Digital economy’s tax battle: Countries adopt interim measures

In the absence of an international tax consensus for digital companies, countries like India, Iceland and the EU are opting for interim measures as there are no easy answers.

Digital transformation has set things in motion not only for businesses and consumers, but is also impacting the global economy. The tremendous global success of digital natives such as Facebook, Amazon, Apple, Google, among many others raises some burning questions.

According to the European Commission, 9 of the world's top 20 companies by market capitalization are now digital, compared to 1 in 20 ten years ago.

In a report commissioned by the G20 powers, the Organization for Economic Cooperation and Development (OECD) highlights the benefits and challenges of a growing digital economy – and why there’s a need to revamp the traditional international tax systems.

This comes on the heels of the 2016 Basic Erosion and Profit Shifting (BEPS) package, and a call from G20 countries to engage an even broader range of countries in the implementation of the measures.

Abhishek-Goenka-PwC

Whether it is the EU report or UK report or what India has done, countries have come up with interim measures because finding a long term consensus is so difficult. There’s also political pressure and a dire need for countries to collect taxes so they can’t indefinitely wait.

Abhishek Goenka
  Partner & Leader, Corporate & International Tax, PwC

What’s the status now?

For digital companies, revenues are not restricted to their physical presence. Abhishek Goenka, partner and leader, Corporate and International Tax at PwC, says, “When it comes to digitalized infrastructure today there are companies that cater to billions of consumers in other countries, without any physical presence there. They are either earning real revenue from those consumers or gathering data from the users, which is further monetized. In the light of this, the old framework is not robust enough to ensure what value is created, and where.”

At the same time, there is no general consensus if changes should be made to international tax treaties, reveals the OECD report. The report points out diverging views of different countries. It identifies three aspects of digital businesses: cross-jurisdictional scale without mass, importance of intangible assets, especially intellectual property (IP), importance of data, user participation, and their synergies with IP.

Explaining the backbone of how tax treaties have been orchestrated over the years, Goenka says, “One aspect is to ensure there is no double taxation – businesses don’t end up paying taxes to multiple countries, and if they do they should get credit for it. Another objective of international tax has been that there should be no double non-taxation. It shouldn’t be that companies are arranging their affairs in a particular manner and end up paying no tax anywhere.”

Clearly, there are no easy answers.  

It is very difficult to find consensus, he points out. “Newer and newer business models are emerging. But equally – there is a little bit of a divide between the producing states and the consuming states. Whether it is the EU report or UK report or what India has done, they have come up with some interim measures because finding a long term consensus is so difficult.

“There’s also political pressure, and a dire need for countries to collect taxes that they can’t indefinitely wait.”

India has implemented an equalization levy (EL) that was introduced in 2016, which is a kind of turnover tax applicable on B2B digital advertising payments. It’s a 6 percent tax on online advertising fees paid to international companies by Indian customers if the gross value of such payments exceeds Rs 1 lakh a year.

According to the Indian government, revenue from the EL amounted to approximately Rs 3.4 billion from June 2016 to March 2017. “But the inference is on the consumer rather than the business. Iceland and Italy have done something similar. With this report, we expect more and more countries to introduce some interim measure,” he points out.

The European Commission has proposed plans to levy a 3 percent tax on turnover of online companies, which will bring in an estimated 5 billion euros. 

Currently, digital giants pay an average tax rate of 9.5 percent in the EU, compared to the 23.3 percent paid by traditional companies.