Digital taxation: Need for uniform rules
- Opinion
- August 29, 2022
International tax rules, drafted more than a century ago are inadequate to in today’s dynamic and changing reality. Further, the pervasive nature of digitalisation makes it difficult for countries to streamline taxation of digital business. Hopes are pinned on OECD’s final report to be tabled in 2020, to provide a consensus-based long-term solution for bridging divergent views on taxation of highly digitised businesses around the world.
Economies and markets have been increasingly integrating in recent years, putting a considerable strain on international tax rules, which were designed more than a century ago. Moreover, weaknesses in current rules create opportunities for Base Erosion and Profit Shifting (BEPS) and require policy-makers to make bold moves in order to restore confidence in the system and ensure that profits are taxed wherever economic activities take place and value is created.
In October 2015, the Organisation for Economic Co-operation and Development (OECD) released a report on the BEPS Action Plan-I, which focused on addressing tax-related challenges faced by the digital economy.
After the launch of the BEPS report (in 2015), several countries have taken significant initiatives to secure share of their tax revenue from digital transactions. In this context, steps taken by India, Italy and France to tax digital transactions are noteworthy.
India has introduced the 6% Equalization Levy on cross-border business-to-business transactions for online advertising or provision of digital advertisement space. On similar lines, Italy has put in place a levy on Digital Transactions to provide a level field for suppliers of digital services and conventional services. France has introduced its ‘YouTube Tax’.
India has also implemented a new nexus rule, based on the concept of Significant Economic Presence (SEP). The concept of SEP is not new, but different countries have different SEP related practices. For instance, India uses the rule to tax digital transactions, based on the threshold of local revenue or users. Israel decides on the basis of conclusion of online contracts, use of digital products and services, localised websites, etc. Therefore, we see that there are no uniform practices relating to SEP around the world.
Countries are taking unilateral measures to tackle challenges faced in the digital economy. Such measures can be broadly grouped in four categories―(i) alternative applications of the Permanent Establishment threshold, (ii) Withholding Tax, (iii) Turnover Taxes and (iv) specific regimes targeting large multinational enterprises.
The measures mentioned above aim to protect and expand a country’s tax base on the basis of the location of customers or users and include elements linked to the market in designing its tax base, e.g., sales revenue, place of use or consumption. This reflects discontentment among other countries due to taxation-related outcomes resulting from current International Income Tax rules.
Such uncoordinated or unilateral measures will not resolve the challenges of international taxation. Introduction of a worldwide coherent and concurrent regime for digital taxation seems to be the only meaningful solution.
Two multilateral organisations–the OECD and the European Commission (EC)–have been working on options and recommendations to address the challenge of taxing digitised businesses.
In March 2018, the OECD released its interim report, Tax Challenges Arising from Digitalisation. The report provides an in-depth analysis of the main features of some highly-digitalised business models and value creation. It describes the main features of digital markets and how these shape value creation, e.g., (i) scale without mass, (ii) heavy reliance on intangible assets and (iii) the role of data and user participation, and identifies the characteristics of highly digitalised businesses.
This report elaborates on the need for future reforms and the continuing evolution of digital technologies, including the areas in which different countries hold divergent views.
Acknowledging these divergences, the OECD has undertaken the task of comprehensively reviewing the two key aspects of the existing tax framework―the ‘profit allocation’ and ‘nexus’ rules that aim to gauge the impact of digitalisation on the economy. The report also states that the OECD would provide another update in 2019 before finalisation of the consensus-based solution (by 2020).
Following the launch of the report, the European Commission has disseminated its proposals, which seek to deliver new ways of taxing digitised business activity. The Commission has suggested an interim solution in the form of the Digital Service Tax (DST), which is to be levied on gross revenue (turnover). It proposes that the tax is set at a uniform rate of 3 per cent in all EU member states, and focuses on the new concept of Digital Permanent Establishment with revised profit attribution rules. These proposals will be submitted for further discussion. We hope to see their final adoption by the end of 2019.
The UK released its position paper around the same time as OECD and the European Commission. It elaborates on the country’s views on digital taxation. The position paper recognises the need for reformation of the international tax system for digital economies, but does not subscribe to the ‘market jurisdiction’ concept (as in the OECD report). The UK Government supports the principle that profits should be taxed in the country in which these create value for digital enterprises, regardless of the location of the users.
The fact that emerges is that given the pervasive nature of digitalisation, it is difficult to streamline taxation of digital businesses. However, the bright side is that the OECD will present its final report in 2020. This is expected to provide a consensus-based long-term solution for bridging divergent views on taxation of highly digitised businesses around the world.
Author:
Pallavi Singhal, Partner and Tax Leader -Technology Sector, PwC India.
(With inputs from Neetu Singh, PwC India)
Economies and markets have been increasingly integrating in recent years, putting a considerable strain on international tax rules, which were designed more than a century ago. Moreover, weaknesses in current rules create opportunities for Base Erosion and Profit Shifting (BEPS) and require policy-makers to make bold moves in order to restore confidence in the system and ensure that profits are taxed wherever economic activities take place and value is created.
In October 2015, the Organisation for Economic Co-operation and Development (OECD) released a report on the BEPS Action Plan-I, which focused on addressing tax-related challenges faced by the digital economy.
After the launch of the BEPS report (in 2015), several countries have taken significant initiatives to secure share of their tax revenue from digital transactions. In this context, steps taken by India, Italy and France to tax digital transactions are noteworthy.
India has introduced the 6% Equalization Levy on cross-border business-to-business transactions for online advertising or provision of digital advertisement space. On similar lines, Italy has put in place a levy on Digital Transactions to provide a level field for suppliers of digital services and conventional services. France has introduced its ‘YouTube Tax’.
India has also implemented a new nexus rule, based on the concept of Significant Economic Presence (SEP). The concept of SEP is not new, but different countries have different SEP related practices. For instance, India uses the rule to tax digital transactions, based on the threshold of local revenue or users. Israel decides on the basis of conclusion of online contracts, use of digital products and services, localised websites, etc. Therefore, we see that there are no uniform practices relating to SEP around the world.
Countries are taking unilateral measures to tackle challenges faced in the digital economy. Such measures can be broadly grouped in four categories―(i) alternative applications of the Permanent Establishment threshold, (ii) Withholding Tax, (iii) Turnover Taxes and (iv) specific regimes targeting large multinational enterprises.
The measures mentioned above aim to protect and expand a country’s tax base on the basis of the location of customers or users and include elements linked to the market in designing its tax base, e.g., sales revenue, place of use or consumption. This reflects discontentment among other countries due to taxation-related outcomes resulting from current International Income Tax rules.
Such uncoordinated or unilateral measures will not resolve the challenges of international taxation. Introduction of a worldwide coherent and concurrent regime for digital taxation seems to be the only meaningful solution.
Two multilateral organisations–the OECD and the European Commission (EC)–have been working on options and recommendations to address the challenge of taxing digitised businesses.
In March 2018, the OECD released its interim report, Tax Challenges Arising from Digitalisation. The report provides an in-depth analysis of the main features of some highly-digitalised business models and value creation. It describes the main features of digital markets and how these shape value creation, e.g., (i) scale without mass, (ii) heavy reliance on intangible assets and (iii) the role of data and user participation, and identifies the characteristics of highly digitalised businesses.
This report elaborates on the need for future reforms and the continuing evolution of digital technologies, including the areas in which different countries hold divergent views.
Acknowledging these divergences, the OECD has undertaken the task of comprehensively reviewing the two key aspects of the existing tax framework―the ‘profit allocation’ and ‘nexus’ rules that aim to gauge the impact of digitalisation on the economy. The report also states that the OECD would provide another update in 2019 before finalisation of the consensus-based solution (by 2020).
Following the launch of the report, the European Commission has disseminated its proposals, which seek to deliver new ways of taxing digitised business activity. The Commission has suggested an interim solution in the form of the Digital Service Tax (DST), which is to be levied on gross revenue (turnover). It proposes that the tax is set at a uniform rate of 3 per cent in all EU member states, and focuses on the new concept of Digital Permanent Establishment with revised profit attribution rules. These proposals will be submitted for further discussion. We hope to see their final adoption by the end of 2019.
The UK released its position paper around the same time as OECD and the European Commission. It elaborates on the country’s views on digital taxation. The position paper recognises the need for reformation of the international tax system for digital economies, but does not subscribe to the ‘market jurisdiction’ concept (as in the OECD report). The UK Government supports the principle that profits should be taxed in the country in which these create value for digital enterprises, regardless of the location of the users.
The fact that emerges is that given the pervasive nature of digitalisation, it is difficult to streamline taxation of digital businesses. However, the bright side is that the OECD will present its final report in 2020. This is expected to provide a consensus-based long-term solution for bridging divergent views on taxation of highly digitised businesses around the world.
Author:
Pallavi Singhal, Partner and Tax Leader -Technology Sector, PwC India.
(With inputs from Neetu Singh, PwC India)