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.