As digital transformation makes it increasingly common for businesses to reach markets in jurisdictions where they may have relatively little physical presence, international tax rules that allocate taxing rights over business profits on the basis of physical presence have struggled to keep pace. Addressing this was the focus for Action 1 of the OECD Base Erosion and Profits Shifting (BEPS) project first launched in 2013, and efforts have continued since that time.
The concern here is that the country of residence for the users of these digital goods and services sees a very high turnover, but no, or very little, corporation tax under traditional rules. As a result, there was a drive from certain countries and stakeholders to change international tax rules and impose local corporation tax on such multinational enterprises (MNEs). This has sometimes been expressed through the argument that users of such digital services are providing data, free of charge, to overseas MNEs, or adding value to them, which, in turn, justifies imposing local corporation tax.
The conclusion, which the OECD reached in its final report on the BEPS project, was that it is not possible to ring fence a digital economy as the entire economy is digitalizing. Therefore, in Pillar One of the so-called BEPS 2.0 project, the OECD has focused more on how to address the phenomenon that modern business models often allow MNEs to make significant sales into jurisdictions where they have no or little tax presence. This is not limited to highly digitalized companies.
Nevertheless, partly due to the length of time it has taken to agree on changes to the global international tax accord, some countries have moved ahead with imposing specific taxes on highly digitalized companies. As such, Digital Services Taxes (DST) focus on taxing revenues from activities such as advertising, the sale of data, and the operation of platforms. As part of the emerging global agreement under Pillar One, it is likely that countries will need to commit to rolling back their DSTs moving forward. In any case, discussions will continue as business models and tax systems continue to evolve.
Another aspect of digitalisation is the increased use of crypto-currencies which, while creating interesting opportunities raise questions about how they should be taxed, how tax authorities can collect required information and their potential impact on evasion, avoidance and tax morale.
Themes addressed within the digital taxation section include:
- The digitalisation of the economy and the future of corporation tax
- The taxation of the digital economy, new perspective
- The impact of businesses of digital services taxes
- Crypto-currencies and information collection