TAX ASPECTS OF THE DIGITAL ECONOMY – SECTION 3 – Interim measures to address the tax challenges of digitalization

We saw in the previous sections of this article how most of the world jurisdictions are making efforts to tackle the phenomenon of tax avoidance arising from the digitalization of the economy through the implementation of the OECD BEPS package as well as of the Multilateral Instrument (MLI). At the same time, we saw that there is currently no consensus between countries neither on the need for interim tax measures to tackle this phenomenon nor on the way those measures should be designed.

The countries that have been in favor of the implementation of such tax measures have thought of a “digital tax” in the form of an excise tax, levied on the supply of certain e-services rendered within a jurisdiction. The tax would apply to the gross amount paid for the service provided by a registered supplier and more specifically:

a) it would be levied on each service fee paid rather than on the supplier’s annual income;

b) it would be charged at a fixed rate calculated on the basis of the service fee paid;

c) it would not be creditable or eligible for any other type of relief against income tax imposed on the same payment.

Ideally, upon designing such a “digital tax”, countries should ensure that the tax:

i) is compliant with a country’s international obligations: a “digital tax” designed as an excise on a gross amount of income may not be covered by tax treaties and, in case a tax treaty applies, Permanent-Establishment treaty rules may oppose that such a tax is levied on non-resident businesses’ income.

ii) is temporary: the interim “digital tax” should cease to apply once a global response to the tax challenges raised by digitalization has been agreed and implemented, consistently with its provisional nature;

iii) is targeted: the “digital tax” should aim at impacting on those businesses that combine high levels of a) scale without mass, b) user participation and c) network effects.

iv) minimizes over-taxation: countries introducing such a tax shall consider carefully a) the rate of the tax and b) the scope of the measure in order to avoid a disproportionate impact on e-services businesses, especially on the smaller ones.

v) minimizes impact on start-ups and business creation: the tax shall not have undesired negative effects on small businesses facing financial constraints or discriminate against certain categories of taxpayers. In view of this, a gross- revenue threshold for the application of the interim tax should be set. Tax compliance costs for small businesses should also be limited.

Since the international and domestic framework on the taxation of digital business activities evolves constantly, we will keep our blog updated and publish further articles on this subject as new relevant updates are released.

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