Article 30 – The Tax Challenges of the Digital Economy

Broader direct tax challenges In our 30th 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 third and last option to address the broader direct tax challenges of the digital economy, namely the introduction of ‘an equilisation levy’. The […]

Written By Stephen Balzan

On July 18, 2016
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Broader direct tax challenges

In our 30th 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 third and last option to address the broader direct tax challenges of the digital economy, namely the introduction of ‘an equilisation levy’.

The introduction of e levy could be considered as an alternative way to address the broader direct tax challenges of the digital economy.  This has been introduced by some countries for example in the insurance sector to ensure equal treatment of foreign and domestic suppliers, whereby domestic corporations engaged in insurance activities are wholly taxable on the related profits, while foreign corporations are able to sell insurance without being subject to tax on those profits, neither in the source nor in the residence country.  A levy could be introduced only to tax the profits derived by a non-resident enterprise where it is determined that it has a significant economic presence.

Scope of the tax

If the policy priority is to tax remote sales transactions with domestic customers, one possibility is to apply the levy to all transactions concluded remotely with in-country customers.  An alternative would be to limit the scope to transactions involving the conclusion through automated systems of a contract for the sale of goods and services between two or kore parties effected through a digital platform.  Alternatively, if the policy priority is to tax the value considered to be directly contributed by customers and users, then a levy could be imposed on data and other contributions gathered from in-country customers and users.

Potential trade and other issues

As is the case with the imposition of a withholding tax on gross revenues (discussed in the previous article), a levy that only applied to non-resident enterprises is likely to raise similar questions both with respect to trade agreements and EU law. One option that could be considered is the imposition of the levy on both domestic and foreign entities.  However consideration should also be given to ways the impact of applying both corporate income tax and the levy to foreign and domestic entities taxable under the existing corporate international tax rules.

Relationship with corporate income tax

An enterprise could be subject to both corporate income tax and the levy.  This could arise in situations in which a foreign entity is subject to the levy at source and to corporate income tax in its country of residence or in the situation in which an entity is subject to both the levy and the corporate income tax in the country of source.  For foreign entities which are subject to corporate income tax in the country of residence are unlikely to be able to credit the levy withheld at source against the corporate income tax.  To address these concerns, it would be necessary to structure the levy in such a way, so as to apply only to situations in which the income would either remain untaxed or subject only to a very low rate of tax.

Another approach would be to allow a taxpayer subject to both CIT and the levy to credit the levy against its domestic corporate income tax.  This would ensure that foreign entities with no nexus for corporate income tax purposes, would only be subject to the levy in the country of source, while the tax burden of entities subject to corporate income tax would be limited to the higher of the levy or the corporate income tax.

In our next article, we shall be focusing our attention on the broader indirect tax challenges raised by the digital economy and the options to address them.

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.