Article 24 – The Tax Challenges of the Digital Economy

Broader direct tax challenges In our 24th 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 options that have been developed to address the broader direct tax challenges of the digital economy. In 2014, the options analysed by the […]

Written By Stephen Balzan

On June 6, 2016
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Broader direct tax challenges

In our 24th 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 options that have been developed to address the broader direct tax challenges of the digital economy.

In 2014, the options analysed by the Task Force on the Digital Economy to address the broader direct tax challenges of the digital economy, included (i) modifications to the exceptions from PE status, (ii) alternatives to the existing PE threshold, (iii) the imposition of a withholding tax on certain types of digital transactions and (iv) the introduction of a tax on bandwidth use.

With respect to (i) the modifications to the exceptions from PE status, work on BEPS Action 7 analysed whether activities that may previously have been preparatory and auxiliary in nature have become core components of a business and whether they should continue to benefit from the exceptions to the definition of a permanent establishment found in Article 5(5) of the OECD MC.

With respect to option (ii), this option would create a taxable presence in a country where a non-resident enterprise has a significant economic presence in a country on the basis of factors that evidence a purposeful and sustained interaction with the economy of that country.  These factors would be combined with a factor based on revenue derived from remote transactions into the country.

Revenue based factor

Revenue that is generated on a sustained basis from a country could be a clear indicator of the existence of a significant economic presence.  Revenues earned from customers in a country are a potential factor for establishing nexus in the form of significant economic presence in a particular country.  Revenues alone will not be sufficient to establish nexus but could be considered as a basic factor, when combined with other factors to establish nexus in the form of significant economic presence in a particular country.

In developing a revenue factor, consideration was given to the following technical issues:

  1. Transactions covered – One approach is to include only revenues generated from digital transactions concluded with in-country customers through an enterprise’s digital platform.
  2. Revenue threshold – The core element in the revenue factor is the gross revenue generated from remote transactions concluded with customers in the country concerned.  The threshold should be set high enough so as to ensure that the administrative burden for tax payers and tax administrations alike is minimized as much as possible while ensuring that nexus is less likely to be created where minimal tax revenue will be collected.
  3. Administration of the threshold – An accurate application of the revenue threshold would depend on the ability of the country to identify and remote sales activities of the non-resident enterprise.  One approach could be the introduction of a mandatory registration system for enterprises that meet the factors giving rise to a significant economic presence.

In our next articles, we shall be focusing our attention on the other factors that evidence a powerful and sustained interaction with the economy of a particular country, namely digital factors and user based factors and how these two factors can combine with the revenue factor to evidence a non-resident’s enterprise’s regular and sustained participation in the economic life of a country.

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.