Tax challenges facing digitalization, robotics and possible interplanetary travel and business

The role of the state in the new reality.

Few of us perhaps, remember a futuristic series , known as “The Jetsons”[1], which without doubt, anticipated many years ago, imagining a reality, in some aspects, very similar to that of our times, outlined from the implementation of the measures of confinement and isolation, to contain the covid-19 and the subsequent “new normal” introduced, with its health protocols.

In the imagined reality, digitalization and automation had overtaken the life of this family (telework, virtual leisure and fun, videoconferencing, obtaining high-quality food with just one button, telemedicine, use of screens, etc.); the robots solved problems and needs, but surely – and this was not shown – they had displaced many humans from their jobs; transport was through flying cars; interplanetary travel and business were possible, etc. remembering this series allows us to make an interesting intellectual exercise, to try to imagine what the role of the state would be and in particular, to define how important taxes would be in such a context.

The disruptive advance of digitalization in social and economic life in recent years, with greater intensity since the pandemic of covid-19, raises a new paradigm, where the state will have an important role but different from what we know.  In particular, economic activity and employment will not be the same, which is why States should devote efforts to dealing with the future of employment, so as not to be surprised, as happened with the pandemic.

The new economic activity will be digital, where some economic sectors will grow, others will be reformulated, and others may disappear. Employment will be hit by changes in the economic sector-unemployment, demand for new profiles, etc. – the increased presence of robotics in economic activity will displace many workers from simple tasks, but artificial intelligence even poses more complex jobs, with sufficient algorithms and information. For example, today a house and even a building can be built with a 3D printer. For its part, the proliferation of digital currencies (bitcoin, etc.) will take away the prominence of the States, which today have the monopoly of issuing money.

On the other hand, in this digitalized society, States will provide goods and services, as well as practice the respective controls, using these technologies. Innovative technologies such as blockchain surge not only for the issuance of digital currencies, their scope is wider, highlighting the ”E-State” case of Estonia, which uses them to sustain and protect (X-Road) the surprising digitalization of activities.[2]

In this new reality, States will continue with their basic function of providing public goods and services, promoting inclusive and sustainable economic development, that is, including elements of social justice and environmental care. Regulation (duties and rights of citizens) and the administration of justice will undoubtedly be key elements in the management of the state of the future. The advance of digitalization and automation also raises certain ethical and moral dilemmas that must be debated by society (e.g., the privacy of individuals, secrecy of the algorithms used by the State, etc.).

In this context, the natural source of financing state activity will continue to be taxes, which will be applied in an economic context where companies will have no physical presence, or a minimal presence, in the national territories, but resident users will create value (importance of data), which will be reflected in important intangible assets, mainly of marketing. Social networks, remote access to audiovisual material, collaborative economy, the use of electronic markets and payments, cloud transactions, etc. All of this will fully occupy the social and economic life.

The advance of automation and the incorporation of robots will mean the destruction of jobs and will generate the urgent need to address unemployment -a problem that will worsen if we consider the natural increase of the population – and the inequalities of opportunities and access that can be generated and those that are historically left behind, for example, the high concentration of income, a scourge in Latin America.

The world of work, in addition to incorporating telework, will be reformulated with the collaborative economy or” sharing economy “and also by the so-called “gig economy” or economy of small orders for a specific time and order.

Outer space beyond planet Earth offers an attractive possibility of exploitation of mineral resources and other business, interplanetary and interstellar travel and even changes of residence, which generate new unknowns about the role of the state, national sovereignty, and taxes.

Digitalized social and economic life

The advance of electronic commerce since the late ‘ 90s[3] and the ubiquitous digital economy since the BEPS Plan (2013-2015) kicked the pillars of international taxation and the principles that held it for many years.  The traditional definitions of sovereign tax powers, based on the criteria of source and residence; taxation of business income in the state of residence, unless there was a physical presence with a permanent establishment in the state of source; the principle of separate entities; transfer pricing guidelines, etc., these do not give a complete answer to varied and complex digital modes of business. A relevant economic presence or, more precisely, a digital presence in a territory highlights the inequity in tax treatment with respect to other businesses with a physical presence.

From the OECD, seeking an international consensus for this year, Pillar 1 proposed an option to tax in that state where value is created. This highlights the importance that consumers and users have in creating value, hence the proposal that states where markets are located can obtain income taxes from these markets – not-routinely-. Pillar 2, for its part, proposes a minimum tax that would be levied by the state of residence of subsidiaries or the possibility of refusing exemptions or deductions for revenues that have not been taxed in the other state.

Robotics and artificial intelligence

Faced with the displacement of Labor by the automation of production and commercial processes, the concern arises as to how to finance the destruction of employment and/or its conversion if applicable, that is why some voices propose a tax on robots (perhaps as a disincentive or compensation). These are working tools, the holder of which will have to give them the corresponding treatment to the machinery and equipment, but in this context of large-scale replacement of employment, the issue acquires peculiar edges.

Interplanetary travel and business

It is not strange, to hear of plans to travel to space, to the Moon, to Mars and beyond, which leads us to reflect on how tax systems could cope with some aspects of economic exploitation in space (for example, lunar mining and in asteroids), interplanetary and even interstellar travel. A space tax had even been proposed so that the exploitation of space resources could benefit all mankind.[4]

The agreed international law places the exploitation of Natural Resources in space in a grey area. Thus, Article II of the Outer Space Treaty prohibits “appropriation”, providing that ” outer space, including the Moon and other celestial bodies, is not subject to national appropriation by claim of sovereignty, by use or occupation, or by any means “. Moreover, article I of the treaty stipulates that “outer space, including the Moon and other celestial bodies, shall be free for the exploration and use of all states without discrimination of any kind, on an equal basis and in accordance with international law, and there shall be free access to all areas of celestial bodies””

The spatial environment raises a necessary and anticipated debate regarding the tax sovereignty of states, taxable entities, taxable events, collection management and its purpose, etc. A new chapter of taxation will need address this unknown, but auspicious field.


[1] The series was created in 1962 (” The Jetsons”). It showed the life of a family in 2062 in houses suspended in the air by huge supports and transportation in aerial cars. This series did not have the popularity of “The Flintstones”, which posed a prehistoric context. At that time of our childhood, paradoxically it was prehistoric life (in some way known) that was more attractive for viewers  than Futurism (totally unknown, especially in the ‘ 60s when the series was created) that was proposed in that television program, but we must recognize the great merit of imagining a reality, with many points of contact with the current one,  and what we will live in the next coming years.
[2] 70% of GDP is made up of the contribution of the services sector and those related to ICT. This is the first 100% digital country. In this country, 88 per cent of people surf the Internet daily and 87 per cent of the population, aged 16-74, connect to the government website.
[3] Already at that time, the use of the internet in business arose, allowing dematerialization, dis-intermediation and de-territorialization, and challenges were beginning to emerge for states and their sources of tax collection.
[4] Milan Mijovic (2018) – “Taxation of outer space: a next step for space exploration?”.

 

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