Rapid advancements in communications technology and the development of the Internet into a global 'network of networks' are said to be drivers of the 'new economy'. The access to these networks have stimulated the emergence of 'cyber business' and 'electronic commerce'. In the world of cyberspace, this 'new economy' represents a channel, rich in information, choices, opportunities, entertainment, knowledge, and commerce. It has changed the manner in which society works and interacts, whilst embracing the commercial sphere. The 'net' may be seen as an instantaneously accessible global shopping mall. Thus, there is a need to understand the problems associated with this new technology. As e-commerce continues to boom, globalisation presents new challenges to governments around the world, tax policymakers and administrators with regard to the application of existing tax norms. Whether or not the Internet continues to be a driving force behind the economy depends upon the policies, regulations, and taxes imposed on this new medium. The fact that the existing tax laws were developed to deal with the trading of physical goods or the provision of services to clearly identifiable persons, and not with the border less, faceless nature of electronic commerce, tax authorities must reach an international consensus and clarity on which taxing jurisdiction may collect taxes, when businesses and individuals are transacting online. Characterisation of income is important because national and international income tax rules assign different categories of income to different jurisdictions. The concept of 'permanent establishment' is based on a physical presence, which may be more difficult to apply with the modern communication systems. Due to the increasing rate at which multinationals share central services and business development activities, the transfer pricing issue is one of determining an appropriate price or value of transactions undertaken between related parties. These issues need to be examined by, among others, the OECD. It has yet to reach definite conclusions, but drafts of its working papers, made pUblic, suggest a chief focus of the GEeD work will be to clarify transactions in cyberspace. This thesis critically examines the ability of the existing tax legislation, within the context of the Income Tax Act 58 of 1962, to the challenges posed by trading on the Internet. An examination of the impact of tax principles on e-commerce is prefaced by an analysis of international response to this subject. The basic structure of the Internet, e-commerce and its functioning is examined. These daunting challenges and the controversial sets of issues are powerfully documented in this thesis, up to and including the enactment of the Taxation Laws Amendment Act 30 of 2002, which took effect on 13 December 2002.

Thesis (LL.M.)-University of Natal, Pietermaritzburg, 2003.