One of the key planks of the BEPS project is finding a way to tax the digital economy. The driver behind this is the low tax rates enjoyed by digital businesses (particularly US owned ones) and the political outcry this has caused compared to the higher rates of taxation suffered by bricks and mortar retailing and business. Some time ago I posed the question to the IMF of what they thought was the appropriate level of taxation for digital business in a consultation on what is the correct level of taxation for resources. My challenge was that if the IMF could opine on the framework for resource taxation surely they could do the same for the digital economy? I would still be interested in their view.
The business consultation on BEPS on October 1st was very interesting in considering the digital economy. A number of presentations were made by various business sectors ranging from the pure digital to what many would not assume to have a digital content in their delivery of content and services to their customers. What emerged was the wide spread of digital delivery in a wide range of business sectors.
This posed the question, can we have a separate regime for the digital economy if digital delivery is so widespread? It’s a very good question and one which has been leapt upon by those who advise US digital business that this would not be a practical solution. I have to agree that finding a regime which taxes digital services and goods will be very difficult, but I think we have to consider the consequences if we don’t take this route.
The suggestion seems to be that instead of devising a tax regime for digital business, we should adapt and change the business framework for cross border services and that the issues with digital can be dealt with within that. This is an astute move both strategically and tactically by the large digital businesses as it embroils all business in the consequences of finding a way to tax digital services and goods. It poses all sorts of problems for non-digital businesses which I believe they completely underestimate at present and they underestimate these issues at their peril.
The issue, let’s remember, is the lack of taxable presence of digital providers for corporation tax purposes in their ultimate markets. A new regime which addressed the digital economy would address this issue and reallocate taxing rights so that more related to the market economy. If, however, one doesn’t address this as a digital issue then one has to address the allocation of taxing rights for all businesses. This would affect businesses which sell goods cross border and provide services associated with those goods cross border. Because the BEPS focus is regarded as focusing on a “digital” issue I fear some business sectors may be sleep walking into a new regime which could affect them very adversely because they are ignoring this wider aspect of the BEPS process, particularly as some national representative bodies seem to only be reflecting the views of the digital sector in that process rather than their whole membership.
One of my other interests is the tax policy framework for the challenges of moving towards an economy based on sustainable development, I struggle to understand why a tax framework which only taxes the digital economy at low rates while taxing those businesses which facilitate the change to a green economy at higher rates makes any sense?
I don’t have a simple solution for taxing the digital economy. However, I do have real concerns that not seeking a solution for the digital economy may have serious impacts for most business. That should make us think about whether a separate regime for digital, while difficult, is in fact the least worst option?