Tax Administrations and The Digital Economy: The future is today

While in the world of taxation there is a debate as to how the digital economy should be taxed, the purpose of this comment is to focus the issue on the actions that the Tax Administrations (TAs) could already undertake to arrive at a more efficient control of the digital economy.

The question that inspired me to write these lines is whether the TAs should start acting or, if on the contrary, they should wait for the issuance of the regulations by the different Organizations that are analyzing this matter.

According to Oxfam,[1] the digital economy currently represents 15% of the Gross Domestic Product (GDP), although according to estimates, it might reach 25% within a period of 5 to 10 years.

The digital economy represents a great challenge for the treasuries at the international level, which have not yet agreed on how they should adequately tax it.

The reason therefor is that the tax systems are not adapted to the new ways of doing business implicit in the great development of the digital economy in this fourth industrial revolution.

The problem arises because the international tax system considers that in order to pay taxes in a country, there must be physical presence therein, while technological giants may be active in different countries without physical presence.

According to experts on the subject,[2] the tax system is not only obsolete, but also absolutely unfair. It overloads the tax burden of the multinationals on the small and medium businesses as well as on the rest of the citizens, through regressive indirect taxes such as the Value Added Tax, which has a strong impact on the population that lives in poverty.

In addition to the evasion being produced, the digital economy is generating in many countries an unfair competition with the businesses of the countries with physical presence, which carry out similar activities.

The OECD with its BEPS Action plan recently said [3] that the countries and jurisdictions participating in the OECD / G20 BEPS inclusive framework will intensify efforts for arriving at a global solution to the increasing debate on how to impose taxes to multinational enterprises in an economy that is being rapidly digitalized.

The new international debates will be focused on two main pillars.

The first pillar will focus on how to modify the existing rules that divide the right to tax the revenues of multinational enterprises between the jurisdictions. These include the traditional transfer pricing rules and arm’s length principle, in order to take into account the changes that have resulted from digitalization.

A second pillar is aimed at solving the BEPS pending problems and will explore two sets of rules designed to provide the jurisdictions a remedy in cases in which the revenues are subject to null or very low taxation.

The members of the Inclusive Framework renewed their commitment to arrive at a long-term solution based on consensus by 2020, with an update that will be presented to the G20 in 2019.

One of the latest documents is the one entitled: “Addressing the Tax Challenges of the Digitalization of the Economy”.[4]

On its part, the EU is fully debating this issue and different countries have already proposed unilateral solutions consisting of imposing specific taxes to the businesses of the sector.

In March, Brussels proposed the establishment of a 3% tax on the revenues –not on the benefits–of those businesses with a turnover of more than 750 million Euros.

Although there has been progress in indirect taxation within the EU, the situation has not been the same in the case of direct taxation.

On the other hand, the IMF published a document entitled: “Corporate Taxation in the global economy”[5] which describes the different problems faced by international taxation of corporations and the different options for facing them.

The document highlights the need to maintain and take advantage of the progress achieved in recent years in international cooperation in tax matters.

Other Organizations such as ICRIT[6] propose a different approach to that of the OECD. They state that a more equitable and effective approach would be to tax multinationals as individual enterprises and no longer considering every subsidiary as independent. In other words, they are in favor of the so-called unitary approach.  They propose to treat multinationals as unified enterprises combining it with a global effective minimum tax of 20-25%. In their opinion, this would significantly reduce the financial incentives, whereby multinationals transfer benefits between jurisdictions and for the countries to reduce their tax rates.

However, while the different Organizations earnestly discuss the issue the question is: What should the tax administrations do?

It is my understanding that the digital economy concept includes different aspects, ranging from electronic commerce, the so-called collaborative platforms, electronic currency and cryptocurrencies, among others.

For the European Commission the term “collaborative economy” refers to business models whereby collaborative platforms create an open market for the temporary offer of goods and services, frequently by individuals.

It is noted that there are factors that have allowed the progress of these platforms, such as the new technologies and likewise, changes in consumption guidelines.

This definition recognizes the presence of 3 participants: the service providers or vendors, the users (end consumers or enterprises) and the intermediaries (online, collaborative platforms, etc.).

All these new ways of carrying out transactions have afforded new opportunities for evading taxes.

The discussion arises precisely not only because of the large amounts which the States fail to collect, but as well because of the huge inequality generated by the effective direct taxes which these “digital giants” end up paying, compared to that paid by other production factors such as labor.

Nevertheless, I warn that the risk run with the different solutions applied in the countries, by unilaterally collecting taxes from these taxpayers, is that the “digital giants” end up transferring direct as well as indirect taxes to the users (consumers), whereby the inequality one endeavors to combat will very probably be increased.

From the standpoint of the TAs, I undoubtedly believe that a first task is to revise their entire regulatory tax framework, to propose, as appropriate, the legal or regulatory modifications in each country, in order to tax the digital economy in the same way as the rest of the operations.

Obviously, in countries subject to a community framework, such as those in Europe, this may generate greater difficulties than in the rest, with respect to the approval of the regulations.

I understand that the TAs, in the meantime while legal modifications are approved, they should analyze how, with the current legislation, they may collect the corresponding taxes from the different intervening parties.

In other words, a very important step is to identify the parties intervening in the business and the different activities carried out by each of them.

I likewise make this statement, considering the noncompliance gaps on which a Tax Administration should work. The first one deals with the nonregistered, which arises from the difference between individuals obliged to register and those actually registered in each tax.

Therefore, this will be the starting point of the control strategy whose implementation on the digital economy is decided.

Thus, for example, in a real estate lease service rendered by a collaborative platform there are normally 3 intervening parties: the owner of the real estate, who devotes it to leasing, the lessee, which is the user (either business or end consumer) and finally the platform that acts as link between the two parties.

The challenge is to identify each of the parties, the activities carried out by each of them to thus demand the taxes, to the extent taxable events occur in accordance with each legislation.

To this end, the TAs may implement information systems, beneficiary registries or other measures, as is currently done, for example, when the intermediary is a physically constituted real estate agency, continuing with the example given.

For example, in Spain, Airbnb and other similar intermediaries were obliged to compile data on the hosts and customers that had used the platforms throughout the year. This new information obligation was established to prevent individuals or entities from being subject to tax fraud, in particular the so-called «collaborative platforms» that act as intermediaries in granting the use of housing for tourist purposes.[7]

In this respect, it is a key issue that the TAs know and familiarize themselves with these new legal transactions between the different intervening parties.

We agree with the statement by Santiago Díaz de Sarralde Miguez[8] in the sense that, in order to be effective, taxes require that the administrations have: a) information on the agents and their economic activities; b) legislative capacity (sovereignty) to determine their obligations; and c) administrative capacity (feasibility) to apply the legislation efficiently.

One should begin analyzing such aspects as who sets the price, who is the owner of the goods or services offered, whether the platform acts as intermediary or direct provider, to mention only some aspects.

For this reason, I recommend that the TAs establish, in case of doubts, the technical criteria of these new businesses.

For example, in Argentina, AFIP determined that the drivers of automobiles through the UBER platform are dependent workers, for which reason indirect labor costs should be taxed as such.[9]

That country also determined that the revenues from VAT corresponding to the import of services rendered by specific digital platforms be withheld and paid directly by the companies that manage the credit or debit cards since the majority of them are paid through this modality.

That is, each country should begin determining within its normative framework how all these new businesses of the digital economy pay the different taxes, taking into consideration the different actors intervening in the new businesses being proposed.

The Tax Administration Forum[10] published an official announcement with the results achieved in the Chile meeting of March 2019, which has been focused on four priority issues:

  • Comply with BEPS and tax certainty.
  • Improve cooperation.
  • Support digitalization of the tax administrations, and
  • Improve the capacity of the agencies of the developing countries.

During the forum, emphasis was placed on cooperation focused on two areas: the “Common Reporting Standard” (CRS), with a view to expanding and improving the analysis derived therefrom and the digital economy, to ensure effective taxation of commerce through digital platforms. With respect to digitalization of the TAs, the forum agreed to explore the use of new technologies, analytical tools and data analyses to improve compliance, reduce the administrative burden, create efficiencies and improve taxpayer services. It was agreed to explore greater collaboration in this sphere.

All of these issues will undoubtedly contribute to a better control of the digital economy by the TAs.

I would like to point out, in particular, the greater cooperation and collaboration between the TAs, which is already bringing about specific results in the information exchanges being carried out.

There is no doubt that transparency and exchange of information are the key to combat international tax evasion. The design of international taxation standards for the digital commerce implies a complex analysis and joint work between the countries[11].

This greater cooperation and collaboration between the TAs also allows for applying in the different countries, the best practices on the subject in order to manage the digital economy.

Probably this comment lacks many more actions that the TAs can already begin putting into practice to better control the digital economy.

However, if there is one thing of which I am sure it is that I have answered the question that inspired me to draft these lines. Therefore, in this regard. the future is today and the TAs must act to efficiently manage the digital economy.

[1]    https://www.eleconomista.com.mx/economia/Economia-digital-el-gran-reto-internacional-en-materia-fiscal-20190318-0067.html

[2]    Magdalena Sepúlveda Idem nota 1.

[3]    29/01/2019 http://www.oecd.org/tax/beps/international-community-makes-important-progress-on-the-tax-challenges-of-digitalisation.htm

[4]    https://www.oecd.org/tax/beps/public-consultation-document-addressing-the-tax-challenges-of-the-digitalisation-of-the-economy.pdf

[5]    https://www.imf.org/en/Publications/Policy-Papers/Issues/2019/03/08/Corporate-Taxation-in-the-Global-Economy-46650

[6]                Comisión Independiente para la Reforma de la Fiscalidad Corporativa Internacional   https://www.icrict.com/icrict-in-thenews/2018/2/8/icrit-propone-un-nuevo-sistema-tributario-para-acabar-con-los-parasos-fiscales-que-incorpora-reparto-mundial-junto-a-una-baja-tasa-de-impuestos-corporativos

[7]    https://www.eldiario.es/economia/Airbnb-entregara-Hacienda-enero-utilice_0_791271301.html

[8]    Tributación, digitalización de la economía y Economía Digital – CIAT – octubre 2018

[9]    https://www.infobae.com/economia/2019/04/28/la-afip-le-reclama-a-uber-impuestos-por-mas-de-358-millones/

[10]  https://periscopiofiscalylegal.pwc.es/el-foro-de-administraciones-tributarias/amp/?sub=true&sub=true&__twitter_impression=true

[11]  https://blogs.iadb.org/gestion-fiscal/es/3-iniciativas-clave-del-g20-para-potenciar-la-politica-fiscal-internacional/

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