Section 8 - Recent International Literature on Taxation of Digital Economy Enterprise
90. Taxation of digital economy and the need and feasibility of modifying international taxation rules have attracted a lot of attention recently, leading to significant and very interesting academic work by experts. Some of these experts were requested to share their detailed analysis with the Task Force on Digital Economy during the work on Action 1 and the influence of their work can be easily seen in its Report. Most of such works revolve around the possible ways in which the limitations of existing nexus rules (physical presence), can be addressed by either extending the scope of existing permanent establishment definition in Article 5 of the Model Tax Conventions and tax treaties, or by a way of a final withholding tax levied on payments made for digital business transaction without necessitating them to the need to have a permanent establishment. Some of these works find mention in the Bibliography of the Report on Action 1. This Committee took cognizance of some of these papers and the views stated therein, which are summarized in this section.
8.1 Blueprints for a New PE Nexus to Tax Business Income in the Era of the Digital Economy by Peter Hongler & Pasquale Pistone; IBFD Working Papers50
91. This paper by two renowned authors51 put forth the need for a new criteria in the existing definition of the permanent establishment in the following words:
“The core of the PE concept was gradually adapted over the past decades with a view to
reflecting more closely the actual part of business operating from the market country.
Accordingly, it was first deprived of the force of attraction principles and then more
closely linked to the actual situations in which the fixed place of business was in fact
directly involved in the business.
The PE concept continued meeting the needs of the economy to the extent that the latter
remained mostly physical. However, it slowly turned into a cage for the exercise of the taxing jurisdiction of the market country, which could be targeted by international tax
planning aimed at confining business activities of non-residents outside the PE
framework. Avoiding a taxable presence means, for instance, that a non-resident
company might interact with customers of another country without having a tax nexus
with the jurisdiction of such state, i.e. not forming a PE through a fixed place of business.
The digital economy merely enhanced such inexorable process.
There are potentially various ways of addressing the problems of taxation of business
profits of non-resident enterprises caused by the erosion of the actual boundaries of the
PE concept.
One potential solution is to do away with the idea of linking business profits to a PE
concept, for instance by strengthening the use of withholding taxes. The merits of this
solution can be manifold and include a simplification in the exercise of taxing powers on
business income derived by non-residents, but also manifold are the additional problems
this would bring. Furthermore, withholding taxes can be used as a kind of toll charge by
the state of source in order to preserve the exercise of its jurisdiction on business income.
As we all know, the PE concept currently serves various significant functions in
international tax law, such as those of being a nexus rule, a source rule, a threshold rule
or a tool to secure net taxation of foreign enterprises, thus securing equal treatment with
their local competitors and avoiding trade and investment distortions whose business
profits are taxable in the PE state. Such elements show that the path towards the
implementation of such solution should also address a much broader change than that
which is strictly needed to allow an effective and balanced taxation of business income
derived by non-resident enterprises. The use of withholding taxes is not per se
incompatible with the PE concept,7 but the analysis of such issues falls outside the scope
of this paper.8 Besides, and as also argued in detail by Baez and Brauner,9 the IBFD
academic taskforce views the new PE nexus as the superior solution to the introduction of
new withholding taxes.
Another option is to restrict the scope of the PE limitation to source taxation of business
income in tax treaties; for instance, by including an additional provision on taxation of
services based on the model that India consistently follows in its tax treaties. Besides the
merits that such position may have in the framework of a policy that strengthens the
taxing rights of the state of source, it is undeniable that adding one more treaty article
will increase the potential for disputes as to which provision should govern a given
income derived by non-residents. The interpretation by Indian authorities and courts has
in some cases shown an inclination to keep taxing powers with the state of source in
respect of both types of income, thus reducing the relevance of the dividing line and
leading to a general stronger protection of taxing rights in respect of income derived by
the non-resident in India. However, this paper will only partly further explore the merits
and shortcomings of a solution based of strengthening taxation at source and the
interpretative issues arising in such framework.”
92. The authors go on to analyze the limitations of existing international taxation rules that govern the allocation of taxing rights to source jurisdictions, and the findings of their work are well presented in the Executive Summary of the paper, which reads as under:
“1. Introduction
This paper outlines the core issues of the introduction of a new PE nexus based on digital
presence. It puts forward its essential features and rethinks the foundations of the concept
of sourcing for income tax purposes in the global economy. Our proposal of a new PE nexus based on digital presence is also supported by a theoretical reconstruction in the
light of a new dimension for the benefit theory. Our work directly relates to Action 1 of
the OECD/G20 BEPS Project. However, the development of a new PE nexus is in fact not
an instrument to counter BEPS, but reflects a structural revision of the criteria for
allocating taxing rights on cross-border business income in the era of the digital
economy.
This paper should be understood as a discussion paper and first proposal to shed further
light on (i) whether there is a theoretical justification for a new PE nexus based on
digital presence, (ii) how a new PE nexus based on digital presence could be defined and
(iii) whether and how potential implementation issues could be resolved. By publishing
the present blueprints for a new PE nexus, the authors wish to provoke a more concrete
discussion on this particularly important matter.
2. The need for amending the existing PE definition
The current PE definition provided by the OECD Model, as also suggested within Action
7 of the OECD/G20 BEPS Project, requires certain structural changes, including a new
framework for the PE threshold, in order to satisfactorily address the new business
models developed in connection with the digital economy (see section 2. in the main text).
\
The envisaged amendments to the current PE definition, however, would only affect
certain e-commerce enterprises as part of the digital economy, but would not otherwise
affect enterprises that do not sell any physical goods (see section 2.4.). By amending the
current PE definition and still relying on a physical presence threshold, no reallocation
of income within the digital economy occurs.
3. Developing a theoretical framework for the new nexus
The immediate goal of the new PE concept is not to strengthen taxation at source, but
rather to allow the state of source to preserve its sovereignty on the taxation of business
income derived in connection with activities effectively linked to its territory and
jurisdiction (see section 3.1.)
In particular, our analysis suggests establishing a new PE nexus based on digital
presence. Such new nexus finds its inspiration in a revised theoretical framework for the
traditional sourcing theory, reflects the benefit theory and reduces the existing bias in the
tax treatment of cross-border digital and physical business activities with a view to
achieving a broader consistency between the two categories.
Theoretical analysis contained in this paper develops a new dimension for the sourcing
theory and provides the background for drawing a nexus with the taxing jurisdiction,
shifting away from the association of the PE nexus with physical presence and more
closely reflecting value creation in respect of business income, taking into account its
more prominent role in the era of the digital economy (see section 3.2.). Value creation
within the digital economy means that not only the supply side of an enterprise but also
the market itself enhances the value of an enterprise.
4. Our proposal
The theoretical framework allows this paper to conclude that the new PE nexus should
consist of four main elements or requirements: (i) digital services; (ii) user threshold;
(iii) a certain time threshold and (iv) a de minimis revenue threshold (see section 4.2.).
Our proposal supports the introduction of a new article 5(8) of the OECD Model with the
following wording (see section 4.2.):
If an enterprise resident in one Contracting State provides access to (or offers) an
electronic application, database, online market place or storage room or offers
advertising services on a website or in an electronic application used by more than
1,000 individual users per month domiciled in the other Contracting State, such
enterprise shall be deemed to have a permanent establishment in the other Contracting
State if the total amount of revenue of the enterprise due to the aforementioned
services in the other Contracting State exceeds XXX (EUR, USD, GBP, CNY, CHF,
etc.) per annum.
Due to the existence of a user threshold, we expect the new PE nexus to eventually cover
more enterprises operating B2C than B2B. However, we provide arguments to support
that this is also a natural consequence of the theoretical framework. Besides, the ecommerce
business (understood in a narrow sense) should not be substantially affected
by the new PE nexus. Due to the physical flow of goods, some of these enterprises might
already form a PE in the state of consumption on the basis of the traditional criteria
currently included in Article 5 of the OECD Model.
Obviously, such definition does not resolve existing and new ambiguities created by the
new nexus. Further guidance is required, for instance, with regard to the term “users”,
since it would need to be defined whether users having access to the free services also
count and whether the user amount is calculated based on sign-ons (see also the case
studies in the Annex). Other terms contained in the new PE nexus should also be defined
in more detail, such as “database”, “advertising services”, “website”, “per month” and
“domiciled”.
An Annex with case studies enriches the content of this paper, showing that reference to a
time frame is necessary due to the fast growth of certain enterprises within the digital
economy, since the risk of non-compliance would otherwise be very large. These case
studies also prove that the new PE nexus should also work if an enterprise offers various
digital (and other) services (see, for instance, case study “Company H” in the Annex).
We understand that following our theoretical framework, the actual wording of our
proposal could also rely on other thresholds such as, for instance, data usage.
Nevertheless, we are of the opinion that our proposal is a feasible option and should
launch a more concrete discussion concerning a new PE based on digital presence.
Our proposed changes and the specifications of the sourcing theory and benefit theory as
guiding justifications for a new PE nexus based on digital presence will also require that
further elements of the current PE definition should be subject to revision, including in
particular the exemption for auxiliary activities (see section 4.5.).
For the purposes of the new PE nexus, it should not be decisive whether the digital
service is a main part of the business of an enterprise (see section 4.6.) nor may the user
requirement lead to an unintended removal of the fundamental distinction between VAT
and corporate income tax (see section 4.7.).
The innovative approach of this paper to the allocation of taxing powers can be
implemented in line with the arm’s length principle or through a shift to formulary
apportionment. As regards the former scenario, we submit that the current OECD
Transfer Pricing Guidelines be amended in order to apply to income allocation between
an enterprise and its PE based on digital presence. We suggest that the profit split
method, combined with an upfront allocation of one third of the profit to the market
jurisdictions, serves as the most suitable transfer pricing method to operate in this
framework (see section 4.8.).
5. Tax enforcement
Our study recommends extraterritorial tax enforcement by one state on behalf of several
other states be considered as a feasible option in order to ensure the taxation of PEs
based on digital presence (see section 5.2.). Since in some instances enterprises may not
have any physical presence in the PE state, we suggest that the group company invoicing
the services serves as the taxpayer for the PEs in different jurisdictions (see section 5.3.).
However, we are also aware of the risk that such a system could lead to “accounting
rules shopping”.
6. Implementation
The interaction between the new PE nexus, the existing PE definition and other articles
of the OECD Model, such as article 12 (see section 6.2.), is likely to determine additional
repercussions, which are to be addressed more precisely in the framework of a dedicated
study. With regard to the implementation process of the new nexus and in order to
rebalance the exercise of tax sovereignty, either a soft or hard law approach could be
taken, since multilateral action appears required as most suitable in this respect (see
section 6.3.).”
93. Thus, the paper provides a theoretical justification of expanding the existing definition of physical presence permanent establishment by introducing a new threshold criteria for taxation of business income in the source jurisdiction. Their suggested criteria consists of a 1000 users in combination with a revenue threshold for a minimum period like one year, that in their view, would be sufficient evidence and indication of a non-occasional nature of business undertaken by an enterprise in a tax jurisdiction. They consider it a superior option to the other option of having a final withholding tax on gross payments. The proposal is perhaps one of the first authentic recognition of the role and significance of users in determining the tax nexus and in that sense, can be perceived as an important milestone.
8.2 Withholding Taxes in the Service of BEPS Action 1: Address the Tax Challenges of the Digital Economy by Prof. Yariv Brauner & Prof. Andrés Baez, IBFD52
94. This paper by two recognized experts53 analyzes the need for adjusting to the changing dynamics of business in a digitalized world, from the perspective of finding a simple but workable solution, by focusing upon the option of a final withholding tax that can be levied on payments without the need for satisfying the permanent establishment criteria. The proposal of the authors and their justification is aptly presented in their Executive Summary, which is reproduced below for ease of reference:
“Executive Summary
This position paper of the IBFD Academic Task Force (hereinafter IBFD Task Force)
relates to the OECD’s work on BEPS Action 1 and is devoted to withholding tax aspects.
It provides possible solutions to the challenges presented to the international tax regime
by the digital economy. This paper considers both the option of installing a withholding
tax mechanism as the primary response to these challenges and the option of using
withholding taxes in support of a nexus-based solution of the kind explored by a
companion position paper authored by P. Hongler and P. Pistone (hereinafter Hongler &
Pistone Paper).
The IBFD Task Force views the nexus-based solution as superior to the withholding tax
solution proposed herein since it better fits the system in place and therefore it is both
more consistent with the OECD’s conservative evolutionary approach to the matter (it is
likely to be more efficient, i.e. less wasteful) and it would likely be easier to fine-tune in
order to reach a stable balance between source and residence taxation.
The two key issues addressed by this position paper, as well as the entire BEPS Project,
are (i) under-taxation of so-called stateless income and (ii) an unacceptable division of
tax revenues (collected from the digital economy) that leaves source jurisdictions
wanting. These are two distinct issues and a solution to one may negatively impact the
other. We therefore chose to, first, address the former, emphasizing the negation of base
erosion and, second, correct for the latter, providing mechanisms to further correct if
necessary.
Consequently, we propose the design of a globally standard 10% final withholding tax on
all base-eroding business payments to registered non-residents, with specific, again
globally standard, exemptions to payees registered to be taxed under a net taxation
scheme. Such net taxation scheme may be a nexus-based solution or an elective scheme
to avoid the withholding tax proposed here. This proposal depends on a reliable, globally
standard, quick, cheap and automatically shared registration system shared by at least
the major economies, such as the BEPS countries.
Other exemptions may also be standardized for payments subject to in-place withholding
schemes (e.g. employment), to non-base-eroding payments (e.g. dividends) and to nondigital
goods and services (e.g. material, rents and services performed by humans on the
ground).
Payments to unregistered payees will be subject to a higher 15% withholding tax. These
would include payments to accounts in or owned by low- or no-tax jurisdictions (say, a
15% general corporate tax threshold). This tax may be non-final and partially refundable
upon filing.
B2C transactions should initially be exempt as non-base eroding. Yet, if countries are
already concerned with the revenue division implications of such a decision, a
complimentary final withholding tax of 15% could be collected on all payments cleared
by financial institutions, unless the payees register to be taxed under any net taxation
scheme. Strict regulation and international cooperation are crucial for this solution to
work.
C2C transactions do not necessitate a distinct taxing scheme.
The withholding tax scheme is not perfect; however, in the case that countries cannot
reach agreement on a nexus-based scheme it permits a simple, if crude, response to the
challenges of the digital economy. As such, however, it requires monitoring and perhaps tweaking over time. Therefore, the scheme should be accompanied by a review
mechanism.
The proposed solution does not directly employ a definition of the digital economy, on
which it is notoriously difficult to achieve a consensus. Nevertheless, if countries insist on
basing a withholding tax on a legal definition, this paper offers to follow a functional
definition that, similarly to the whole withholding tax solution, although not perfect,
could cover most of the bases at this time. We view this option as the least desirable of
the solutions mentioned in this paper.
Lastly, the proposal raises several potential interactions with related BEPS matters. Most
directly, the VAT response to the challenges of the digital economy may well correspond
to our proposal, especially in the need for a coordinated, standard registration-based
response. One should bear in mind, however, the tax mix implications. Furthermore, the
multilateral instrument (Action 15) may be used for efficient standardization of the
solution. Advances in reporting (e.g. CbC) and automatic information exchange, as well
as all monitoring aspects (Actions 11-13) also fit well with the necessary review
mechanism. The treatment of capital income is left to other Actions (2-6)”
95. The authors, while recommending a final withholding tax at 10% rate on gross payments, put forth several possible options. One option suggested by them could be to restrict the payments only to business-to-business (B2B) segments on the ground that they are the ones that erode the tax base. Another option could be to extend such tax to business-toconsumer (B2C) segment as well, if the tax jurisdiction views it essential. A third implicit option, arising from their work, consists of a two step imposition, wherein B2B segment is subjected to tax before the B2C segment. They recommend exempting the Consumer-to-consumer (C2C) segment completely from this tax. The influence of this paper can be seen in the approach taken in the BEPS Report on Action 1 that has since been endorsed by the international community.
8.3 Taxation and the digital economy: A survey of theoretical models- Final report by France Strategie in combination with several Universities54
96. This extensive report prepared by several authors55 provides the findings arrived at by a group of academicians and researchers, working on various theoretical models dealing with the tax challenges of digital economy. This work, again a first of its kind, backed by extensive analysis conducted with various theoretical models, provides significant insights into this challenge and puts forward several recommendations that are relevant to the work undertaken by this Committee. Their findings are reproduced below for ease of reference:
“Summary - Recommendations
Summary
The digital economy creates new challenges for taxation. The emergence of powerful
internet platforms, transforming entire industries like commerce or advertising, has
affected the ability of national authorities to tax transactions and corporate profits. The
main actors of the digital economy localized outside the jurisdiction of national tax
authorities, use transfer prices to reduce their tax bills inducing thus a net loss in tax
revenues from corporate taxation. In addition, the shift away from traditional forms of
commerce affects the tax authorities’ ability to collect taxes based on sales and financial
transactions, leading again to a loss in fiscal revenue. Overall, the tax base of major
internet platforms is reduced both because of difficulties in locating activities to specific
geographical jurisdictions and because major elements of the revenue-generating chain,
like the use of personal data uploaded by users, do not result in financial transactions.
Faced with this situation, tax authorities should reform and adapt their instruments to
take into account the new conditions created by the emergence of the digital economy.
The digital economy is characterized by four important features : (i) a blurring of
geographical frontiers which makes the assignment of activities to jurisdictions more
complex, (ii) large network externalities which give monopoly power to platforms
because of coordination issues, (iii) multi-sided markets, where platforms are used to
connect different actors, and pricing strategies on different sides of the platform are
interdependent, (iv) the collection of data uploaded by users and used as inputs to
generate profits for the platform. Any discussion of taxation in the digital economy must
take into account these specific features.
In this report, we have developd five original theoretical models to analyze the effects of
taxation in the digital economy. The five models focus on specific aspects of the digital
economy and reflect the four important features described above.
· The first model, inspired by platforms for social networking, deals with network
externalities, coordination and competition in the presence of taxation.
· The second model, focused on two-sided markets, considers a platform
mediating between users and advertisers, and allows for a comparative study of
taxation on either side of the market.
· The third model centers on the amount of data collection and exploitation and
studies how different taxes affect the level of data exploitation.
· The last two models deal with the blurring of geographical frontiers and
analyze how the emergence of electronic commerce affects fiscal competition
between countries fixing sales taxes. One model centers around exchange
platforms which cannot discriminate among consumers according to their
geographical origin, like eBay. The other model considers substitution effects
between electronic commerce and cross-border shopping.
We briefly summarize how the five models shed light on the different trade-offs and on
effects of taxation in the digital economy.
Taxation of network rents
Internet platforms collect network rents because of their positions as intermediaries
between users or between the two sides of the market. Taxation of profits (or revenues)
of internet platforms is just a transfer from the platforms to the government, with no
distortive effects on productive and allocative efficiency. In the presence of fixed costs, taxation may generate negative effects on the platform’s incentives to develop new
services or improve the quality of existing services.
Taxation on two-sided markets
On two-sided markets, taxation on one side may lead the platform to shift revenues to
the other side. This explains why, contrary to classical markets, ad valorem commodity
taxation may be worse than unit taxation. Charging a tax on advertising revenues may
induce the platform to charge a subscription price to users, resulting in exclusion of
users with the lowest values. A tax on data flows may lead the platform to start charging
a subscription price in order to limit the amount of data voluntarily uploaded by users.
Taxes per user, whether charged to the platform or directly to the user, also result in
exclusion of users with the lowest values.
Taxation and privacy protection
The revenues of internet platforms can be decomposed into revenues linked to onetime
access and revenues generated by data collection. Data collection by platforms is
excessive from the point of view of users. Taxes based on the platform’s revenues are
ineffective, and taxes based on the number of users or accesses result in an increase
rather than a decrease in data collection. A tax differentiating between the sources of
the revenues of the platform, and imposing a higher tax level on revenues generated by
data collection, could lower the level of data collection. Giving the user the possibility
to « opt out » may actually harm the average user by inducing the platform to increase
data collection on all other users. A pricing policy by which users are paid for data
collection improves the welfare of users and of the platform, whereas a pricing policy by
which users pay to opt out increases the profit of the platform at the expense of users.
Taxation of platforms and fiscal interactions
Taxation of data or online advertising or new privacy regulation may result in a shift in
the business models of the platforms. Taxation reduces the volume of activity on the
platform, lowering revenues from VAT. However, for small levels of taxation on data or
online advertising, the direct effect of the tax dominates the indirect effect on VAT, and
fiscal revenues are increased. Taxes on data and advertising are not perfect substitutes,
and a tax on advertising results in more distortions than a tax on data. If the platform
pays users for uploading personal data, part of the platform’s profits can be taxed as
additional income received by resident users.
Taxation and competition
Taxation affects the market structure and competition among internet platforms. If
platforms invest in quality to attract users, taxation may increase the joint profit of the
platforms by preventing unproductive investments, but will result in lower quality for
users.
On two-sided markets, when two platforms compete to attract users on one side of the
market, taxation has no effect on the market structure when the platforms are symmetric,
but may distort the sizes of the platforms when the platforms are initially asymmetric.
E-commerce and fiscal competition
The development of e-commerce has changed the conditions for fiscal competition
between countries setting their rate of VAT. E-commerce leads to a decrease in crossborder
transaction costs and a possibility of evading taxation, which strengthens
competition between countries under the origin principle, resulting in a decrease in VAT
rates. On the other hand, under the destination principle, e-commerce substitutes for cross-border shopping, and reduces competition between countries, leading to higher
VAT rates. Typical e-commerce platforms prevent sellers from price discriminating
among buyers according to their country of residence. When price discrimination is
banned, and buyers have a bias in favor of domestic goods, tax competition between the
two countries is mitigated and tax rates are higher than when sellers can adjust their
prices to buyers according to their geographical location.
Based on these findings, we would like to issue the following recommendations.
Recommendations
1. Develop a statistical apparatus to measure the activity of internet platforms.
Any specific tax on internet activity requires a precise measure of the activity of internet
platforms. To measure this activity, tax and regulatory authorities must have access to
data on users, numbers of clicks, advertisers. It is thus extremely important to construct
a statistical apparatus to measure the activity of internet platforms.
2. Determine a sharing rule for corporate profits reflecting the number of users in the
jurisdiction of the tax authority
Current rules for the corporate taxation of multinationals are based on transfer pricing
and territorial definitions which are obsolete. In the context of international
negotiations, new rules must be put in place to adapt definitions to the digital economy.
These sharing rules should reflect the number of users in the jurisdiction of a tax
authority, as the presence of these users is a necessary condition for the platform to
make profits. Taxes based on profits are not distortive and enable tax authorities to
capture some of the network rent generated by network externalities.
3. In the absence of a fair sharing rule on corporate profits, consider using a specific
tax based on revenues (sales or advertising) generated in the jurisdiction of the tax
authority
In the absence of a transparent and fair sharing rule, the national tax authority may
implement an ad valorem taxation based on the profits generated in the jurisdiction.
Given that variable costs are negligible, profits can be identified with revenues. Sales
revenues can easily be observed; revenues generated by advertising are more difficult to
assess if contracts between advertisers and platforms are located outside the country.
Specific rules can be put in place to assess advertising revenues based on statistical
information on the activity of internet platforms in the country.
4. In the absence of a fair sharing rule on corporate profits and if taxes on revenues
generated in the country cannot be implemented, consider using a specific tax based
on activity (number of users, flow of data or number of advertisers). This tax should
be calibrated at very low rates, and preferably be based on the collection of data.
A unit tax, based on number of users or adwords, or number of clicks reflecting data
flows, is distortive and will change the behavior of the platform, advertisers and users. It
has negative effects on participation on the platform, and can lead the platform to
change its pricing behavior, excluding some users from the platform. In addition, it will
likely result in an increase in data exploitation. Hence tax instruments based on direct
measures of internet activity should only be used as a last resort, if it is impossible to
base a tax on revenues or profits.
5. Differentiate tax rates according to the origin of revenues: revenues generated by
one-time access should be taxed at lower rates than revenues generated by data
exploitation.
There are two sorts of revenues of the platform: a basic revenue generated by one-time
access (sale of an item, advertising revenue linked to a keyword) and revenue linked to
data exploitation (sale of data on searches to third parties, storage of sales data for
future targeting). Given that platforms choose excessive levels of data exploitation,
differentiated taxes on revenues reduce a platform’s incentive to collect and exploit
data, and results in an increase in the welfare of consumers.
6. Encourage platforms to offer menus of options with different degrees of data
exploitation and to compensate users for uploading personal data.
By offering different options to consumers with different levels of data exploitation,
generalizing procedures like the choice to accept cookies or to be geo-localized,
platforms will sort consumers according to their privacy costs. Offering different levels
of compensation (monetary or through higher quality services) will increase the welfare
of users. This compensation for data already exists in some industries. For example,
supermarket chains offer discounts to consumers using loyalty cards which store their
history of purchases. In addition, if platforms use monetary compensations, this creates
a monetary value for the data which can be taxed as additional income from resident
users.
7. Strengthen the technology watch to anticipate future changes in services, quality
and market structure. Provide targeted tax breaks and subsidies to encourage
innovation.
Taxation of profits or revenues of internet platforms distort a platform’s long-term
decision to invest. Hence, in order to prevent taxation from hampering innovation, it is
imperative to ask regulatory authorities to keep a careful watch on the evolution of
internet platforms, services, products and competitive structure. In order to encourage
innovation and an increase in service quality, targeted tax breaks and subsidies should
be put in place.
8. Generalize the principle of destination and harmonize the level of sales taxation
Under the principle of origin, electronic commerce reinforces tax competition, resulting
in a race to the bottom. Under the principle of destination, electronic commerce instead
reduces tax competition, allowing for an increase in the level of taxation.
Concluding remarks
The models presented in this report set the stage for the analysis of the effects of
taxation in the digital economy, but leave a number of questions unanswered. They
highlight qualitative trade-offs, but fall short of quantifying exactly the effects of
different policies. In addition, the analysis supposes that business models remain fixed,
whereas the digital economy is characterized by fast technological changes and a
continuous evolution of business models and pricing strategies. The implementation of
our recommendations requires a more detailed understanding of the quantitative effects
of taxation and the reactivity of internet platforms. In order to advance the discussion,
and refine our recommendations, we need to enrich the analysis in the following
directions.
· The exact quantification of the optimal tax rate on data requires a calibration of
the models and to run simulations to analyze the welfare impact of different tax
rates.
· The analysis of likely reactions of actors of the digital economy to changes in
taxation régimes.
· The analysis of fiscal competition and electronic commerce needs to be
validated by empirical data. Empirical studies on the effect of exchange
platforms on geographical discrimination, and on the effect of the passage to
the destination principle for electronic services on January 1, 2015, should be
developed.
· Theoretical models should be enriched to take into account competition between
platforms subject to different jurisdictions, and the dynamics of market structure
and competition.
· Theoretical models should be developed to help determine the optimal sharing
rule for profits across jurisdictions based on different activities.”
97. This work represents one of the most elaborate attempts to analyze the issues related to allocation of taxing rights in digital economy, based on economic modeling. The report comes out with useful insights such as the likely economic impact of taxing various segments of the business models followed in digital economy. It recognizes the need for data based sophisticated sharing of tax between jurisdictions, but recognizing the unlikelihood of that being achieved at this stage, it proposes a fix tax on gross payments (revenue) and a last option, puts forward the possibility of a tax on digital activities (byte tax). The recognition in the report of the limitations of the existing rules today, and its emphasis on approaching the issue in a systematic manner by considering options depending upon their feasibility is an interesting approach to take.
8.4 Committee’s Observations
98. These works, in the view of the Committee, represent the global recognition of the need to address broader tax challenges arising from digital economy. The recommendations made therein for expanding the definition of permanent establishment, taking users and their contributions into account, and considering a final tax on gross payments provide a pragmatic and feasible option. The Committee acknowledges the contribution of these papers in its work.
99. These works supplement the findings arrived in the BEPS Report on Action 1, regarding the tax challenges arising from the difficulties in application of existent rules of nexus in the tax treaties, persisting and significant ambiguities in respect of characterization of payments that frequently lead to disputes and tax uncertainty and the yet to be explored challenges of quantifying the value of user data and contributions in profitability of an enterprise relying upon them.
100. Taking these into account, the Committee considers the need to explore all possible options for addressing these challenges in the Indian context.
50. Hongler, Peter & Pistone, Pasquale, “Blueprints for a New PE Nexus to Tax Business Income in the Era of the
Digital Economy”, IBFD Working Paper; 20 January 2015
51. Peter Hongler is IBFD Postdoctoral Research Fellow; Lecturer at the Zurich University of Applied Sciences. (Email:
[email protected]); Pasquale Pistone is IBFD Academic Chairman; Jean-Monnet ad Personam Professor, WU
Vienna University of Economics and Business; Associate Professor of Tax Law, University of Salerno; Professor
Honoris Causa, Ural State Law University. (Email: [email protected])
52. Brauner, Yariv & Baez, Andrés, “Withholding Taxes in the Service of BEPS Action 1: Address the Tax Challenges
of the Digital Economy”, IBFD; 2 February 2015
53. Prof. Dr. Yariv Brauner is Professor of Law with the Levin College of Law at the University of Florida (United
States of America) & IBFD Professor in Residence in 2014. Prof. Dr. Andrés Baez is IBFD postdoctoral research
fellow and Associate Professor of Tax Law at Universidad Carlos III in Madrid (Spain).
54. Bacache et al, “Taxation and the digital economy: A survey of theoretical models- Final report”, France
Stratigie; 26 February 2015, www.strategie.gouv.fr
55. Maya Bacache, Francis Bloch, Marc Bourreau, Bernard Caillaud, Helmuth Cremer, Jacques Crémer, Gabrielle
Demange, Romain de Nijs, Stéphane Gauthier, Jean-Marie Lozachmeur.
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