Article 26 – The Tax Challenges of the Digital Economy

Broader direct tax challenges In our 26th 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 another factor that evidences a powerful and sustained interaction with the economy of a particular country, namely the user based factor. In view of […]

Written By Stephen Balzan

On June 20, 2016
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Broader direct tax challenges

In our 26th 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 another factor that evidences a powerful and sustained interaction with the economy of a particular country, namely the user based factor.

In view of the importance of network effects in the digital economy, the user base is also an important indicator of a purposeful and sustained interaction with the economy of that particular country. A range of factors based on users could be used to reflect the level of participation in the economic life of a country, namely:

  1. Monthly active users (MAU) – One factor reflecting the level of penetration in a country’s economic life is the number of MAUs on the digital platform, that are habitually resident in a given country in a taxable year.  A factor based on MAUs would be able to measure the customer/user base in a given country both in terms of size and also in terms of their engagement.  However more detailed metrics would need to be developed for the purpose of using this factor, such as how to identify a unique user or what level of engagement is required for a user to be considered as ‘active’.  The information needs to be checked so as to confirm its reliability and veracity to address fraudulent accounts and false information amongst others.  
  2. Online contract conclusion – Another factor indicating the level of participation of an enterprise in the economic life of a country is the regular conclusion of contracts.  In the digital economy, contracts are frequently concluded with customers via a digital platform without the need for the intervention of local personnel or dependent agents.  For example online platforms providing services to their users often specify on their website that by accessing or using the products or services of the company, the user will be agreeing to the terms of service and therefore each use of the platform results in the conclusion of a legally binding contract.  The number of contracts concluded through a digital platform with customers or users that are habitually resident in the country in any taxable year could therefore be considered an important factor.
  3. Data collected – Another important factor indicating the level of participation of an enterprise in the economic life of a country is the volume of digital content collected through a digital platform from users and customers habitually resident in that country in a taxable year.  Information on data collected is increasingly available, reliable and up-to-date.  At the same time, however, the volume of data collected from users in a country may not necessarily reflect an effective contribution to the profits generated by a non-resident enterprise, as the value of raw data is rather uncertain and particularly volatile.

In our next article, we shall be focusing our attention on how these two factors mentioned in articles 25 and 26, namely digital factors and user-based 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.