Alternatives to tax the digital economy

The digital economy presents many facts that could be subject to taxation, in order to tax certain manifestations of consumption or wealth associated with its operations.

The pandemic accelerated the growth of this digital economy, and although timidly, the eyes of the political authorities are increasingly aware of its importance as a source of revenues, especially in view of the exhausted public treasury coffers resulting from the active economic policies that have been adopted to mitigate the adverse effects of the coronavirus economic crisis.

Internationally, two types of taxation are distinguished in the first place. The so-called “Google tax” and the so-called ”Netflix tax”.

“Google tax”

It is an indirect tax[1] levied on the gross revenues obtained by the large multinational corporations of the group, that generally invoice more than 750 million euros per year. As I mentioned in the post ” tax on digital services (ISD)”, this is due to the lack of consensus within the OECD on the incorporation of the digital group as Permanent establishment that allows its taxation in the Corporate Income Tax.

“Netflix tax”

It charges digital services from outside non-resident companies[2], when the consumption of these services takes place in the country. VAT and Income Tax can be applied in this topic.

Tax strategy

The strategy followed so far was clear, while European countries opted to apply the “google tax”, LAC countries have chosen the “Netflix tax”. The income that can be obtained from each of these taxes differs as well as the motivation for their application.

While for the “Google tax” the goal is essentially collection  (E.g. France aimed to collect 1,200 million euros per year[3]), for the” Netflix tax ” Latin American countries first aim to avoid unfair competition from non-resident companies with local companies, attentive to the fact that the digital services of local companies were already taxed.

This tax has been legislated in VAT of Colombia, Uruguay, Argentina, Chile, Mexico, Costa Rica, and Dominican Republic. The expected VAT collection in the LAC countries, according to a study prepared by ECLAC (2019) is between USD 60 million to USD 178 million annually, depending on the size of the digital economy of each country.

With regard to the Income Tax on digital services of non-resident companies[4], some countries that tax it[5] (Colombia, Mexico, Uruguay, etc.), while in others, it is under study or it is not in force.[6]

Heterodox taxation: the Brazilian case

As we have indicated in the respective posts of this Blog “The taxation measures against the Coronavirus” and “new tax order…”, heterodox taxation has a wide scope of application in the digital economy, apart from classic taxation (VAT or IT).

Brazil is a clear example of this. Since last year, official sectors in the National Congress, and this year via statements of Paulo Guedes, Minister of Economy, who expressed the intention to implement a tax reform that among other aspects, implements a “tax on electronic commerce”.

In this country, the increase in digital purchases was 10.3% higher in June 2020 compared to the same month of the previous year and on the other hand, between April and June, 5.7 million Brazilians made their first online purchase.

Given this advance of the digital economy, the objective of this tax would apply to  “e-commerce” digital purchases.  The impact on expected revenue would be between USD 18,000 and USD 23,000 per year.

Although the project has not yet been submitted, it would be a specific consumption tax, with an aliquot of 0.2%. The Ministry of economy has highlighted the broad tax base and its high power of collection, in order to achieve fiscal sustainability, by compensating with this income an alleged reduction in Corporate Social Security contributions and Income Tax.

Taxation in India

Apart from the tax policy of European countries and LAC, it is interesting to know the tax system of India on this topic. This country tends to become a billion-dollar digital economy by 2024.[7] Since 2017, the Goods and Services Tax (GST) is in force, [8]which includes digital services[9] with an aliquot of 18 %. It applies to both resident and non-resident businesses. In the latter, the taxable subject is determined according to the category of the transaction.[10]

Conclusion

From the above, it follows that there are various alternatives for the taxation of the digital economy, through orthodox taxation (VAT, IR) as well as via direct or indirect heterodox taxes (General or specific consumption tax). There are also many taxable facts and their different scopes, which will depend on the tax policy of each country.

The slow but steady advance of taxation on the digital economy will continue until its full incorporation into modern tax systems.


[1] The taxable facts are: 1) online advertising services, 2) online brokerage services, and 3) data transmission services.
[2] Faced with difficulties in their control and perception, LA countries adopted a number of strategies: (1) all digital services are included and non-resident companies must register, or (2) only digital services of companies nominally designated by TA are taxed.
[3] Before the suspension.
[4] Under the treatment of nonresident or resident or beneficiary from abroad.
[5] In some, the taxable event is linked to advertising.
[6] On the other hand, with regard to the income tax, it is coherent that local IT service companies (companies within the so-called knowledge economy) receive fiscal incentives for their development, under certain requirements (levels of export, investment in R & D, etc.) .
[7]  Same size as the US digital economy today. In 2027 India plans to become the third largest economy in the world behind the US and China.
[8] A state GST (SGCT, State Goods and Services Tax, for sales within the state) or an integrated GST (for sales between states) also applies. It replaced 29 taxes (including VAT) and rates that were applied prior to the reform.
[9] They depend on the Internet, being essentially automated with minimal human participation.
[10]  In business- to-business (B2B) transactions, the Taxable Person is the acquiring company in India. In Business- to- consumer (B2C) transactions, the Taxable Person is the non-resident enterprise, which must register in a simplified register and pay the respective tax. Digital services include advertising.

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1 comment

  1. Tannia Castro Reply

    La regulación a los servicios digitales es un reto en las AT de ALC, ya que este es un comercio no regulado y debemos considerar si la legislación se basa en una renta territorial, por lo que es un reto que necesitara no solo reformas en las legislaciones, si no un cambio y modernismo de los sistemas computacionales.

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