The No. 42 edition of the CIAT/AEAT/IEF Tax Administration Review of June 2017 includes an article by Ignacio González, from the Spanish Tax Agency, which deals with tax control issues in the digital economy. I recommend that it be read, especially segments 3 and 4, which give an idea of techniques and tools available for facing such control.

The article begins with some definitions and numbers, of a general nature, although focused on the Spanish economy. These elements raise some issues: first, that the size of the digital economy is still relatively small, but continues to grow; that some activities of “doubtful” reputation such as gambling, pornography or illegal sale of controlled substances benefit from the facilities afforded by Internet or the applications, but are not relevant in economic and tax terms. Likewise, that there are ever more new business models that generate difficulties for clearly applying the tax regulations in force. These difficulties are derived from delocalization, collaboration in the generation of value or use of encrypted coins and other nontraditional means of payment.

Further on he lists and describes several of the things a tax administration should be doing or at least investing in, for developing capabilities to control de digital economy. Certainly, it should not only be mere curiosity, or a distant goal in the future, not even if the room for electronic commerce is still small in relative terms. The issue arises because even though the area is relatively small at present, probably it will cease to be so in the near future. It is indeed worthwhile to mention some recent observations that make us think about the unstoppable growth of the digital economy.

• There are ever more newspapers and news platforms that include paid models for accessing news and which induce through different means the transition from online access without cost (even if it is “subsidized” through the sale of advertising or our own data with respect to what we look for, consult or read).
• News regarding staff dismissals and closing of physical facilities in traditional distribution chains are ever more frequent due to, at least partly, the change of sphere of many consumers who prefer to buy directly via Internet, even from the same stores,  or at least investigate and decide online what they will buy, thereby reducing the need for pre-sale support.
• The transition toward the use of cloud services becomes almost commonplace for the user. He is an individual who, in one way or another “has” in Internet his electronic mail (at least the personal one), pictures, music, list of contacts with their details, and at times, without knowing it, the support of their equipment, the perfect identification of secret friends, plans, habits and even sins. In this transition, most users are not concerned about where these data really are, how the companies that offer them monetize those services and less, much less, what is the tax responsibility of said companies in one jurisdiction or another. The same transition is observed in corporate entities (including government agencies and some tax administrations) that are beginning to hire electronic mail services, office productivity software, corporate management software, ERP, sales management, CRM) or platform and infrastructure.
• The new business models may significantly influence the economy as well as the tax bases. Music digital stores and streaming services may have been the safeguard for an industry facing serious problems derived from the digitalization of music and the tremendous “piracy” capacity that came with it, but barely replaced in all jurisdictions the tax revenues generated directly or indirectly by the cement and brick stores that sold “LPs”. Similar things may happen with the “institutionalization” of highly convenient services that may currently compete with a taxi, hotel, restaurant or  automobile.
• In these new models, anyone (many would say not so much, but almost) may conceive an extraordinary idea and turn it into a business with the capacity for disrupting an entire industry. However, it cannot be frequently maintained through time and, when it happens, growth seems to be very fast, at times, resulting in things that resemble monopolies, which show little concern for borders. I recall, for example when in the 2013 Nairobi Technical Conference I brought up the problems a passenger transportation application could pose to the tax administration. Then in a subsequent lecture, several colleagues from different latitudes seemed curious, not so much about the tax implications to which I had referred, but rather the application I was talking about. Today, those colleagues are frequent users of the same service.

The conclusions of the article show a list of things yet to be done, to which, by way of complement, I would add the need to facilitate compliance by the actors. Undoubtedly, there will always be a group of persons that will attempt to use the facilities available in Internet to reduce or avoid their tax contribution or simply carry out illegal activities. Nevertheless, the great majority of suppliers and users will simply try to carry out an activity in a different, ever more efficient manner, without the specific objective of evading. It is clear, for example, that if a supplier of digital goods or services located abroad is required to collect VAT or report operations, one must ensure that compliance with said obligation be simple, expeditious and likewise, executable from abroad.

Thus, if electronic commerce and the digital economy appear to be small in your jurisdiction, there is little probability that they will not achieve significant levels. It is thus necessary, as is being done by the Spanish Agency to invest in the development of capabilities for facing the changes or, at least, know what Ignacio is talking about.

Regards and good luck.

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