTAD) also relies on the OECD definition in a number of recent studies (UNCTAD, 2016[7]).
The Eurostat manual (Eurostat, 2017[8]) provides further clarifications with respect to potential interpretation issues. Accordingly, bookings and reservations are used for some economic sectors (e.g. accommodation) to describe an “order”. The manual also specifies that orders placed by electronic data interchange (EDI) messages in principle characterise B2B e-commerce, while B2C interactions typically take the form of Internet transactions. Furthermore, online sales can take place via an online store (website, e-commerce marketplace), web forms on a website or extranet, or “apps” regardless of how the Internet is accessed (computer, laptop, mobile phone, etc.).1
The US Census Bureau (2018[9]) uses a similar definition but adds that e-commerce might also include sales where the price and terms of the sale are negotiated over the Internet, a mobile device (m-commerce), extranet, EDI network, e-mail, or other comparable online systems. As with the OECD and Eurostat definitions, a payment may or may not be made online. While the definition is slightly wider, the focus is still on how the purchase is initiated rather than on the form of delivery or nature of the product.
Statistics Canada (2016[10]) defines e-commerce as all sales of goods and services in which the order is received and the commitment to purchase is made via the Internet, although payment can be made by other means. It further specifies that this definition includes orders made over the Internet, through an extranet, or by EDI, and excludes orders made by telephone calls, facsimile or e-mail.
Similarly, the Japanese Ministry of Economy, Trade and Industry (METI) (2016[11]) defines e-commerce in both a narrow sense and in a wider sense in line with the original OECD definition. In a narrow sense, e-commerce comprises transactions that are conducted (i.e. purchase orders that are issued) via computer network systems using Internet technologies and whose contract amounts are captured via such systems. In a wider sense, “Internet” is replaced by “computer network systems”.
In private sector surveys, the term e-commerce is often not defined at all or only relates to a subset of the transactions that would be covered by the OECD definition, reflecting the particular interest of the source. For example, in a recent survey DHL (2017[12]), a logistics provider, defines e-commerce as involving the shipment of physical products from the warehouse in the selling company directly to consumers in another country as an individual parcel. Ambiguities in the definition also arise in the business literature and the media where, depending on the audience, e-commerce often relates to either B2B transactions, such as in the context of global value chains (GVCs), or B2C transactions, and most notably retail, rather than both.
The trade policy community tends to take a much broader view of e-commerce. The World Trade Organization (WTO) Work Programme on Electronic Commerce defines e-commerce as the “production, distribution, marketing, sale or delivery of goods and services by electronic means” (WTO, 1998[13]) which captures many activities that would not fall under the definition of e-commerce used in this report. In the context of trade in services, the WTO defines e-commerce as: 1) the provision of Internet access services, 2) electronic delivery of services, and 3) the use of the Internet as a channel for distribution services, by which goods and services are purchased over the Internet, but delivered to consumers subsequently in non-electronic form (WTO, 1998[13]). Of these, only 3) would fall under today’s OECD definition while 1) and 2) would only be captured to the extent that these services have been ordered over a computer network.
Monteiro and Teh (2017[14]) summarise e-commerce provisions in 56 regional trade agreements (RTAs) and find several interpretations that refer to electronic transmissions, including digitally delivered services, or more vaguely to transactions conducted by electronic means. These would most likely be reflected in category 2) of the WTO nomenclature.
Because of the complexities involved from a trade policy perspective, the debate in this field has substantially broadened in recent years and increasingly refers to the term “digital trade”. In this context, digital trade includes digitally enabled transactions in goods and services that can be delivered digitally or physically (López González and Jouanjean, 2017[15]). This definition includes e-commerce transactions as defined by the OECD, but also includes several distinct types of cross-border transactions, including digitally delivered services, irrespective of the method by which they are ordered. This categorisation of digital trade is currently being used by the international statistics community to measure digital trade (OECD, 2017[16]) and the contribution of digital transformation to gross domestic product (GDP).
As a result, e-commerce as understood in this report is only one of the components of this broader topic when it comes to cross-border transactions. While the cross-border trade policy discussion still often uses the term “e-commerce” in line with the broader WTO understanding, when it comes to trade measurement the usage of the term is usually in line with the OECD definition and the focus on the ordering process.
← 1. More specifically, Eurostat defines e-commerce as “as the sale or purchase of goods or services, whether between businesses, households, individuals or private organizations, through electronic transactions conducted via the internet or other computer-mediated (online communication) networks. The term covers the ordering of goods and services which are sent over computer networks, but the payment and the ultimate delivery of the goods or service may be conducted either on- or off-line.” (See the Eurostat Glossary on E-Commerce (Eurostat, 2017[69]) for further details.)
Many of these definitions, and particularly those used in public and private sector surveys, are explicitly or implicitly consistent with the OECD definition as they consider the ordering process to be a crucial determinant of an e-commerce transaction. This understanding is also broadly in line with the more colloquial notion of buying (or selling) online, as opposed to buying in a physical store, where buying is usually understood as referring to the ordering process, as in ordering via a website (which might involve a store pick-up) rather than ordering over a sales desk.
Nevertheless, an e-commerce transaction as defined by the OECD does not necessarily have to happen online in a technical sense, i.e. using an open network like the Internet. Historically, the OECD (2011[6]) definition distinguishes between e-commerce transactions that make use of the Internet and a broader definition relating to transactions using any type of computer-mediated network. This relates to the frequent use of EDI for B2B transactions, which were widely carried out over custom networks before the widespread use of the Internet. E-commerce initially flourished for B2B transactions, like supply chain operations in the manufacturing sector, because the need to document recurring transactions justified the costs of setting up a private network. The rise of networks using non-proprietary protocols like the Internet enabled new forms of e-commerce that did not rely on pre-existing relationships between economic actors, while at the same time reducing the cost of participation in e-commerce for consumers and small and medium sized enterprises (SMEs) (OECD, 1999[2]).
Furthermore, the definition of e-commerce as understood in this report is not based on product characteristics, but encompasses online purchases of both goods and services. This also implies that the increasing bundling of goods and services, e.g. in the case of an iPod and iTunes, or the rising number of business models that combine both goods and services (e.g. physical books and e-books), are captured as long as they are ordered by electronic means. It should be noted, however, that in some cases, such as in the trade context, conceptual issues are likely to arise because rules are usually based on a goods and services dichotomy (López González and Jouanjean, 2017[15]).3
In addition, with the bundling of goods and services, smart devices bought by standard means (e.g. purchasing a smartphone in a shop) could also come with an attached online subscription, potentially invoking recurring e-commerce transactions. In these cases, the distinction between offline and online ordering is increasingly blurring, implying that a reconsideration of the definition from a measurement perspective may be warranted.
The characterisation of an e-commerce transaction is also not contingent on a specific mode of delivery or a specific format of the product. Thus, for example, any online order of music could be considered e-commerce, irrespective of whether the customer obtains musical content via a compact disc, download or streaming service. This definition of e-commerce accordingly accommodates a wide variety of new and emerging delivery options, including not only streaming of digital content but also 3D printing, delivery drones or local store pick-ups.
Furthermore, this definition of e-commerce does not hinge on a specific mode of payment. Payment methods have undergone massive changes in recent years, including in emerging markets. Digital wallets are increasingly gaining ground in the Chinese market, while many consumers in developing countries still use cash on delivery to settle payments for online purchases (see Chapter 3).4
Finally, and of crucial importance, intermediaries like online platforms, discussed in more detail in Chapter 3, are also covered by the definition of e-commerce used in this report and are captured as a sub-group of web sales in some official statistics (Eurostat, 2017[8]). The term “online platform” in the context of e-commerce usually relates to a multi-sided marketplace that allows third-party sellers to interact with customers without taking ownership of the products being offered (OECD, 2019[18]). However, some online platforms also engage in sales to customers as online retailers themselves. Both types of online sales are considered e-commerce if ordering happens online, irrespective of whether the seller is a third party platform user or the platform provider. Firms that use online platforms dominate e-commerce sales in several countries, but may also derive turnover from activities beyond e-commerce (e.g. via brick-and-mortar book sales or grocery stores).
In spite of the apparent flexibility of this e-commerce definition, it is important to highlight that not every digitally-enabled commercial transaction falls within this definition of e-commerce. As a result, e-commerce transactions according to the OECD definition only include orders conducted through methods specifically designed for the purpose of receiving or placing orders (OECD, 2011[6]). The interpretation guidelines associated with the OECD definition accordingly exclude transactions realised by manually typed e-mails, telephone or fax.
An extension of this limitation is the exclusion of orders transmitted via manually typed short message services (SMS) or instant online messaging services and social networks. These are often used for purchases from smaller firms and in the informal economy. As these methods are usually not specifically designed for the purpose of receiving or placing orders, such transactions are therefore not considered a form of e-commerce according to the OECD definition. However, they may still be relevant from a policy perspective. To the extent that some social networks have specifically designed templates and functionalities for commerce, transactions conducted using such applications would fall within the boundaries of the OECD e-commerce definition.
Importantly, this also implies that some digitally delivered services are not covered by the OECD definition. For example, highly personalised digital services, such as professional design services or customised ICT solutions, are less likely to be sold via e-commerce as defined in this report because the ordering process requires complex interactions that are currently not easily captured by automated ordering methods. Furthermore, some emerging firms of bundled product and service purchases, as well as omni-channel selling strategies, might make it increasingly difficult to distinguish e-commerce from non-e-commerce transactions.
Measuring e-commerce
Measuring e-commerce is complex. As pointed out early by Fraumeni (2001[19]), part of the problem arises because economic data typically does not record how firms do business. E-commerce breakdowns, particularly with respect to quantities such as shipment volumes or values, are therefore often not available and must be estimated.
One approach used by several government agencies is to include specific questions on e-commerce in firm, household and individual surveys. However, in practice these surveys often relate to participation only. Information on quantities is more difficult to obtain from surveys because firms often do not record turnover by sales channel and because individuals might not recall how much or how often they have bought online.
With respect to cross-border transactions, evidence for Europe suggests that individuals tend to significantly underestimate their participation in cross-border e-commerce (European Commission, 2015[20]). About 40% of individuals that had purchased from a seller in another country in the European Union (EU) incorrectly assumed that their latest online purchase was from a domestic seller. Furthermore, only 26% of respondents with purchases from countries outside the EU correctly identified the source of their purchase and 33% wrongly identified the seller as being domestic.
Another concern is that results are often not comparable across countries due to different methodologies in the data collection process, including with respect to the definition of e-commerce (see Box 1.1), imputation methods, as well as the treatment of outliers or multinational enterprises (OECD, 2011[6]). This concern is particularly troublesome for many private sector surveys, which often do not provide information about the underlying survey methodology. As private sector surveys and published estimates may also target an audience of potential customers, it is particularly important to question the credibility of such data (OECD, 1999[2]).
With respect to cross-country coherence, the OECD established an Expert Group on Defining and Measuring E-commerce as early as 1999.5 A definition of e-commerce was first provided in 2002 (updated in 2009) and two model surveys on ICT access and usage by households and individuals and ICT usage by businesses were devised (last updated in 2014), which are now widely applied by government agencies, albeit virtually never in private sector surveys.
Apart from survey data, several other data sources have been used to approximate e-commerce shipments, including across borders. These include the aggregation of data from company reports, payment data, parcel shipments or Internet traffic, among others (UNCTAD, 2016[7]). However, each of these sources usually only provides a partial and potentially biased perspective on e-commerce transactions. As a result, the aggregation of company reports mostly cover only a limited number of large firms, sometimes restricted to pure online retailers. Payment data are typically limited to a specific method of payment or might contain certain transactions that are not related to e-commerce (e.g. payments via near-field communication).
In addition, the geography of cross-border payments does not always reflect the geography of cross-border e-commerce because the payment processing might have been outsourced to a third country. Parcel shipments only relate to physical products and usually do not provide detailed information on the value of shipments. More importantly, not all parcel shipments are due to e-commerce transactions. Similarly, Internet traffic, sometimes used as a proxy for cross-border transactions, is influenced by non-commercial transactions and rarely indicates the value of the transaction.
Measurement challenges related to e-commerce are similar to the challenges of measuring digital transformation more broadly (OECD, 2019[21]). As noted in Fraumeni (2001[19]), issues such as the lack of quality-adjusted price data, particularly for services; the difficulty of measuring intangibles; the blurring distinction between goods and services; and the treatment of free services, often cross-financed by advertising revenues, are particularly important. In addition, challenges might also arise as firms strive for integrated omni-channel sales strategies, eventually leading to a convergence of the different sales channels over time (see Chapter 3).
Such measurement challenges are becoming more pressing as digital transformation progressively deepens across economic sectors. To address them, several international initiatives are currently underway to improve the measurement of digital transformation, including with respect to cross-border activities where the challenges are often exacerbated (OECD, 2017[22]). Two recent expert groups closely related to the measurement of e-commerce include the Inter-Agency Task Force on International Trade Statistics and the Partnership on Measuring ICT for Development.
To better understand how the conditions for B2C e-commerce are changing, UNCTAD has further developed an indicator, first introduced in 2015, that measures the readiness of countries to participate in online commerce for 144 countries (UNCTAD, 2017[23]), using data on Internet users, secure servers, financial account penetration and postal reliability.
A wide range of policy areas impact e-commerce
Despite challenges related to defining and measuring e-commerce, the e-commerce policy agenda continues to evolve. A wide range of policy areas affects e-commerce and e-commerce developments, and they must all be considered to support further innovations in the e-commerce marketplace. Five of these policy areas – consumer policy, taxation, competition, cross-border trade and the environment – are briefly discussed below.
Consumer policy
E-commerce is a core interest of policy makers concerned with consumer protection. The OECD has contributed significantly to addressing many issues related to consumer protection and e-commerce; the ambition in this sub-section is to provide a brief summary of some of this work as well as research done by other organisations. A detailed consideration of the consumer policy aspects of e-commerce however is beyond the scope of this report.
In 2016, the OECD adopted a Recommendation on Consumer Protection in E-commerce (OECD, 2016[24]), updating the original Recommendation from 1999 that had been adopted following the OECD’s 1998 Ottawa Ministerial. The OECD e-commerce Recommendation covers B2C e-commerce including business practices by online platforms that enable consumer-to-consumer transactions. The Recommendation underscores that people buying online are entitled to the same level of protection as those who make conventional transactions. It calls on governments to work with business and consumer groups to determine legal changes that could improve consumer trust in e-commerce.
In particular, the Recommendation suggests that consumer protection laws should cover online apps and services offered for “free” in exchange for gaining access to a user’s personal data (OECD, 2016[24]), themes that have been recently echoed by the EU (European Commission, 2018[25]). The OECD Recommendation also indicates that businesses should take special care in marketing targeted at children or other vulnerable consumers. Provisions should also be made to ensure consumers understand the terms and conditions relating to the acquisition and use of digital content, and consumers should have access to easy-to-use mechanisms to resolve domestic and cross-border e-commerce disputes. The Recommendation also calls on governments and stakeholders to work together to develop minimum levels of consumer protection across payment mechanisms, given that the level of payment protection can vary depending on the type of payment mechanism used. Better trust in payment services is essential to boosting consumer engagement in e-commerce.
The OECD has further conducted work on remedies for consumers engaging in e-commerce. For example, new work on the use of behavioural insights to improve online disclosures in OECD countries has been undertaken with the aim of ensuring that consumers remain informed in the digital age (OECD, 2018[26]). Similarly, the OECD is also exploring the challenge of ensuring adequate product safety in online purchases (OECD, 2016[27]).6
More generally, cross-border e-commerce challenges the enforcement of national, and sometimes regional, consumer protection regimes. In particular, international co-operation on the enforcement of consumer issues, including in relation to product safety and recalls, becomes more important. To boost e-commerce across borders, the OECD (2013[28]; 2018[26]) recommends that policy makers ensure interoperability of legal frameworks in relation to consumer protection, commercial practices and product labelling and certification rules.
Other work on consumer protection in an international context has been undertaken by UNCTAD in accordance with the United Nations Guidelines for Consumer Protection. The revised UN Guidelines for Consumer Protection − adopted by the UN General Assembly in December 2015 − sets out the main characteristics of effective consumer protection legislation, enforcement institutions and redress systems. The UN Guidelines include a specific section covering e-commerce that highlights some of the key considerations for ensuring that consumers are as protected in their online activities as in other types of commerce (United Nations General Assembly, 2015[29]). UNCTAD also considers issues specific to e-commerce, including redress measures, consumer education, good business practices and international co-operation (UNCTAD, 2017[30]).
The International Consumer Protection Enforcement Network (ICPEN), a network of consumer protection law enforcement authorities from across the globe, has several initiatives focused on consumer protection. The overall aim of ICFPEN is to improve international information sharing as well as co-ordination and co-operation on consumer protection enforcement matters and the exchange of best practices. Other related international and regional co-operation networks include the Global Privacy Enforcement Network (GPEN), the Unsolicited Communications Enforcement network (UCENet) and the Ibero-American Forum of Consumer Government Agencies (OECD, 2018[31]).
Taxation
Tax policy is high on the e-commerce agenda. With regard to direct taxation, new digital business models, including for e-commerce, have raised issues around how and where value is created, particularly through their heavy reliance upon intangible assets and increased levels of data collection and user engagement. As intangible assets are highly mobile, new e-commerce business models challenge existing income taxation systems, which rely predominantly on physical factors to determine a taxable presence and allocate profits.
While the delivery in 2015 of the OECD/G20 (2015[32]) base erosion and profit shifting (BEPS) initiative has significantly contributed to realigning income from intangibles with value creation, some more systematic tax challenges remain that go beyond the issue of how to tackle BEPS and double non-taxation. These issues typically relate to the question of how taxing rights on income generated from cross-border activities in the digital age should be allocated among countries. The OECD/G20 Inclusive Framework on BEPS is currently conducting work on these broader direct tax issues, including an analysis of value creation across different digitalised business models, such as those related to e-commerce (OECD, 2016[33]).
A recent Interim Report (OECD, 2018[34]) reflects the progress made by the Inclusive Framework since 2015. The report discusses the main features frequently observed in certain highly digitalised business models and analyses value creation in the digital age, as well as the potential implications for the existing international tax framework. It describes the complexities of the issues involved, the positions that different countries have in regard to these features and their specificity to highly digitalised business models as well as the resulting implications for possible solutions.
With regard to indirect taxation, one of the significant tax challenges arising from digitalisation, and specifically from the growth in e-commerce, is the challenge associated with the collection of value-added tax (VAT) or goods and services tax (GST) on B2C cross-border trade in goods, services and intangibles. Considering that digitalised foreign sellers may not have a presence in the market of a consumer and that this jurisdiction may have limited means to require a foreign seller to apply and remit VAT on services and intangibles supplied to final consumers in that jurisdiction, the result is that no or an inappropriately low amount of VAT may be collected on these supplies by such sellers. This can have adverse effects on countries’ VAT revenues, and can result in an uneven playing field between domestic suppliers and foreign suppliers.
Against this background, new guidelines and VAT collection mechanisms were agreed in the BEPS Action 1 report (OECD, 2015[32]). In accordance with the destination principle, they allow a jurisdiction’s tax authorities to collect VAT on services and intangibles supplied cross-border by foreign suppliers to final consumers (i.e. B2C supplies) in that jurisdiction (i.e. the jurisdiction where the customer is located). For efficient and effective collection by tax administrations, foreign suppliers can benefit from being allowed to register for VAT in the destination country under a simplified registration and compliance regime. Implementation of these measures enables the country of destination to secure the VAT revenues arising from B2C digital supplies to market country consumers and can help ensure a level playing field between domestic and foreign suppliers.
Evidence suggests that this has already greatly enhanced compliance levels by promoting more consistent and effective implementation of the agreed approaches (OECD, 2018[34]). To date, over 50 jurisdictions, including the overwhelming majority of OECD and G20 countries, have adopted rules for the VAT treatment of B2C supplies of services and intangibles by foreign suppliers in accordance with the International VAT/GST Guidelines.
Additionally, the Action 1 report outlined options to facilitate the collection of VAT on the importation of low-value goods from online sales. Based on reducing or removing VAT exemption thresholds, these approaches rely on the intervention of online vendors or other parties involved in the supply chain for online sales, such as e-commerce platforms or express couriers. A number of countries have announced or are actively considering the removal of their VAT exemption thresholds for the importation of low-value goods from online sales and the implementation of approaches for a more efficient collection of VAT for low-value imports.7
Ensuring the efficient and effective collection of VAT on online sales remains a priority for the OECD.8 The need for coherence and consistency in the implementation of the VAT rules across countries resulted in the development of further guidance in 20179 to support governments in the implementation of best practices in the design and operation of the collection mechanisms. Tax administrations and the business community have welcomed this guidance as a significant step in supporting enhanced compliance levels while limiting compliance costs for digital suppliers.
The OECD continues its work to promote the consistent implementation and operation of the recommended rules across jurisdictions focuses on the role of online platforms and other intermediaries in the VAT collection process. The focus of this work has now turned to the design and implementation of measures to secure the efficient and effective collection of VAT on online trade generated and executed by platforms and intermediaries. It is anticipated that this work will result in guidance and approaches based on good practice. This work is scheduled to be completed in 2019.
Competition
E-commerce often takes place via online platforms, which are often characterised by multi-sided markets (see Chapter 3). Multi-sided markets typically benefit from indirect network effects that increase overall returns to scale. A range of different competition dynamics come into play for online sellers as well as other actors in the brick-and-mortar space. In this context, work has been undertaken in the field of competition to determine whether traditional antitrust tools remain relevant (OECD, 2018[35]). Recent work from the OECD (2018[36]) explored the competition dimensions of e-commerce in more detail, with a focus on the antitrust enforcement mechanisms that have been used across the OECD.
One such area of antitrust law involves vertical restraints, which may restrict or enhance competition through agreements between actors at different levels of the production and distribution process. These can include selective distribution mechanisms by suppliers, which may privilege offline over online sales. A second form includes price-based restraints, whereby a manufacturer may indicate implicitly or explicitly the price at which retailers, online or offline, should sell to consumers. Other forms of vertical restraints could include explicit bans on online sales, or sales via online marketplaces (including online platforms), or restrictions on the engagement of retailers with price comparison websites. Many competition authorities have explored the role of vertical restraints in online retail markets in recent years, including the European Commission (2016[37]), Mexico (DLA Piper, 2018[38]) and Japan (Japanese Fair Trade Commission, 2016[39]).
A second aspect of antitrust law involves the potential for unilateral conduct by a dominant firm that may be in a position to exert market power over other actors in the marketplace. In the context of platform markets, this dominance may be the result of direct and indirect network effects. Once gained, such dominance may hold out the potential for anti-competitive unilateral conduct. Related issues include uncertainties concerning the boundaries of the market, the role of lock-in effects, and the role of cross-subsidies from indirect network effects, all of which are characteristic of multi-sided markets.
Unilateral conduct can take many forms, including predatory pricing by dominant firms, or refusal to supply, which rests on whether a firm’s infrastructure or technology is “essential” to other firms. The bundling of goods and services (see Chapter 3) may also serve as a vehicle of leveraging market power from one market to another. Another concern is a potential margin squeeze that could arise if a wholesale access provider also competes directly with other sellers. Other forms of anti-competitive conduct could include forced free-riding, discriminatory leveraging and exploitative practices, including price discrimination.
Horizontal collusion, including between competing online and offline suppliers or retailers, is a third area of antitrust law that comes into play in e-commerce markets. The role of algorithms in facilitating such collusion has recently been explored by the OECD (2017[40]). Although algorithms may offer significant efficiencies overall, online platforms that bring together multiple sellers could increasingly use them to facilitate de facto price co-ordination and alignment of behaviour between otherwise unrelated sellers, a practice known as “hub-and-spoke collusion”. With respect to consumer welfare, these dynamics are not always clear-cut and need to be assessed on a case-by-case basis.
Cross-border trade
Digital transformation affects e-commerce – and trade more broadly – in many ways. While e-commerce simplifies access to foreign goods and services in many cases, the trade policy environment overall has become more complex (López González and Ferencz, 2018[41]). At the same time, more trade occurs in digitally enabled services and bundles of goods and services (Ferencz, 2019[42]).
The blurring of boundaries between goods and services can result in legal and regulatory uncertainties for firms participating in cross-border e-commerce under existing multilateral and bilateral trade agreements that rely on rules based on the traditional distinction between these two categories of products (López González and Ferencz, 2018[41]; Wu, 2017[43]). For example, in the ride-sharing context, it is unclear whether such a service should be classified as a transportation service or as an information service (López González and Jouanjean, 2017[15]).10
Local or regional rules and regulations also affect cross-border e-commerce. For example, data flows across borders have raised concerns about privacy and security. Furthermore, public authorities find it increasingly difficult to gain access to data from overseas when this seems warranted from a policy perspective. This has led some governments to restrict the cross-border transfer of data or require that data be stored locally. The implications of these measures are not well understood and have led to a polarised debate. On the one hand, there are concerns about how new and existing data localisation measures affect business activity (increased costs, technology transfer requirements) and the broader benefits of digital trade. On the other hand, there are concerns about ensuring public policy objectives, such as the protection of privacy, security or intellectual property rights. The challenge is to find a balance that enables these key objectives to be met while preserving the significant benefits of digital trade.
Firms engaging in cross-border e-commerce often face challenges resulting from different regulatory environments in areas such as consumer protection, contract law, labelling, logistics and distribution systems, taxation and technical specifications such as interoperability of payment systems (Kommerskollegium, 2012[44]; European Commission, 2015[45]; Hamilton, 2017[46]). Almost half of the respondents in a global cross-border e-commerce survey indicated that complex rules and regulations in overseas markets are their biggest hurdle (McDermott, 2016[47]).
Partly in response to these hurdles, in 2002 METI developed Interpretative Guidelines on Electronic Commerce and Information Property Trading which are periodically revised to take into account technological trends and changes to international trade rules (METI Japan, 2016[48]). In addition, online marketplaces sometimes provide firms with advice on the applicable rules when selling across borders (European Commission, 2017[49]).
Digital transformation also influences digitally enabled trade in physical goods. For example, the rise in trade of small value packages, mainly driven by cross-border e-commerce, has become an important topic for customs and tax organisations. The World Customs Organization (WCO) lists challenges with respect to the processing capacities of customs agencies and issues arising in areas such as fraud, illicit trade, safety, security and revenue collection (World Customs Organization, 2018[50]). Recent work also suggests that access restrictions to several enabling services can be a barrier to digital trade (Ferencz, 2019[42]).
For firms engaging in e-commerce, the low value content of small packages often implies that transportation and border costs as well as logistical hurdles are relatively more important (DHL, 2017[12]; International Trade Centre, 2016[51]). The WCO is currently exploring potential solutions to the issue of increasing trade costs, including opportunities for co-operation between e-commerce firms and customs organisations. The role of trade costs for small packages will be addressed in forthcoming OECD work. This line of analysis also touches upon the issue of de minimis thresholds, which set the minimum value of a traded good below which no tariffs or taxes are collected. If these thresholds are set too low, clearance times increase but set too high they can tilt the playing field in favour of foreign firms. Accordingly, with the number of small consignments crossing the border increasing, these thresholds are becoming more contentious.11
Moreover, cross-border e-commerce is sometimes also affected by private market participants who restrict the sale of products across borders. The EC recently released a regulation that specifically addresses several forms of unjustified geo-blocking within the EU (European Commission, 2018[53]).
The latest flagship report of the OECD-WTO Aid for Trade initiative includes two chapters on e-commerce, focusing on the size and progression of e-commerce in developing countries and its potential benefits in terms of growth, competitiveness, export diversification and trade participation (OECD/WTO, 2017[54]). Challenges to e-commerce in developing countries were also identified, including poverty, access and connectivity, skills shortages as well as traditional trade barriers and trade costs.
ITC (2016[51]) more specifically addresses policies that affect SMEs’ participation in cross-border e-commerce and provides examples of best practices and new approaches to trade facilitation and regulation. The report also highlights the opportunities that e-commerce entails for SMEs, including in landlocked developing countries, and singles out high shipping costs and international payment solutions as key barriers. Online platforms and social media are discussed as important enablers. Meltzer (2015[55]) focuses on the Internet as a promoter of services exports by US SMEs, but contains several relevant references for e-commerce in other countries.
Digital trade issues have been addressed in multilateral and plurilateral trade agreements since the rise of the Internet in the mid-1990s. In 1998, e-commerce was introduced into the global trade agenda through the work programme on e-commerce launched by the WTO (WTO, 1998[13]). While progress has been measured, at the 11th Ministerial Conference in Buenos Aires, Members agreed to continue work under the current work programme and “maintain the current practice of not imposing customs duties on electronic transmissions” until the next Ministerial (WTO, 2017[56]). A group of 71 Members further agreed to “initiate exploratory work together toward future WTO negotiations on trade-related aspects of electronic commerce” (WTO, 2019[57]).
E-commerce provisions are also increasingly appearing in RTAs. However, these RTAs do not often specify what e-commerce relates to or e-commerce definitions are limited to products and services delivered electronically and do not apply to physical products that have been electronically ordered (Monteiro and Teh, 2017[14]). The most common types of e-commerce provisions include a suspension of customs duties (similar to the WTO moratorium), the general promotion of e-commerce, and related e-commerce co-operation activities (Monteiro and Teh, 2017[14]). Other e-commerce provisions concern the domestic legal framework as well as more specific issues, such as electronic authentication, consumer protection, personal information protection and paperless trading.
Environment
There has been little conclusive research on the net environmental impact of e-commerce. On one hand, e-commerce can reduce transportation use (and the associated negative environmental effects) to brick-and-mortar stores, as well as decrease pressure on physical infrastructures associated with brick-and-mortar stores (e.g. lower electricity use). Increasing e-commerce in intangible products including digital content like e-books, music and films can also reduce production costs in terms of resources since they may be copied at almost zero marginal cost.
On the other hand, increased residential deliveries do not benefit from the same scale effects as professional bulk purchases, reducing transportation and packaging efficiency. The transportation sector is already one of the largest contributors to greenhouse gas emissions (Environmental Protection Agency, 2017[59]; Eurostat, 2018[60]). Advances in smart logistics and routing may mitigate some of these impacts (see Chapter 3). Increasing consumer demand and expectations with regard to same day delivery and similar options will also affect transport efficiency.
Further research is needed to understand the environmental impact of e-commerce which, due to increased use of digital technologies like computers and mobile phones, also carries costs in terms of chemical use, electricity consumption and the recycling of electronic waste. A recent Greenpeace report found that the ICT sector consumes 7% of global electricity output (Greenpeace, 2017[61]). As e-commerce increases, this share will likely grow. Similarly, as e-commerce progresses and connected devices increasingly take part in e-commerce transactions, the environmental impacts of such devices may also increase. Recent analysis has found that 17 kg of e-waste was generated per inhabitant of the OECD in 2017, the equivalent of approximately 41 kg per 100 000 USD of GDP (OECD, 2019[62]).
More generally, e-commerce might not necessarily replace, but could increasingly complement, brick-and-mortar stores (see Chapter 3). From an environmental perspective, a 2013 analysis from MIT’s Centre for Transport and Logistics found that customer travel comprises up to 75% of the total greenhouse gas emissions associated with traditional shopping, indicating that e-commerce that involves brick-and-mortar shopping may not lead to any reduction in emissions (Weideli, 2013[63]). Increased reliance on delivery systems using road and freight vehicles could also heighten aggregate emissions and affect congestion (Marshall, 2018[64]).
E-commerce could also enable the sale of used and second-hand goods to increase their lifespan and promote the circular economy. Similarly, trends towards hand-made goods made at a small scale could shift demand away from cheap mass-produced “fast” forms of fashion, which are bought more regularly but have shorter lifespans and are more difficult to recycle (Greenpeace, 2015[65]).
Moreover, e-commerce enables easier trade across borders, which can challenge the application of national, regional, and local environmental protection policy regimes. For example, extended producer responsibility (EPR) mechanisms aim to make producers responsible for the environmental impact of their products throughout their lifespan. In some cases, these regimes are challenged by e-commerce. For example, because an e-commerce firm has no physical nexus with the consumer’s home country, it may not be registered with national EPR schemes and as such, EPR obligations would no longer apply. Recent OECD work notes that free-riding associated with the rapid growth of online sales has compromised the viability of EPR schemes (Hilton et al., 2019[66]).
Key areas for policy action
The developments highlighted in this chapter have several important implications for policy makers. In particular, omni-channel sales strategies, the convergence of technologies (e.g. web-based EDI), blurring boundaries between goods and services, the increasing role of online platforms and payment intermediaries as well as uncertainties with regard to the geography of sales transactions in a virtual world, complicate the empirical assessment of e-commerce transactions in terms of both scale and scope. The resulting lack of data seriously limits the ability of policy makers to determine the need for policy action and calls for an intensification of the e-commerce measurement agenda.
On the one hand, this implies that the harmonisation of available data on e-commerce across countries (e.g. ICT usage surveys), largely facilitated through international organisations including the OECD, should be continued and adjusted in response to an evolving technological environment. Changing technologies and business models might eventually also warrant a reconsideration of the current OECD e-commerce definition.
On the other hand, the limitations of ICT usage surveys, e.g. with regard to an assessment of the value of transactions, requires governments to foster the inclusion of e-commerce related questions in other official data sources, such as structural business or household expenditure surveys (OECD, 2019[21]). Additionally, national statistical offices (NSO) should foster the use of non-standard data sources. This will likely require establishing data sharing agreements with the private sector, including with online platforms, payment intermediaries or logistics service providers. Because most of these sources provide only a partial and often biased perspective on e-commerce transactions, ensuring the representativeness of these data should become a priority for NSOs.
Apart from arising measurement challenges, and as with many other facets of digital transformation, a wide range of policy areas directly affects the development of e-commerce. This includes policies related to consumers, tax, competition, cross-border trade and the environment. Some of the key e-commerce policy issues in these policy areas are briefly discussed below.
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Consumer protection has become more complex in the digital era, including for vulnerable consumers (e.g. children). At the same time, new issues have emerged, for example in relation to online apps and services offered for “free” in exchange for gaining access to the user’s personal data. More generally, cross-border e-commerce challenges the enforcement of national and regional consumer protection regimes, particularly for product safety and recalls.
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Tax policy challenges have moved to the top of the global agenda, especially with respect to the taxation of intangible assets, as new digital business models, including for e-commerce, have raised issues around how and where value is created, particularly through emerging opportunities for data collection and user engagement. As intangible assets are highly mobile, new e-commerce business models further test existing income taxation systems, which are based predominantly on physical factors to determine a taxable presence and allocate profits (e.g. the definition of permanent establishment).
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Competition policy also comes to the fore with respect to e-commerce. A range of different competition dynamics have emerged for online sellers as well as other actors in the brick-and-mortar space, including for online platforms. Issues around whether traditional antitrust enforcement mechanisms are fit for the digital age have become more important, including with respect to possible horizontal collusion. The role that algorithms may play in facilitating such collusion has also been raised in competition policy circles.
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Trade policy represents another important e-commerce policy area. As more trade occurs in digitally-enabled services and bundles of goods and services, the blurring of boundaries between goods and services can result in legal and regulatory uncertainties for firms participating in cross-border e-commerce under existing multilateral and bilateral trade agreements that rely on rules based on the traditional distinction between goods and services. Rules regarding cross-border data flows also impact e-commerce.
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Environmental policy may also affect e-commerce, although the net effect is not clear-cut. On the one hand, e-commerce can reduce transportation use (and the associated negative environmental effects) to brick-and-mortar stores, as well as decrease pressure on physical infrastructures (e.g. lower electricity use). On the other hand, increased residential deliveries do not benefit from the same scale effects as professional bulk purchases, reducing transportation efficiency, while increased e-commerce may also increase e-waste. E-commerce can also raise issues with national, regional, and local environmental protection policy regimes.
Technological change and business model innovations are constantly altering the e-commerce landscape, and these new developments are increasingly challenging several policy areas simultaneously. While many of the challenges identified in the early days of e-commerce remain relevant (e.g. related to data protection), new challenges have emerged (e.g. the rise of tradeable services and their implications for trade policy frameworks).
These developments imply that a holistic approach to e-commerce policy making is essential, including co-operation and collaboration across policy domains. Policy makers should ensure that policy action is not unilateral, but instead developed with thoughtful consideration of the impacts across policy domains, particularly those identified in this report. A periodic review of policy settings may be useful in ensuring that the benefits of e-commerce can be maximised while addressing the related challenges.
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Notes
← 1. Several high-level meetings on e-commerce were held, including the G7 Ministerial Conference on the Information Society 1995 in Brussels and the Ministerial Conference on Global Information Networks in Bonn 1997. The OECD held a conference in 1997 on “Dismantling the Barriers to Global Electronic Commerce” in Turku followed by its Ministerial Conference on E-Commerce in 1998 in Ottawa.
← 2. An order is understood as a commitment to purchase goods or services, irrespective of how the payment is made (OECD, 2011[6]).
← 3. The blurring distinction between goods and services poses challenges for the multilateral trade system, where policy makers need to determine whether emerging product bundles are to be treated according to the rules under the General Agreement on Tariffs and Trade (GATT) or the General Agreement on Trade in Services (GATS) (Magdeleine and Maurer, 2016[70]).
← 4. The recent update of the OECD Guidelines for Consumer Protection in the Context of Electronic Commerce (OECD, 2016[24]) highlights that increasingly non-monetary transactions must be considered in the context of e-commerce.
← 5. The OECD Working Party on Indicators for the Information Society (WPIIS, now WPMADE) led the measurement work related to e-commerce.
← 6. The work on consumer protection, particularly in relation to e-commerce, is led by the OECD Working Party on Consumer Product Safety (WPCPS).
← 7. For example, the 28 EU member states have recently approved proposals for modernising VAT collection in cross-border e-commerce. These proposals provide for the extension of the mini-one-stop-shop (MOSS) registration system to cover imports of low-value goods and all cross-border services to final users and to remove the exemption for low value consignments with effect from 2021. Australia has already enacted legislation on the GST treatment of low-value imported goods, with effect from 1 July 2018. Switzerland changed its rules regarding the treatment of low-value imports as of 1 January 2019. Singapore is also considering implementing a simplified registration regime for both the taxation of cross-border services and low-value goods and is currently consulting affected stakeholders.
← 8. The work on consumption taxes, including in relation to e-commerce, is led by the OECD Working Party No. 9 on Consumption Taxes (WP9).
← 9. The report, “Mechanisms for the effective collection of VAT/GST where the supplier is not located in the jurisdiction of taxation” was developed with the active involvement of both a broad range of jurisdictions beyond the OECD and the global business community, notably through the OECD Global Forum on VAT and the Technical Advisory Group to the WP9. It provides a general description of basic policy questions and design issues concerning the collection of VAT on supplies of services and intangibles by foreign suppliers together with an overview of key policy and design issues for tax authorities to consider when designing and implementing a registration-based collection regime with or without simplification measures. It also provides more detailed guidance on the design and practical operation of a simplified registration and collection regime as recommended by the VAT/GST Guidelines and by the Action 1 report. It does not aim at detailed prescriptions for national legislation. Jurisdictions are sovereign with respect to the design and application of their laws. Rather, the report seeks to present a range of possible approaches and discuss associated policy considerations. The report is evolutionary in nature and will be reviewed regularly in light of the rapid development of technology and online sales and delivery processes.
← 10. See also the recent European Court of Justice ruling related to Uber (European Court of Justice, 2017[71]).
← 11. The 2015 BEPS Action 1 Report (Annex D) indicates that countries could consider if they wish to remove VAT exemption thresholds applying to imports of small consignment (parcels). Further work is currently being developed with respect to the role of digital platforms in the collection of VAT/GST on online sales (see Chapter 3 for more discussion of online platforms in e-commerce).