Article 22 – The Tax Challenges of the Digital Economy

Broader direct tax challenges In our 22nd 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 second category of the main policy challenges raised by the digital economy i.e. Data and the attribution of value created from the creation […]

Written By Stephen Balzan

On May 28, 2016
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Broader direct tax challenges

In our 22nd 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 second category of the main policy challenges raised by the digital economy i.e. Data and the attribution of value created from the creation of such data through the use of digital products and services.

Digital technology has enabled the remote use, storage and collection of data from users, consumers or indirectly from third parties.  This data creates value for businesses in a variety of ways by allowing businesses to segment population in order to offer tailor offerings, to improve the development of their products and services and to improve decision making.

The question arises as to whether any profits attributable to the remote gathering of data by an enterprise should be taxable in the State from which the data is gathered, as well as questions about whether data is being appropriately characterized and valued for tax purposes.

The value of data and the difficulties associated with determining a value for that data is relevant for tax purposes in a cross border context.  The question arises as to whether the remote collection of data should give rise to a nexus for tax purposes even in the absence of a physical presence.  If so, what impact would this have on the application of transfer pricing and profit attribution principles which require an analysis of the functions performed, assets used and risks assumed.

Thus the fact that the value of data can impact tax results if attributable to a PE or if held by a local enterprise and sold to a foreign enterprise, but not if collected remotely by a foreign enterprise with no PE, places pressure on the nexus issues and raises questions regarding the location of data collection.

In addition, data may be collected from customers or devices in one country using technology developed in the second country. The data may be processed in the second country and used to target customers in the second customers.  Determining whether profits are attributable to each of these functions and the appropriate allocation of profits between the two countries raises tax challenges.  These may be increased when different data is gathered from different sources and for different purposes and combined in different ways to create value.

The fact that current tax rules for allocating income among different parts of the same MNE require an analysis of the functions performed, assets used and risks assumed, raises questions where part of the value creation may lie in the contribution of users or customers in a jurisdiction.  This relates to the core question of how to determine where economic activities are carried out and what value is created for income tax purposes.

In our next article, we shall be focusing our attention on the third category of the main policy challenges raised by the digital economy i.e. the characterization of income derived from new business models.

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.