Article 27 – The Tax Challenges of the Digital Economy

Broader direct tax challenges In our 27th 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 how the two factors mentioned in articles 25 and 26, namely digital factors and user-based factors can combine with the revenue factor to evidence […]

Written By Stephen Balzan

On June 20, 2016
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Broader direct tax challenges

In our 27th 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 how the 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.

For the purposes of this potential option, total revenue which is in excess of the revenue threshold would be an indicator of the existence of a significant economic presence.

Total revenue may however not by itself be sufficient evidence of a non-resident enterprise’s regular and sustained participation in the economic life of a country.  The revenue factor must be combined with other factors such as the digital factors and the user based factors that indicate a purposeful and sustained interaction with the economy of the country concerned. 

In other words, a link would have to be created between the revenue generating activity of the non-resident enterprise and its significant economic presence in a country. The report on Action 1 provides the following example to highlight the importance of the revenue factor being combined with the other two factors, namely the digital factors and the user-based factors to evidence a non-resident’s enterprise’s regular and sustained participation in the economic life of a country.

If a non-resident enterprise generates gross revenues above the threshold from transactions with-in country customers concluded electronically through a localized digital platform where the customer is required to create a personalized account and utilize the local payment options offered on the site to execute the purchase, it could be considered that there is a link between the revenue generated from that country and the digital and /or user based factors evidencing a significant economic presence in that country.

In contrast, it would be more difficult to find such a link where a non-resident enterprise generates gross revenues above the threshold from transactions with-in country customers through in-person negotiation taking place outside of the market jurisdiction, if the enterprise only maintains a passive website that provides product information with no functionalities permitting transactions or intensive interaction with users.

In our next article, we shall be focusing our attention on how to determine the income attributable to the significant economic presence.

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.