Taxation

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The spirit of the discussion on the Internet and taxation can be likened to Faraday’s response to a politician who asked him about the purpose of his invention (electromagnetic induction): ‘Sir, I do not know what it is good for. But of one thing I am quite certain, some day you will tax it.’

With the Internet moving into the mainstream of modern society, the question of taxation has come into sharper focus. It has become even more important since the financial crisis in 2008. Many governments have been trying to increase fiscal income in order to reduce growing public debt. The taxation of economic activities on the Internet became one of the first possibilities for increasing fiscal income. One of the first comprehensive reports on Internet taxation was presented by the French Ministry of Economy and Finance in January 2013, and was later followed by other reports dealing with the issue of taxation in the digital economy (e.g. by EY and OECD).


The Internet governance dilemma of whether cyber issues should be treated differently from real-life issues is clearly mirrored in the question of taxation. Since the early days, the USA has been attempting to declare the Internet a tax-free zone. In 1998, the US Congress adopted the Internet Tax Freedom Act. After this act was extended several times, the US Senate finally decided to pass legislation that permantly bans states and local governments from taxing Internet access. In addition to the permanent extension of the Internet Tax Freedom Act, the measure bans some taxes on digital goods and services.

The OECD and the EU have promoted the opposite view, that is, that the Internet should not have a special taxation treatment. The OECD’s Ottawa Principles (outlined in the Electronic Commerce: Taxation Framework Conditions report that was endorsed by the OECD Ministerial Conference in 1998) specify that taxation of e-commerce should be based on the same principles as taxation for traditional commercial activities: neutrality, efficiency, certainty and simplicity, effectiveness and fairness, and flexibility. In a recent report, the European Commission reiterated that ‘there should not be a special tax regime for digital companies. Rather the general rules should be applied or adapted so that ‘digital’ companies are treated in the same way as others.’ Following the view that the Internet should not have special taxation treatment, the EU introduced legislation in 2003 requesting non-EU e-commerce companies to pay value added tax (VAT) if they sold goods within the EU. The main motivation for the EU’s decision was that non-EU (mainly US) companies had an edge over European companies, which had to pay VAT on all transactions, including electronic ones.

Currently, non-EU countries have started to adopt similar strategies. With the rapid increase in the number of Internet users and the increased centrality of Internet companies - mostly from the USA - in their economies, many countries have started to tax Internet services that are offered by companies not registered within their borders. Examples range from Russia and India to Israel and Indonesia.

Another e-taxation issue that remains unresolved is the question of the location of taxation. The Ottawa Principles introduced a ‘destination’ instead of ‘origin’ principle of taxation. The US  government, however, has a strong interest in having taxation remain at the origin of transactions, since most e-commerce companies are based in the USA. In contrast, the EU, for example, is interested in ‘destination taxation’ is it has more e-commerce consumers than sellers.

In the context of the Internet, taxation is not only discussed as an object of revised legislation, but also in the context of tax avoidance by large Internet companies. In January 2016, the European Commission presented an Anti Tax Avoidance Package, which aims to prevent companies in the EU from shifting their profits to low-tax countries. The publication came in the midst of rising discussions concerning Google’s tax practices. According to Italian authorities, Google evaded 227 million euros in taxes between 2009 and 2013. On top of that, controversy arose in the United Kingdom concerning the revelation of a 130 million pound tax deal between Google and national tax authorities. In May 2016, the French government even organised a search in Google’s Paris headquarters as part of an investigation in tax fraud, as France accused the company of owing it 1.6 billion euros in unpaid taxes. A 2015 study showed that among the top 30 tax withholding businesses, 10 were tech companies, with Apple as record holder.

Some countries are introducing tax reliefs for Internet infrastructure providers and/or providers of online services, with the aim to encourage investments in the deployment of infrastructure and to boost local e-commerce companies. In India, for example, the telecom ministry proposed a ten-year tax ‘holiday’ for big projects in the IT sector in order to draw investment. In China, the State Council offers tax concessions to Chinese hi-tech companies, lowering their corporate tax from 25 to 15 percent. The UK government included a provision in its 2016 budget introducing a tax relief for micro-entrepreneurs who sell their services online or rent their home through the Internet.

Dr Stephanie Borg Psaila

Interim Director, DiploFoundation

Dr Stephanie Borg Psaila is the Interim Director of DiploFoundation and the Geneva Internet Platform, and the Editor of the GIP Digital Watch observatory. She holds a Doctorate in Law (LL.D.), a Master's in Contemporary Diplomacy, and two law-related diplomas from the University of Malta, and her areas of interest include legal issues in Internet governance, human rights, and e-diplomacy. She holds a warrant to practice as a Notary Public in Malta, and is a former journalist with The Sunday Times of Malta.

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