Digital economy and its taxation at the subnational level: The experience in the province of Cordoba (Argentina)

A key antecedent

A key antecedent on this issue is the ruling issued on 21/06/2018 by the United States Supreme Court, in the framework of the case South Dakota vs. Wayfair Inc. In  this ruling,  by a   majority ­of 5 judges in favor and 4 against, a jurisprudential criterion in force for several decades was set aside and it was admitted that the state of South Dakota could collect the sales Tax from the companies Wayfair Inc.,, for the online sale of furniture and household items, and Newegg.­­­ Inc, for the online sale of electronic items; even if they do not have an establishment, employees, representatives, and/or any physical presence in that jurisdiction.­­

For a long time and as a result of the interpretation of the constitutional trade provision of the American Court in the cases of National Bellas Hess” (1967) and “Quill Corp” (1992), the American states were unable to levy such sub-national sales tax on companies located outside their jurisdiction and the collection and payment of sales tax on sales made to customers located within their territory, if the company did not comply with the “rule of physical presence” (have a local physical office, employees, or representatives in the state‚Äôs territory ).¬≠¬≠¬≠

Cordoba experience

The province of C√≥rdoba, as a subnational jurisdiction of the Argentine Republic, has started since 2017 to adjust the typification of the taxable event in the tax on gross income[1], in order to address the challenge generated by the digitalization of the economy and, in particular, in those operations of commercialization of services carried out by subjects domiciled, settled and/or constituted abroad ‚Äďsubjects not included in the tax registry-.

With regard to this last point, Cordoba has done so through the use of elements and/or indicators that allow providing greater precision and/or contextualization to the connection and/or linkage between the taxation criterion (onerous activity exercised with regularity) and the spatial scope for its configuration within the jurisdiction of the province of Córdoba (territorial presence).

It should be noted that, in addition, at the national level since 2018, VAT is applied to the digital services provided by non-resident subjects in the territory of the country.

The reality and complexity of the different businesses and/or economic activities that arise from the digitalization has not allowed to make a unified adjustment to the taxable event in the aforementioned taxes, to consider them within their object; especially the linkage, or nexus that is required within the existing legal framework for safeguarding ‚Äď due to constitutional principles – the taxable portion of digital services provided in the territory of the province , without exceeding the scope.

To this end, it has been defined[2] for the case of the commercialization of services in general that the link or nexus between the taxable event and the spatial scope for its configuration in said jurisdiction occurs through the economic use of the service by those who consume and/or request it or on whom it falls (subjects, goods, persons, products, etc.) provided that the condition is given that they are based, domiciled, or located in the provincial territory. Specifically considering online subscription services or in the case of intermediation of digital services. In addition to these elements, the significant digital presence has been included as an indicator.

This regulatory adjustment would not imply altering the legal nature of the tax, it is not a tax on consumption or the use of the service in the jurisdiction but using such elements as mere indicators and/or certain and tangible parameters of the existence and/or materiality of an ‚Äúactivity development‚ÄĚ within the provincial scope and in the framework of the gross income tax itself.

The province of Cordoba considers that there will be economic use or consumption of the service in that jurisdiction, when the immediate use or the first act of disposal of the service by the user is verified even if, if applicable, the latter destines it for consumption. In the case of digital services, it is presumed-unless proven otherwise – that the use or consumption is carried out in the provincial jurisdiction when the following elements are verified:

  • In the case of services received through the use of mobile phones: when the location identified by the mobile phone code of the SIM card corresponds to the province of C√≥rdoba.
  • If these are services received through other devices: when the IP address of the electronic devices of the receiver of the service corresponds to the province of C√≥rdoba. The IP address is the unique numeric identifier formed by binary values assigned to an electronic device.

For the purposes of introducing the concept of ‚ÄúSignificant Digital Presence‚ÄĚ in the Province of Cordoba, we have used aspects of economic character and/or economic activity, which -a priori – would allow directing or contextualizing the taxable concept to the Tax on Gross Income, such as:

  • that the digital service provider make consecutive or successive operations and/or transactions (not mere isolated occurrences or accidental),
  • the service provider -by itself or through third parties ‚Äď is using or hiring companies, or ‚Äúproviders of services‚ÄĚ domiciled or with activity in the jurisdiction of the province of C√≥rdoba, to the provision of the service of online subscription or access to all kinds of audiovisual entertainment (the expenses supported as a qualitative aspect that allows reflecting the existence of the activity in the province),
  • that the provider perform -by itself or through third parties – the offering of the service within the geographical scope of the province of Cordoba and/or have a license to display the content of that service in such jurisdiction,
  • that the service provider may require for the marketing of their services, within the province of Cordoba, a point of connection and/or transmission (Wi-Fi, mobile device, etc.) located in this jurisdiction or of an internet or phone service provider with address or activity in the province of C√≥rdoba.

It should be noted that the province of Cordoba has made its own adaptation of the concept of digital presence through elements that allow to demonstrate the will or intention of the provider to enter the local jurisdiction to plan the development and/or execution of its economic activity where the user/consumer (local) is located, as the main object of its business, since without the interaction and/or relationship with them, the service would not make sense, that is, would not take place.

With regard to the collection of the tax, it has been provided that the subjects who have the character of lessees or borrowers of said taxable facts act as withholding agents[3] being ‚Äďeven – obliged those who act in the character of intermediaries, administrators, or agents, for the payments abroad made on behalf of the subjects who order them, except when they prove to have practiced and entered the respective withholding. In the case of digital services, when credit or debit card issuing entities intermediate in the payment, they must act as withholding agents of the service provider.[4]

As a conclusion

As a conclusion, we can argue that the province of C√≥rdoba comes to addressing‚Äďin a concrete way – the challenges that creates and/or raises an economy increasingly digitalized, and carrying it out – to our knowledge – within the framework of the principle of territoriality and of attribution of income in conformity with the various legal regulations in force; to tax only the portion of the taxable event in the services which, by their nature and/or feature, demonstrate a development or event executed in the area of provincial jurisdiction, without exceeding it. Other provinces of the country have followed this experience, with some nuances.

Finally, we understand that this experience may be of interest to the subnational governments of other countries that, like Argentina, are organized in a federal state in order to collect, in their respective territorial areas, the sales tax or the one that replaces it.

[1] It is an indirect consumption tax that taxes the usual development and for consideration of economic activities, taking as a tax base the total amount of gross income earned in the fiscal period, on a multi-phase and cumulative basis, and representing the main source of financing of provincial governments.

[2] Through the Provincial Tax Code-Law N¬į 6006 TO 2015 and its amendments-and its regulatory Decree n¬į 1205/2015 and its amendments.

[3] Single and final payment withholding. The provider does not need to register in the tax.

[4] In the regulations it is presumed, unless proven otherwise, that in such operations the tax is borne by the provider of the taxed service ‚Äď the price of the service is tax-free.


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