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Next phase of taxing the digital economy

Next phase of taxing the digital economy

Jenny Wong discusses the gaps and difficulties of taxing new digital business models in digital economy.

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Director, Australian Tax Centre

KPMG Australia

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It seems that the pressure to tax profits of the digital economy where ‘value is created’ has been gradually mounting. There has been some work done in the European Union (EU) and the United Kingdom (UK) in this space, which is likely to be a big change for social media companies and online marketplaces. The work done by these countries is in response to the desire to address the gaps and difficulties in taxing new digital business models.

Firstly, the European Commission (EC) released a paper - Communication from the Commission to the European Parliament, (PDF 481 KB) on 21 September 2017 outlining different options for taxing profits of digital businesses to ensure tax is paid where value is created. The EC is proposing a number of alternatives for EU Member States which include:and the Council, 

  • An ‘equalisation tax’ chargeable on revenues of digital companies from EU customers
  • A final withholding tax on gross income paid to overseas suppliers of goods and services ordered online and
  • A levy on revenues generated from the provision of digital services or advertising activity.

Secondly, the UK also released a position paper - Corporate tax and the digital economy, (PDF 308 KB) in November 2017 for consultation (until 31 January 2018) as part of the UK Budget that sets out the government’s view on the challenges posed by the digital economy for the corporate tax system and its preferred solution, ahead of the Organisation for Economic Co-operation and Development (OECD) interim report next year.

The UK proposals focus on businesses serving UK consumers where there is significant ‘user-generated value’ created in the UK and in particular online marketplaces and social media business that generate value through uses worldwide, but is only taxed where it is a tax resident or has a permanent establishment. The position paper indicates the UK government intends to:

  • Push for international tax reform so the focus is on the value created by digital businesses in determining what and where something is subject to tax.
  • Explore interim measures in relation to digital businesses prior to the OECD work including taxing revenues in the UK that businesses generated from the provision of digital services to the UK market.
  • Address practices by multinational groups that achieve low tax outcomes by holding valuable assets in low taxed countries by extending the UK withholding tax from April 2019 to royalties paid to entities holding intangible assets in a low tax jurisdiction by UK or non-UK entities that sell products and services to the UK market. There is a question of whether there is a risk of double taxation and whether tax treaties would resolve any conflict in double tax if this is introduced.

Both proposals raise questions as to ‘where value is created’. Is it the location of customers, entrepreneurs, staff, valuable intangible? The EC equates location of value with the customers. It will also be interesting to see how Australia’s position will unfold given the work done in this space by the UK and EC ahead of the OECD interim report on taxing the digital economy.

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