Taxation of goods and services in the digital economy

The most interesting seminar at the year’s tax congress hosted by the International Fiscal Association was Taxing the digital economy. This seminar provided a review of this interesting topic and of the challenges currently faced by companies and ministries of finance in this context. How and where should the goods and services be taxed?

An overview of the areas involved:

• Digital products sold over the internet.
• New media products in the form of advertisements to users who do not pay anything for the actual media, for example, Google.
• Products that are sold via a platform, for example, electronics, clothes and foodstuffs.
• Services that are sold via a platform, for example, Airbnb and Uber.
• The intellectual property rights associated with the services and products sold via platforms.
• Management functions which, for example, determine the services to be provided via platforms, and which can be located, physically, almost anywhere.

There are certain situations in which tax liability, in general, applies. A home page in a country can incur tax liability in that country even if the server is located in another country.

Based on this scenario, international cooperation organisations and legislators see a number of challenges.

• Quite often the sales take place via so-called ”cashbox companies” in countries with low tax rates. The companies have limited or no material substance, except for cash.
• Another example can be a ”crowdfunding” platform. Here, the owner of the platform takes a fee for the mediated service. The service can, then, comprise a gift, loan, sale of shares or some other form of financing. How does one handle VAT in such a case?
• The associated intellectual property rights are often located in low tax countries.
• One effect of the situation is that total VAT and sales taxes end up being, in general, lower than intended by the regulations in place.

The questions are many and the companies can fly ”under the radar”.

The starting point, today, also as regards taxation of income in this part of the economy, is that there is an OECD agreement addressing corporate taxation but not VAT. The digital economy is “pushed into” this agreement on taxation of corporate gains, which is based on the taxation of profits allocated between countries based on the so-called arms-length principle. In other words, there is a market-based allocation of profits. However, there are no similar international rules on net sales taxes.

It is interesting to note that it is India, which has a strong IT sector, who has more or less taken things into their own hands and has recently introduced a net sales tax of 6 percent on business-to-business services within marketing applying to companies who are not liable for taxes in India. This applies if the companies do not register for tax liability in India.

Within VAT, the development is towards the payment of VAT based on the recipient country’s VAT rate.

Comments

The level of uncertainty in this area is very significant. The only thing a company can do is to reconcile their circumstances with a tax lawyer in terms of what should be seen to apply before international law practice is developed and established.

The EU has set up a special task force for the digital economy. Later in October, the Swedish Tax Agency will release its report on taxation of companies within the so-called sharing economy, which is a part of the digital economy.

Developments will probably move toward an increased component of various net sales taxes. A number of countries can follow India’s example. This can lead to increased double taxation of income as net sales taxes and other “fees” cannot, necessarily, be settled against income tax in another country.

Note that during the Almedal Week this summer, PwC brought attention to tax issues related to the digital economy in a special seminar where, amongst others, representatives from the Tax Agency and Uber participated.