Article 28 – The Tax Challenges of the Digital Economy

Broader direct tax challenges In our 28th 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 to determine the income attributable to the significant economic presence. The option discussed in the previous articles, namely the revenue based factor, would […]

Written By Stephen Balzan

On July 4, 2016
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Broader direct tax challenges

In our 28th 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 to determine the income attributable to the significant economic presence.

The option discussed in the previous articles, namely the revenue based factor, would establish a nexus for taxation in cases where a non-resident enterprise might not have a physical presence in a particular country. Therefore consideration must be given to the changes that are required to the profit attribution rules, so as to ensure parity between enterprises that are subject to tax in terms of the existing rules and principles due to their physical presence in the market country and those that are taxable only due to the application of this option.

Several adjustments to the existing principles were considered, however all potential adjustments would require substantial departures from existing standards applicable to allocate profits within an MNE operating in different jurisdictions.  These existing standards are currently based on an analysis of the functions performed, assets used and risks assumed by the enterprises concerned.  It was therefore concluded that alternative methods would need to be considered in order to avoid a substantial re-write of the existing rules.

Modified deemed profit methods

One possible approach would be to determine the deemed net income by applying a ratio of presumed expenses to the non-resident enterprise’s revenue derived from transactions concluded with-in country customers. Determining an appropriate ratio would depend on a number of factors, including the country concerned, the degree of integration of the particular enterprise and the type of product and service provided.  One possible approach would be to classify taxpayers by industry and apply an industry specific ratio.  A more refined approach would be to divide taxpayers within a given industry into additional classes based on factors such as equipment, turnover and employees.

Such methods are deemed to be relatively easy to administer and raise revenue.  However large MNEs, have complex structures operating in many lines of business, while others have different cost structures than those found in the traditional business models.

In our next article, we shall be focusing our attention on the second option to address the broader direct tax challenges of the digital economy, namely the imposition of a withholding tax on certain types of digital transactions.

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.