Global Issues
Contemporary Prospects And Challenges; Finding The Way Forward In The E-commerce Sector -By Oyetola Muyiwa Atoyebi
In the first three quarters of 2020, the growth in the global E-commerce sector was estimated to have reached $612.86 billion, making for 13.6 per cent of the overall retail sales globally, involving primarily the buying and selling of goods and services, the electronic transmission of data or funds via the use of the internet.
SNIPPET
The E-commerce sector is predicted to be one of the leading industries in the upcoming years, as it will change the conduct of business transactions, by generating new opportunities and creating new challenges for growth.
However, while E-commerce presents a tremendous opportunity for economic growth, it poses significant challenges to existing tax laws and regulatory mechanisms, foreign exchange rates, and data protection, largely owing to the inherently non-territorial nature of its digital transactions.
To address these issues, stakeholders have enacted frameworks, regulations and laws to ensure better administration in the E-commerce sector. A few of these regulations are: The Ottawa Taxation Framework (OTF), the General Data Protection Regulation (GDPR) 2018, and the Nigerian Data Protection Regulation (NDPR) 2019, amongst others.
1.0 INTRODUCTION
The retail sector, like many other industries, has witnessed significant transformation since the advent of the internet, owing to the global reliance on the supply of services made available on online platforms. With the recent technological innovations experienced in the world today, E-commerce has become an essential component of the global retail framework, as it permeates the limitations imposed by national regulations, and makes room for a single world trading system.
In the first three quarters of 2020, the growth in the global E-commerce sector was estimated to have reached $612.86 billion, making for 13.6 per cent of the overall retail sales globally, involving primarily the buying and selling of goods and services, the electronic transmission of data or funds via the use of the internet.
However, owing to the global reliance placed on the use of the internet for the supply of services, several issues affect the operations of E-commerce ranging from trans-border issues, cross-border taxation issues, foreign exchange risks, data protection in the use of electronic payment systems, and many more.
This disquisition is aimed at identifying the prospects of the E-commerce sector, identifying the key issues that affect electronic commercial operations, and making recommendations on the way forward.
2.0 The Meaning of E-commerce
E-commerce (Electronic commerce) is the buying and selling of goods and services, or the transmitting of funds or data, over an electronic network, primarily the internet[1].
Following the publication of the World Wide Web in 1989 and of the first browser for accessing it in 1990, commercial activities slowly transitioned from the use of conventional trading mechanisms to the use of the Internet in carrying out business transactions. More recently, with the global spread of smartphones and the accessibility of fast broadband connections to the internet, much of E-commerce has moved to mobile devices, which includes phones, tablets, laptops etcetera.
E-commerce being the buying and selling of goods and services online, has deeply affected everyday life and how businesses operate owing to the conduct of commercial operations in electronic marketplaces ranging from large electronic malls, consumer-to-consumer auction platforms, multichannel retailers, now utilized by a majority of retailers[2].
3.0 Prospects in The E-Commerce Sector
It is estimated that the global sales growth in the E-commerce sector worldwide would be around 12.7 per cent in 2022, a 4.1 percentage point dip from 2021. This will fall to 11.2 per cent in 2023, 9.8 per cent in 2024, and 9.0 per cent in 2025[3] with benefits such as cost-effectiveness, quick comparison shopping, better customer service, information saving and knowledge market development.
The E-commerce sector is projected to be one of the leading industries in the upcoming years. It has changed the business of transactions by creating generous new opportunities and creating new challenges. It makes traditional businesses into a modern competitive world, and will likely make them run out of their business.
However, the E-commerce sector is not without its challenges, which are mainly as a result of the growing global reliance on the use of technological innovations, like the internet for the conduct of business transactions, such as business to business, business to consumer, business to government, and consumer to consumer transactions. Some of these challenges which affect the E-commerce sector are examined as follows:
- Trans-National Issues:
Whilst it is a recognisable fact that E-commerce could also be a domestic transaction, the e-commerce sector is undoubtedly also thriving globally as it presents consumers with the opportunity of comparing products online and making informed purchase decisions. More so, due to the advancements in technology, it is easier now for consumers to look for the best deal, even outside their countries. And this, along with the global e-commerce’s predicted growth of over $800 billion by 2022, is what makes cross-border e-commerce business appealing to consumers[4].
Understandably, when it comes to cross-border E-commerce solutions, there are no one-size-fits-all. Different businesses have entirely different solutions for different countries and markets, and while these variations may seem unremarkable, they can have profound implications for customer satisfaction, retention and purchase price. With E-commerce becoming more dominant, and cross-border purchases set to become a more commonplace part of consumers’ lives, these are challenges that will need to be tackled in ensuring better operations of online marketplaces[5].
- Cross-Border Taxation:
While E-commerce presents a tremendous opportunity for economic growth, it poses significant challenges to existing tax law and regulatory mechanisms due to the inherently non-territorial nature of its digital transactions which are hard to trace and could potentially lead to tax revenue losses at sub-national, national and international levels. This revenue loss is particularly worrying to governments, that rely heavily on tax revenue as a source of funding for their fiscal programs. To address these issues, the Organization for Economic Corporation and Development (OECD) has taken the lead role in establishing the guiding principles and tax rules, to govern the tax treatment of international E-commerce transactions, by engaging member countries to come up with the Ottawa Taxation Framework (OTF).
Before the OTF, there were diverse opinions on how E-commerce taxation issues should be addressed, in light of which the source rules and the permanent-establishment rule were established. The “source-based” taxation, or territorial jurisdiction rule, proposed that “the country with the primary right to tax the profits of an enterprise, is the country in which the enterprise earns the income”. While the permanent-establishment rule proposed that the second basis for tax jurisdiction, is permanent establishment or residence, according to which the enterprise’s country of residence or permanent establishment has primary taxing jurisdiction, over the income generated[6].
Confronting the taxation challenges arising from the digitalization of the economy, has been a leading priority of the Base Erosion Profit Shifting (BEPS) project of the Organization for Economic Cooperation and Development (OECD)/G-20 Inclusive Framework (IF) since 2015[7]. Studies have shown that the major causes of E-commerce taxation complexities, most often than not include but is not limited to borderless commerce models and digital convergence. The OTF in harmonising the existing tax policies in the jurisdictions of member countries, established a two-pillar solution (Nexus and profit allocation rule, and the Global Minimum Tax Rule), to address the tax challenges arising from the digitalisation of the economy on the principles of neutrality, efficiency, certainty and simplicity, effectiveness and fairness, and flexibility, as the basis for taxation in the E-commerce sector[8].
- Foreign Exchange Risk
The International Monetary Fund (IMF) defines exchange rate risk as the possible direct loss (as a result of an unhedged exposure), or indirect loss in cash flows, assets and liabilities, net profit and, in turn, its stock market value from an exchange rate move[9].
With cross-border E-commerce becoming increasingly prevalent, it has been indicated by industry analysts that about 51% of online shoppers worldwide are purchasing from online retailers. Consequently, as businesses pivot to the E-commerce sector, setting up a localised experience for international shoppers on the various trading platforms, in mitigating related foreign exchange trading risk, becomes a matter of importance.
Foreign exchange (FX) risk exists because the exchange rates represent a volatile market that is subject to daily changes. It is often horizontal risk, meaning it occurs between two different currencies.
The fluctuations do not only exist between two fiat currencies (such as the dollar and the Naira), but may also affect a non-fiat currency. They can be caused by the appreciation or depreciation of both the home currency and foreign currency – either independently or together.
Consumers, on the E-commerce platforms, are usually faced with exchange rate risks, and the problems associated with computing the exchange rate values, especially in cases where the currency acceptable on the platform fluctuates, in comparison to the currency applicable to the user. However, for businesses, in the E-commerce sector, the challenges are quite broad, as they operate direct to customer’s model (D2C) and sometimes fail to offer multi-currency pricing options that cater to the buyer’s preferences, resulting in lower checkout conversion for international sales[10]. This is supported by a PayPal survey, which indicates that 76% of online shoppers prefer to have the option of paying in their local currency, and over 60% of survey respondents check currency conversion rates, before paying in foreign currencies[11].
In light of the above challenge, settlement models have been developed in cross-border E-commerce transactions one of which is the “settlement currencies”. The settlement currencies, give businesses on the E-commerce platforms, the option to receive sales proceeds from their Payment Service Provider in a small number of settlement currencies, which in turn is made to match the functional currencies of their business. This implies that foreign exchange related choices managed by Payment Service Providers (PSP), would effectively curb the FX inefficiencies, that arise from settlement workflows.
- Data Privacy Threats to E-Commerce
It is a fact that in recent times, most transactions are conducted online, involving the transmission of personal data such as shipping addresses, billing information amongst others, it is no news that the data of consumers are exposed to highly prevalent threats, that can adversely impact the personal information of an E-commerce site visitor, such as phishing attacks, identity theft and unlawful data processing among a host of others.
Privacy concerns would ordinarily arise in any situation where personal information is collected and stored. Any website that collects personally identifying information is required to post a Privacy Policy disclosing the ways that the party gathers, uses, discloses, and manages personally-identifying information. Although data privacy concerns have been a part of online business since the inception of the Internet, in the past few years there has been a fundamental shift in handling user data, as government regulators and legislators have enacted a host of data privacy laws to govern the collection and use of user data. These new rules require more than a one-sided privacy policy granting broad privileges to the E-commerce service providers. Instead, E-commerce businesses must disclose in clear language how and what data they collect. They must also provide the ability for users to review the data that has been collected, and must give users the right to have this data deleted upon request[12]. As such, E-commerce privacy policy terms must be written in such a manner that consumers have significantly more power over the collection and use of their data.
As noted above, governments have made data privacy a priority in recent years. The chief examples of this are the General Data Protection Regulation (GDPR) 2018, which was enacted by the European Union (EU) and the Nigerian Data Protection Regulation (NDPR), 2019 enacted by the National Information Technology Development Agency (NITDA). Some key aspects of the GDPR applicable to the operation of e-commerce in the European continent include:
- Lawfulness, fairness and transparency — Data processing must be lawful, fair, and transparent to the data subject (consumers on the e-commerce platforms).
- Purpose limitation — e-commerce companies must process data for the legitimate purposes specified explicitly to the data subject when you collected it.
- Data minimization — e-commerce companies should collect and process only as much data as necessary for the purposes specified.
- Accuracy — e-commerce companies must keep personal data accurate and up to date.
- Storage limitation — e-commerce companies may only store personally identifying data for as long as necessary for the specified purpose.
- Integrity and confidentiality — Processing must be done in such a way as to ensure appropriate security, integrity, and confidentiality (e.g. by using encryption).
- Accountability — The data controller (the e-commerce company) is responsible for being able to demonstrate GDPR compliance[13].
Before the above developments, online businesses would create a privacy policy that was usually one-sided and typically granted the company a broad range of rights concerning how and what data they collected, and how they chose to use it. Since these policies were buried in a link somewhere on the site, most users never even read the policy.
With different countries enacting data protection laws like the Children’s Online Privacy Protection Act (COPPA)[14], The Health Insurance Portability and Accountability Act (HIPAA) etcetera[15] it is possible that protection of data subjects in the e-commerce sector would be addressed with the required level of importance.
4.0 Conclusion
The entry of E-commerce into the business world has benefited the global economy in a variety of ways, since it offers answers to some of the limits imposed by traditional trading channels. Despite the foregoing, the e-commerce industry has encountered several difficulties in its operations.
Given the above, national legislation should be enacted to mirror international standards governing cross-border transactions, notably in the areas of taxation, intellectual property protection, and data privacy. Furthermore, existing national or worldwide regulatory agencies should be established and charged with ensuring that the E-commerce sector complies with legal restrictions. More specifically, in mitigating foreign exchange risks, settlement currencies should be implemented on E-commerce platforms in addition to regulatory frameworks, as it is easier and more cost-effective.
AUTHOR: Oyetola Muyiwa Atoyebi, SAN.
Mr. Oyetola Muyiwa Atoyebi, SAN is the Managing Partner of O. M. Atoyebi, S.A.N & Partners (OMAPLEX Law Firm) where he also doubles as the Team Lead of the Firm’s Emerging Areas of Law Practice.
Mr. Atoyebi has expertise in and a vast knowledge of Telecommunications, Media and Technology Law and this has seen him advise and represent his vast clientele in a myriad of high level transactions. He holds the honour of being the youngest lawyer in Nigeria’s history to be conferred with the rank of a Senior Advocate of Nigeria.
He can be reached at atoyebi@omaplex.com.ng
COUNTRIBUTOR: Love Ebekhile
Love is a member of the Technology Law Team at Omaplex Law Firm. She also holds a commendable legal expertise in commercial transactions.
She can be reached at love.ebekhile@omaplex.com.ng
[1] Wesley Chai, ‘E-Commerce’ Tech Target < https://www.techtarget.com/searchcio/definition/e-commerce> accessed 26January 2022.
[2] Vladimir Zwass, ‘E-Commerce, Economics’ < https://www.britannica.com/technology/e-commerce> accessed 18January 2022.
[3] Oberlo ‘Global E-Commerce Sales Growth 2019-2025’ <https://ng.oberlo.com/statistics/global-ecommerce-sales-growth > accessed 20 January 2022
[4] Contentserv, ‘The Top 5 Challenges of Cross Border E-Commerce’ < https://www.contentserv.com/blog/top-5-challenges-of-cross-border-ecommerce> accessed 18 January 2022.
[5] Daniel Webber, ‘Cross-Border E-Commerce: Three Challenges Defining the Next Decade’ Forbes (March 4 2021) < https://www.forbes.com/sites/danielwebber/2021/03/24/cross-border-ecommerce-three-challenges-defining-the-next-decade/?sh=79df3e093a3a> accessed 18 January 2022.
[6] Peter Misani, ‘Taxation of Electronic Commerce’.
[7] For further information on digital taxation please refer to our article on: ‘Taxation in E-Commerce’< https://drive.google.com/file/d/1utTVcs5eXXjPhuQT182BIjlGsrnC9cny/view>
[8] OECD Policy Statement issued 1 July 2021.
[9] James Chen, ‘What is Foreign Exchange’ Investopedia < https://www.investopedia.com/terms/f/foreign-exchange.asp> accessed 19th January 2022
[10] Managing Risks and Supporting Growth in the E-Commerce Era <https://www.citibank.com/tts/sa/flippingbook/2020/Managing-Risk-Supporting-Growth-Ecommerce/2/#zoom=z> accessed 19th January 2022
[11] Ibid 8.
[12] Cybervadis, ‘E-Commerce and Data Privacy’ < https://cybervadis.com/articles/e-commerce-and-data-privacy-part-1/> accessed 18 January 2022.
[13] Jim Chester, ‘Privacy Law and Requirements for E-Commerce Businesses’ <https://www.klemchuk.com/ideate/data-privacy-and-privacy-policies-for-ecommerce > accessed 20 January 2022.
[14] COPPA 1988: A Federal law of the United States of America which imposes certain requirements on operators of websites or online services directed to children under 13 years of age, and on operators of other websites or online services that have actual knowledge that they are collecting personal information online from a child under 13 years of age.
[15] HIPAA 1996: A Federal law of the United States of America that required the creation of national standards to protect sensitive patient health information from being disclosed without the patient’s consent or knowledge.
