Tag Archives: digital tax

How cybersecurity and data storage laws could pull the plug on Southeast Asia’s digital economy

southeast-asiaJeff Paine says governments in Southeast Asia are keen to capitalise on the opportunity presented by the digital economy, but their rush to regulate data flows and storage will hit start-ups and small local firms hard.

Southeast Asia is one of the most diverse regions in the world, a handful of countries with thousands of languages and cultures, yet all having one thing in common – bold ambitions for their digital economies.

From the establishment of digital agencies like Malaysia Digital Economy Corporation in Malaysia and the Digital Economy and Promotion Agency in Thailand, to charting impressive road maps such as Thailand 4.0 and Making Indonesia 4.0, many governments in the region are prioritising capturing as much of the region’s US$200 billion digital economy opportunity as possible.

What isn’t clear is how these bold aspirations will be achieved.

Despite the inherent benefits of digital technologies and the internet, many governments are pursuing policies that will limit the use of these technologies. Driven by pressure to address specific and immediate challenges including cybersecurity, data protection, privacy and misinformation, governments fail to consider the long-term impact of these laws on economic growth, jobs and investment.

Vietnam’s recent Law on Cybersecurity and Indonesia’s Government Regulation 82 are examples of this, with provisions including restrictions on data flow and content, requirements for foreign companies to set up local offices and local data storage requirements. Meanwhile, proposed rules in Thailand subject over-the-top (OTT) service providers to tax, security and content regulations.

The impact of these regulations goes far beyond the information and communications technology industry, given that virtually every business today uses the internet and digital technology.

For foreign businesses, restrictive, too broad and unclear regulations create uncertainty and an unfriendly investment climate. Multinational companies unable to make long-term financial decisions are likely to shift their investments to countries with more flexible regulatory environments that support the development of a digital ecosystem.

Local businesses, like small and medium-sized enterprises and entrepreneurs that comprise 95 per cent of Southeast Asia’s economy, will bear the brunt of poor policies. Restrictions on cross-border data flows, digital tax and local data storage, will prove difficult to comply with.

Many small businesses depend on digital services and platforms such as cloud for data storage and collaboration, online marketplaces for e-commerce, social media for communication and marketing, and OTT platforms to reach customers at scale. Such laws will increase the cost of doing business, create barriers for expansion beyond borders and are likely to block small players from competing in the global marketplace.

For example, if a neighbouring country enacted similar provisions to Vietnam’s cybersecurity law, a Vietnamese software start-up would be unlikely to be able to afford data storage facilities and local offices in locations outside Vietnam – curbing regional or global expansion plans.

With significant economic prospects at stake, and the challenges of security, privacy, data and misinformation in mind, governments must find better ways to manage risk without hampering growth.

Southeast Asian governments can learn from how larger, developed economies manage emerging technology. For example, Thailand has looked towards the European Union’s implementation of the General Data Protection Regulation as a basis for their data protection laws.

On taxation, intergovernmental organisations such as the Organisation for Economic Co-operation and Development provide useful guidance in key areas such as the need to create consistency between countries on cross-border digital taxes. Unilateral moves like Australia’s goods and services taxin July 2018 on low-value imported goods is likely to pose compliance challenges and higher costs for small businesses in the long run.

Instead, a cross-sectoral range of agencies, ministries and industry players could together craft comprehensive policies that manage risk and promote growth. A good example of this is Singapore’s approach to digital taxation and preventing misinformation.

The digital economy is uncharted territory for most. There is a small window of opportunity now to ensure smart regulations and policies are in place to secure future growth. Technology companies and industry groups can work with governments, ensuring that the opportunities and benefits of the digital economy are realised and not wasted.

source: www.scmp.com

Tax Department’s Consultation On Digital Taxation May End Up Being An Academic Exercise, Experts Say

taxationTechnology giants like Facebook, Google, Amazon, Alibaba and other such digital companies derive considerable value from a large user base. For instance, some digital companies sell user data for targeted advertising. It’s this value that nations now want to tax.

Europe, for instance, has proposed a tax on turnover. Australia is mulling a tax on digital advertising. Singapore has announced a sales tax on digital services, starting 2020. India isn’t far behind either.

Digital advertising on foreign platforms is already under the tax net, also known as the equalisation levy. But now, India now wants to tax the business profits of digital companies, for which the taxman has reached out to various stakeholders for consultation. Experts told BloombergQuint the move will run into two problems: attribution of profits among countries i.e. who can tax how much, and treaty troubles.

Digital Services: What Gets Taxed?

Two years ago, the government imposed a 6 percent tax on digital advertising, which is attracted when an Indian resident or a non-resident with a fixed place of business in the country advertises online with a service provider with no permanent establishment in India. Permanent establishment is, in tax parlance, a fixed place of business. The levy is applicable if the transaction value exceeds Rs 1 lakh in a financial year. Reportedly, this levy has added close to Rs 3,000 crore to tax collections in the last two years.

Equalisation levy is applicable on advertising revenues and the administration of it has been smooth in the last two years, Sudhir Kapadia, partner and national tax leader at EY India, told BloombergQuint. It’s a tax on business-to-business transactions and the law has ensured there’s no double taxation, he said.

There is no income tax in the hands of a non-resident once the equalisation levy is discharged. So, it is a proxy for any kind of income tax liability that can be levied on the company concerned.Sudhir Kapadia, Partner, EY India

What About B2C Transactions?

Enter, Significant Economic Presence. In budget 2018, the government proposed to get its fair share of tax from business-to-consumer transactions by introducing the concept of significant economic presence. According to the finance minister, the idea is to tax profits of those digital businesses that don’t have a physical presence in India but derive significant economic value from the country.

India’s belief is that we follow strict source-based rules of taxation; our domestic law and treaty definitions of permanent establishment have lost their relevance because of the digital invasion, Mukesh Butani, managing partner at BMR Legal, said.

A lot of foreign luxury goods and garment manufacturers don’t have a physical presence in India. You can use an Amazon platform and order those goods, or you can go to the company’s website and order. But you can’t tax those activities in India, assuming they don’t have presence here. Under this significant economic presence, such activities will come under the tax net.

Mukesh Butani, Managing Partner, BMR Legal

What Does The Tax Department Want To Know?

In one word, thresholds. The department has asked for consultation on:

  • Revenue threshold of transactions with respect to physical goods or services carried out by a non-resident in India.
  • Revenue threshold of transactions pertaining to digital goods or services or property, including the provision of download of data or software.
  • Threshold for number of “users” with whom systematic and continuous soliciting of business activities is done through digital means.

To begin with, the phrase used in our law is significant economic presence and not just digital presence as is the case in Europe, Kapadia said. The first element on which consultation is sought is about transactions involving physical goods and so, our approach is far more overarching, he added.

The budget memorandum only talked about digital economy, but this would include all transactions of import of goods, which currently attract only customs duty. For example, EPC contracts, manufacturing, supplies from vendors etc who do not have a presence in India.

Sudhir Kapadia, Partner, EY India

If India is determined to bring this, revenue threshold for digital goods and services and user threshold can be akin to what the E.U. has proposed, he said.

Europe has proposed a three percent tax on businesses with E.U. digital revenues of over 50 million euros and total global revenues of over 750 million euros. Revenues derived from online advertising, sale of user data and online marketplaces will attract this levy.

So, What’s The Problem?

The first is profit attribution. Or, how should governments determine the revenue attributable to digital activities in their country.

It’s going to be very difficult for India or any other country to ascertain this since the conventional principles of permanent establishment won’t apply to digital businesses, Kapadia said. He explained that data about users in other countries, revenues collected in other countries arising from that user data isn’t easy to get despite the exchange of information arrangements.

 Currently, India has two provisions for attribution. Rule 10 of the Income Tax Rules which essentially says that revenues from India divided by global revenues multiplied by global profits should be the taxable base in India. This, in a brick-and-mortar space, poses enough challenges. It would be impossible to apply this principle in a digital business. Second is the arm’s length principle under transfer pricing. That can’t be the answer either since the entire functions, contractual and legal risks are outside of India in the digital business context.

Sudhir Kapadia, Partner, EY India

The second issue would be tax treaties. If the treaty problem isn’t addressed, this consultation will just be an academic exercise, Butani said.

When the law was passed in Budget 2018, it clearly said India is proposing this law in order to be prepared for the changes that occur in double-tax treaties, Butani said. This subordinate legislation that the department is proposing won’t be useful in situations where the non-resident tax payer is from a country that has a tax treaty with India, he added.

The definition of permanent establishment under the tax treaties don’t contemplate digital transactions. The only way is to amend the treaties using the multilateral instrument tool proposed by the Organisation for Economic Co-operation and Development. But if the treaty partner hasn’t signed up to MLI, the provision under the domestic law won’t help.

Mukesh Butani, Managing Partner, BMR Legal

You’re looking at a scenario where some treaties will trigger a digital permanent establishment and some treaties won’t, he said. So, how will a change in the domestic law affect the taxable position under these treaties, he added.

Difficult and contentious: taxing the digital economy (Australia)

Accountants have been urged to keep a lookout for significant changes to the tax environment as the government considers options for taxing the digital economy.

In Treasurer Scott Morrison’s budget address, he noted how the government’s crackdown on multinationals had brought $7 billion a year in sales revenue and would now be looking towards the digital economy as part of its initiatives to strengthen its tax base.

“The next big challenge is to ensure big multinational digital and tech companies pay their fair share of tax,” said Mr Morrison.

“Over the past year I have been working with counterparts at the G20 to bring the digital economy into the global tax net.

“In a few weeks’ time I will release a discussion paper that will explore options for taxing digital business in Australia.”

Thomson Reuters tax consultant Terry Hayes believes taxing digital business in Australia will continue to be a difficult and contentious issue and suggested that Mr Morrison was looking to Europe for ideas.

“Europe has been taking a lead in measures to tax the digital economy,” said Mr Hayes.

“In March this year, the European Commission proposed to introduce a digital services tax aimed at addressing the tax challenges of the digital economy in the European Union. Companies such as Google and Facebook would clearly be impacted.”

Mr Hayes believes the upcoming discussion paper announced by Mr Morrison might shadow two distinct legislative proposals put forward by the European Commission in March this year.

The proposed long-term solution would allow EU member states to tax profits that are generated in their territory, even if a company does not have a physical presence there. Profits would be registered and taxed where businesses have significant interaction with users through digital channels.

The second option, would be for an interim digital tax, roughly 3 per cent, to cover the main digital activities that currently escape tax altogether. This interim tax would apply to revenues created from activities where users play a major role in value creation.

“However, it is understood there may be some wavering on the proposals as concerns rise among European countries of possible US retaliation over the measures,” said Mr Hayes.

source: www.accountantsdaily.com.au

European Commission – Fair Taxation of the Digital Economy

ecOn 21 March 2018, the European Commission proposed new rules to ensure that digital business activities are taxed in a fair and growth-friendly way in the EU.

What is the Commission proposing?

The Commission has made two legislative proposals:

  • The first initiative aims to reform corporate tax rules so that profits are registered and taxed where businesses have significant interaction with users through digital channels. This forms the Commission’s preferred long-term solution.
  • The second proposal responds to calls from several Member States for an interim tax which covers the main digital activities that currently escape tax altogether in the EU.

Proposal 1: A common reform of the EU’s corporate tax rules for digital activities

This proposal would enable Member States to tax profits that are generated in their territory, even if a company does not have a physical presence there. The new rules would ensure that online businesses contribute to public finances at the same level as traditional ‘brick-and-mortar’ companies.

A digital platform will be deemed to have a taxable ‘digital presence’ or a virtual permanent establishment in a Member State if it fulfils one of the following criteria:

  • It exceeds a threshold of €7 million in annual revenues in a Member State
  • It has more than 100,000 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 also change how profits are allocated to Member States in a way which better reflects how companies can create value online: for example, depending on where the user is based at the time of consumption.

Ultimately, the new system secures a real link between where digital profits are made and where they are taxed.

The measure could eventually be integrated into the scope of the Common Consolidated Corporate Tax Base (CCCTB) – the Commission’s already proposed initiative for allocating profits of large multinational groups in a way which better reflects where the value is created.

a-common-reform-of-the-eus-corporate-tax-rules-for-digital-activities

Proposal 2: An interim tax on certain revenue from digital activities

This interim tax ensures that those activities which are currently not effectively taxed would begin to generate immediate revenues for Member States.

It would also help to avoid unilateral measures to tax digital activities in certain Member States which could lead to a patchwork of national responses which would be damaging for our Single Market.

Unlike the common EU reform of the underlying tax rules, this indirect tax would apply to revenues created from certain digital activities which escape the current tax framework entirely.

This system will apply only as an interim measure, until the comprehensive reform has been implemented and has inbuilt mechanisms to alleviate the possibility of double taxation.

The tax will apply to revenues created from activities where users play a major role in value creation and which are the hardest to capture with current tax rules, such as those revenues:

  • created from selling online advertising space
  • created from digital intermediary activities which allow users to interact with other users and which can facilitate the sale of goods and services between them
  • created from the sale of data generated from user-provided information.

Tax revenues would be collected by the Member States where the users are located, and will only apply to companies with total annual worldwide revenues of €750 million and EU revenues of €50 million.

This will help to ensure that smaller start-ups and scale-up businesses remain unburdened. An estimated €5 billion in revenues a year could be generated for Member States if the tax is applied at a rate of 3%.

an-interim-tax-on-certain-revenue-from-digital-activities

Next Steps

The legislative proposals will be submitted to the Council for adoption and to the European Parliament for consultation. The EU will also continue to actively contribute to the global discussions on digital taxation within the G20/OECD, and push for ambitious international solutions.

source: https://ec.europa.eu/taxation_customs/business/company-tax/fair-taxation-digital-economy_en

OECD host Digital Economy Webcast On March 16

oecd-tax-talks-squareWith a number of recent and upcoming developments in the OECD’s international tax work, OECD invite to join a live webcast with experts from the Centre for Tax Policy and Administration for an update on the work relating to the tax challenges arising from the digitalisation of the economy, in view of the upcoming G20 Finance Ministers meeting.

register and source: http://www.oecd.org/ctp/tax-talks-webcasts.htm 

Digital Tax Proposals Produce New Discord in the EU

taxThe European Union is preparing to debate the way corporate taxes are calculated and paid. In the coming months, the European Commission and large EU countries like Germany and France will present proposals to change regulations that currently allow companies, especially in the digital sector, to report their income and pay taxes in low-tax nations even if most of their earnings are generated in countries where taxes are higher. But many smaller member states, such as Ireland and Luxembourg, see this potential change as a threat to their economic models. A battle between large and small member states could result, creating further divisions in the European Union during a time in which the bloc is trying to introduce reforms in several areas.

The governments in Paris and Berlin are determined to stop what they see as unfair competition from smaller countries that offer tax deals to multinational corporations in the digital economy. Internet giants like Apple Inc., Facebook, Amazon and Google pay few taxes in the EU countries where most of their consumers are located because they have subsidiaries in low-tax EU members like Ireland and Luxembourg. France and Germany are working on proposals that would require companies in the digital sector to pay taxes where they generate money, rather than where they are legally registered. Italy and Spain support these proposals, which are expected to be introduced by June.

eu-corporate-tax-rates

Meanwhile, the European Commission is working on its own proposals to make internet companies pay higher taxes in the EU countries in which they operate. The commission is considering options such as a levy on revenue generated from the provision of digital services or advertising activity, or a withholding tax on digital transactions. Brussels will present its suggestions in late March. These proposals are part of a more ambitious plan, because the commission wants to introduce a single set of rules to calculate the taxable profits of all large companies operating in the European Union. In EU jargon, this is known as a Common Consolidated Corporate Tax Base. Its goal is to present multinational companies with a single EU system to compute their income, instead of the different national rules that exist today. According to the European Commission, this would reduce red tape in Europe while also eliminating the existing mismatches among national tax systems.

But not every country embraces these potential changes. Ireland has been particularly critical, because the proposed reforms threaten its economic model, which is based on offering tax incentives to multinational companies. Some countries in Northern and Central Europe also contend that the European Union does not have the right to interfere with their tax systems.

At this stage, none of the proposed plans implies the imposition of a common corporate tax rate, but Ireland and others like it are concerned that this could happen. Those tax rates vary among EU countries, from below 15 percent in Hungary, Bulgaria, Cyprus and Ireland, to above 30 percent in France and Belgium. Ireland and other low-tax countries fear that the proposed reforms would open the door for the European Union to try to establish a minimum corporate tax rate. This fear is not unfounded: France has said its supports such an idea.

Even if Ireland has the power to block EU initiatives on tax-related issues, the bloc’s heavyweights can find ways to pressure Dublin not exercise it.

The Battles to Come

Reforming the way digital companies are taxed will not be easy. Changes in EU tax rules must be approved unanimously, giving individual countries veto power. The European Commission has said it wants to change the voting mechanism for this issue, but doing so also requires unanimity.

Even if Ireland has the power to block EU initiatives on tax-related issues, the bloc’s heavyweights can find ways to pressure Dublin not exercise it. For example, the European Union supports Ireland’s position that the border between it and Northern Ireland must remain open after Brexit and is asking the United Kingdom to find a solution to the problem. But in exchange for its continuing support on the matter during the Brexit negotiations, the European Union could ask Ireland to drop its opposition to tax changes. This is probably one of the reasons why Dublin has sought to enlist other EU countries on its side in the tax fight.

Should the European Union fail to find unanimity on this issue, a smaller group of countries could decide to implement reforms without involving the entire bloc. This would be only a consolation prize for the likes of Germany and France, as the changes probably would not be sufficient to end what they perceive as unfair competition from the low-tax countries. As a result, pressure on those countries probably will continue regardless of the future of specific measures currently on the table.

A Digital Single Market?

The debate over the best way to tax digital companies is a natural consequence of the rapidly increasing importance of the sector. Only one digital company was listed among the top 20 companies in Europe by market capitalization in 2006. By 2017, nine were, led by the U.S. giants. According to a recent report by the European Commission, revenue of the top five e-commerce retailers operating in Europe grew by an annual average of 32 percent between 2008 and 2016. During the same period, the revenue of the entire retail sector in the European Union grew by a yearly average of 1 percent. The rapid change is forcing policymakers to undertake the complex process of adapting to the new environment. Increasing the complexity with internet-based companies is that unlike traditional businesses, it is hard to determine exactly where value is created and how profits should be taxed.

Ireland and others have argued that the issue should not be discussed at the EU level, but rather at the level of the Organization for Economic Cooperation and Development (OECD), a club of rich countries. Ireland and other low-tax nations argue that restricting the reforms to the European Union would reduce the bloc’s competitiveness and make it less attractive to foreign investors. They also argue that a change in taxation could lead to higher prices for consumers. While the European Commission supports the idea of discussing the issue at the OECD level, it has said it is willing to push ahead with a European solution in the likely case that a broader consensus cannot be found.

Ultimately, these disputes are the result of an attempt by Brussels and the largest EU countries to move the bloc toward a federal system. Just as the European Union created a single market for the movements of goods, services, capital and people, it is now trying to introduce a “digital single market” with uniform rules. For many EU member states, this push will threaten their national interests and economic models. For tech companies, the taxation issue is only the tip of the iceberg. In the coming years, disputes with the European Union over issues such as data policy and privacy regulations will also surface.

France and Germany will probably reach an agreement between themselves on the taxation issue in the coming months and, together with other big economies like Italy and Spain, pressure smaller EU members to accept their plans. But unanimity probably will be hard to find, and the bloc will have to decide whether to pressure the rebel members to comply, at the risk of deepening fragmentation in the bloc, or to simply leave the reforms to a smaller group of countries.

source: https://worldview.stratfor.com/