The digitalization of the economy has had a huge impact on how the global economy functions.
The world’s markets are ever more integrated and the nature of the services provided is changing the way activities are carried out and value is created.
Needless to say that the digitalization process and the new business models are challenging the current international tax framework which was designed early in the 20th century.
In view of this, the tax aspects of the digitalization of the economy came to the attention of governments and academia who started working on how to adjust the current domestic and international tax framework to the digital era.
Indeed, since most digital business do not need physical presence, assets or workforce in a given country in order to generate profits and value, the main tax challenge of the digital era relates to identifying the most appropriate ways to adapt the current criteria for the allocation of taxing rights between source and resident jurisdictions to the current digital business models.
One of the most important actions taken to tackle the tax implications of the digitalization of the economy is the OECD 2015 BEPS Package Action 1 Report that tackles “the Tax Challenges of the Digital Economy” which is part of the larger BEPS (Base Erosion and Profit Shifting) Project launched in 2013 by the OECD and the G20.
The 2015 OECD Report 1 identifies a series of features of the digitalization that are relevant from a tax perspective and that should be addressed in order to tackle tax distortions by digitalization:
1) identifying whether a digital business has a significant economic presence in a given country (nexus approach);
2) attributing value to the data collected by digital businesses from end-users (e.g. users’ data used by social networking businesses to sell advertisement on their websites);
3) characterizing correctly the payments made by a resident payer to a non-resident digital business (since in most cases it is difficult to understand whether a payment made over an e-commerce transaction has to be regarded as a royalty paid to a non-resident or, conversely, as a business profit made by the non-resident business through its permanent establishment).