DIGITAL TAXATION THE EMERGING DEMAND OF DIGITAL ECONOMY
Technology has revolutionized our world by introducing distinct technology-enabled services in every sphere of our lives. Digital economy is the fastest growing economy, influencing our social and economic activities and even the way we live. The transformation has increased the complexities in the tax system. The study focuses on the taxation of digital giants around the globe with reference to European Union’s(EU’s) proposal of Fair and Efficient tax. European commission wants to tax large digital companies’ revenue, based on where their user is located rather than where they are headquartered, as the companies are accused of paying too little tax by re-routing their EU profits to low tax countries. Adoption of digital permanent establishment is seen as a solution to existing problem.
The digital economy is the result of a transformative process brought by information and communication technology (ICT)1. The digital economy is accelerating the pace of business and the expectation of all those involved from the supplier right for the customer. Because the digital economy is increasingly becoming the economy itself, it would be difficult, if not impossible to ring-fence the digital economy from the rest of the economy for tax purposes. The digital economy and its business model presents however some key features which are potentially from a tax prospective2.
To combat the problem of digital economy and to overcome the issue of digital taxation , tax policy reform specifically targeting the digital economy is being proposed in the European commission. EU member states have had difficulty taxing digital technology giants such as Amazon, Facebook, and Google. The digital companies are suspected to pay their fair share of tax , but they are reducing their tax burden by using the loopholes present in the tax system. The European commission has also weighted in and, flanked by a few powerful EU governments, is now considering a new revenue tax on companies that under some definition can be called ” digital corporations”.3
REASON FOR THE PROPOSAL
The commission communication on “A Fair and Efficient Tax System in the European Union for the Digital Single Market adopted on 21-sepembert-20174, focuses on the value creation and tax treatment. In Organisation for Economic Co-operation and development(OECD)/G20 Base Erosion and Profit Shifting (BEPS) project action1 report on “Addressing the Tax Challenges of the Digital Economy”5. Interim report 2018-“Tax Challenges Arising from Digitalisation”6 deals with the concept of permanent establishment, transfer pricing and profit attribution relating to digital services. It is argued that “International tax rules no longer fit the modern context where business in rely heavily on hard-to-value intangible assets, data and automation, which facilitate online trading across borders with no physical presence.”
The following are the reason behind the proposal
To tackle aggressive tax planning and increase tax transparency
Corporate taxation is based on the principle that profit should be taxed where the value is created but for the digitalised economy today’s rules result in a poor congruence between taxation and value creation.
Permanent physical settlement : the current international tax rules takes into accounts the physical presence of the business. It feels to meet the current scenario of digital services, where a company can supply digital services without being physically present there. The prevailing taxation rule is for “brick and motor” businesses.
Value creation: the existing international tax rules feels to identify the value creation procedure involved in digital world in respect of intangible assets such as patents and algorithms. Company with preponderantly digital activities have a reduced need to be physically present when operating abroad. only 50% of the affiliated digital multinational are foreign based compared to 80% for traditional multinational7
Tax base erosion :minimal or no taxes by the digital company leads to unfair burden sharing among the tax payer. Tax revenue generated is insufficient, it risk the sustainability of public finances.
Corporate tax rules prevailed in the economy: the allocation of taxing rights between two countries is laid down in bilateral double tax treaties. These treaties lay down the rule of where to tax, how much to tax and allocation of taxable income. The international corporate tax rules aims to tax profits where the value is created.
Proposal 1: Reforms in Corporate Tax rules
Proposal 2: interim tax for EU member states
The first initiative is to get the profit registered and tax for the business having interaction with users through digital means.
In case company does not have physical presence in a particular country , this proposal enables the taxation of profits generated there. The proposal covers all the member states of EU.
In traditional ‘brick and motor’ companies it contributes to the public finances, implementation of new rule enable the online businesses to make the same contributions.
Virtual permanent establishment in a member state: a digital platform will be considered to have digital presence if it fulfils on of the following criteria
It exceeds a threshold of 7 million in annual revenues in member state.
It has more than 1 lakh users in a member state in a taxable year.
Over 3000 business contracts for digital services are created between the company and business users in a taxable year
The new rules will affect online value creation making clear how profits are allocated to member state. For example depending on where the user is based at the time of consumption.
Measures could be integrated in to the scope of common consolidated corporate tax base(CCCTB).
Interim tax on certain revenue out of activities not been effectively taxed will generate revenue for member state
This proposal helps to avoid the damages towards a single market by avoiding unilateral measures .
Revenues which escaped the current tax framework will also be covered under this interim tax.
The given measure will last until the mechanism to alleviate the possibility of double taxation is being implemented.
In business activities where users play major role in the value creation , revenue generated from such will be taxed here:
Revenue generated from selling online advertising space.
Revenue generated from digital intermediary activities which allow users to interact with other users and which can facilitate the sale of goods and services between them.
Revenue generated from the sale of data, generated from user provided information.
Eligibility for collection of tax by member state on the basis of:
Location of users
Companies total annual world wide revenue is 750 million and EU revenues of 50 million.
Such element will safe guard the interest of smaller start-up’s and scale of business.
CONCEQUENCES OF PROPOSAL
Small enterprises will not be affected, where as some sort of impact may be there on medium size enterprises the concept of permanent establishment is there for applicable to those countries which are at least present in two countries.
The level for small and medium size companies are expected to improve. Digital taxation would provide the digital single market, which in return would help the small and medium size enterprises.
A tax framework which is stable and also modern in digital economy will help in setting up of conditions so that as a result innovation can be stimulated, which will ultimately result in table of market segmentation and will also allow domestic businesses to become global players.
There is a gap in tax rates between digital and non digital, traditional companies which can also be reduced because of the presence of ‘a single set of rules to calculate companies’ taxable profits in EU.