The digital economy and its taxation at the subnational level: The experience in the province of Córdoba (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 which, 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 endorsed 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 goods; even though they do not have an establishment, employees, representatives, and/or any physical presence in that jurisdiction.

For a long time and a product of the interpretation of the constitutional commerce provision of this American Court in the cases of National Bellas Hess” (1967) and “Quill Corp” (1992), the American states were unable to levy such a sub-national sales tax on a company located outside of its territory and the collection and remission of sales tax on sales made to customers located within it, if the company did not comply with the “rule of physical presence” (have a local physical office, employees, or representatives in the territory of that State).

Cordoba experience

Even before the aforementioned antecedent, the province of Córdoba as a subnational jurisdiction of the Argentine Republic has been making, since 2017, adjustments to the typification of the taxable event in the tax on gross income[1], in order to address the challenge generated by the digitalization in the tax system and, in particular, in those operations of commercialization of services conducted out by subjects domiciled, located and/or constituted abroad –subjects not registered in the tax-.

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

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

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

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

This regulatory adjustment would not imply altering the legal nature of the tax, it is not the consumption or the use of the service in the jurisdiction that is taxed, but such elements are used as mere indicators, along with certain and tangible parameters, of the existence and/or materiality of an “activity development” within the provincial area, and within 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 provision the service to 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 conducted in the provincial jurisdiction when the following conditions are verified:

  1. In the case of services received through the use of mobile phones: when the code of the mobile phone’s SIM card corresponds to the province of Córdoba.
  2. If these are services received through other devices: when the electronic devices IP address of the service’s receiver corresponds to the province of Córdoba. The unique numeric identifier formed by binary values assigned to an electronic device is considered as an IP address.

For the purposes of introducing the concept of “Significant Digital Presence” in the Province of Cordoba, other aspects of character and/or economic activity are used, which -a priori – would allow to direct or contextualize the concept as taxable event for the Gross Income tax, such as: (a) that the service provider digital make direct benefits or successive performance and/or transactions or operations (not mere isolated occurrences or accidental), (b) the service provider -by itself or through third parties – is using or hiring companies, or “providers of services” domiciled or with activity in the jurisdiction of the province of Córdoba, to the provision of the service of online subscription or access to all kinds of audiovisual entertainment (the expenses endured as a qualitative aspect that allows to reflect the existence of the activity in the province), (c) that the provider perform -directly 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, (d) 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 service provider or telephone provider with address or activity in the province of Córdoba.

It should be noted that the province of Cordoba has performed its own adaptation of the concept of digital presence through elements that enable demonstrating the will or intention of the providers to enter the local jurisdiction to speculate with the development and/or execution of their economic activity when they have the user/consumer (local) as the main object of their business, since without the interaction and/or relationship with them, the service would not make sense, that is, it would not be offered/performed.

With regard to the collection of the lien, it has been provided that the subjects who have the character of lessees or service users of the taxable events commented, act as withholding agents[3], and those who act in the character of intermediaries, administrators or agents are obliged, 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 payment, they must act as withholding agents of the leaser or service provider.[4]

By way of conclusion

As a conclusion, we can argue that the province of Córdoba comes to addressing–in a concrete way – the challenges that creates and/or raises an economy increasingly digitalized, and it is doing it- to our knowledge – within the framework of the principle of territoriality and of attribution of income to give and/or attend the various legal regulations in force; to tax only the portion of the taxable events for services which, by their nature and/or feature, evidence of a development or event execution in the provincial jurisdiction area, without exceeding said territory. 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 system, in order to collect, in their respective territorial areas, the sales tax or a similar tax substituting it.

[1] It is an indirect consumption tax levied on the usual and onerous development of economic activities, taking as taxable base the total amount of gross income earned in the tax period, with a multiphase and cumulative nature, and which represents the main source of financing of provincial governments.

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

[3] Single and final payment withholding. The lender should not register in the tax.

[4] In the regulations it is presumed, unless proven otherwise, that in such operations the tax is borne by the lessee or borrower of the taxed service –the price of the service is tax-free.

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