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:
- 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.
- 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.
- 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.
