Article 20 – The Tax Challenges of the Digital Economy

Broader direct tax challenges In our 20th article in a series of articles on the tax challenges of the digital economy, we shall be providing you hereunder with a brief overview on the broader tax challenges raised by the digital economy. The growth of the digital economy have resulted in non-resident companies operating in a manner […]

Written By Stephen Balzan

On May 9, 2016
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Broader direct tax challenges

In our 20th article in a series of articles on the tax challenges of the digital economy, we shall be providing you hereunder with a brief overview on the broader tax challenges raised by the digital economy.

The growth of the digital economy have resulted in non-resident companies operating in a manner which requires less physical presence, i.e. in a totally different manner than at the time international tax rules were designed. The fact that source taxation required physical presence is also due to the need to ensure that such country has the administrative capability of enforcing its taxing rights over a non-resident enterprise.  Requiring less physical presence today raises challenges for international taxation.

The main policy challenges raised by the digital economy fall into three categories:

(a)   Nexus – The increase in the potential for companies operating in the digital companies to sell goods and services without a physical presence, combined with the increasing role of network effects generated by customer interactions, can raise questions as to whether the current international tax rules to determine nexus with a jurisdiction for tax purposes are appropriate.

(b)   Data – The growth in the sophistication of information technologies have enabled companies in the digital economy to gather and use data to an unprecedented degree.  This raises questions of how to attribute value created from the generation of data through digital products and services and how to characterize for tax purposes the supply of data in a transaction.

(c)    Characterization – The development of new digital products or means of delivering services creates uncertainties in relation to the proper characterization of payments made in the context of new business models, particularly in relation to cloud computing.

These challenges raise two main questions (i) whether the current tax rules are still appropriate in particular to the allocation of taxing rights between the source and the residence jurisdiction and (ii) the paradigm used to determine where economic activities are carried out and value created for tax purposes.  These all generate BEPS issues because these challenges create opportunities to achieve double non-taxation.

The digital economy also creates challenges in the area of indirect taxation for VAT systems, particularly where goods, services and intangibles are acquired by private consumers from suppliers abroad.  This is partly due to the absence of an effective international framework to ensure VAT collection in the jurisdiction of consumption.

In our next article, we shall be focusing our attention on the first category of the main policy changes raised by the digital economy i.e. Nexus and the ability to have a significant presence without being liable to tax.

How can we help?  

For further information, please contact one of the firm’s tax partners, Stephen Balzan on [email protected] or Elaine Camilleri [email protected]. ACT can help you understand the changes to the tax rules and how these can impact your business.  

Apart from its offices in St. Julian’s Malta, ACT operates from a second office in Gozo, which is situated in the capital city of Victoria.  For an appointment in our Gozo office, please call on 00356 21378672 or send us an email on [email protected]. 

Disclaimer: This article contains general information only and is not intended to address the circumstances of any particular individual or entity. ACT, by means of this article is not rendering any accounting, business, financial, investment, legal, tax, or other professional advice or service. This article is not a substitute for such professional advice, nor should it be used as a basis for any decision or action that may affect your finances or your business. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. Before making any decisions or before taking any action that may affect your finances or your business, you should consult a qualified professional adviser. ACT shall not be responsible for any loss whatsoever sustained by any person who relies on this article.