Taxation

Updates

19 Sep 2017

The members of the North American Free Trade Agreement (NAFTA) are preparing another round of negotiations, due for 23-27 September. The gathering is part of an accelerated timeframe planned by ministers. The proposals under discussion touch upon several points related to digital commerce, such as taxation of online purchases. NAFTA has been in place for over two decades, with the countries involved responsible for approximately one-quarter of the world’s gross domestic product. An issue that remains unclear is how much of the Trans-Pacific Partnership’s (TPP) terms will carry over into the NAFTA process. All three NAFTA parties were involved in the TPP negotiating process, until the US decides to leave the deal earlier this year.

18 Sep 2017

At a meeting in Tallinn, Estonia, EU finance ministers discussed the recently proposed plans by France, Germany, Italy, and Spain to tax Internet companies on their revenue, rather than their profit. Although there was agreement on the need to 'move forward swiftly', there was division among the EU on the proposal. About a third of the EU member states backed the proposal, which they hoped would enhance 'economic efficiency', 'tax fairness and sovereignty'. Yet, the plan also received extensive criticism. Denmark pointed out that it might push innovative companies away from Europe, and Luxembourg added that 'it doesn't make sense' to move without a global agreement. Some countries identified technical and legal challenges, and others feared it would divide the EU and cause friction with the USA. Generally, the plan was seen as a 'quick fix' for the short term, while in the meantime, more structural solutions should be found. One of these long-term solutions was proposed by Estonia and would 'permit states to tax companies where they have a digital, and not just a physical, presence'. 

14 Sep 2017

Following last week's proposal by France, Germany, Italy and Spain to the EU to create an 'equalisation tax' - which would tax Internet companies where their revenues are generated - EU President Jean-Claude Juncker highlighted this issue in his State of the Union Address. Not only did he voice his support for 'fair taxes for the digital industry', he also expressed his hope for a Union 'where profits will be taxed where they were made'. These discussions only intensified with the presentation of a report by an EU lawmaker, concluding that between 2013 and 2015, the EU could have lost 5.4 billion euros in taxes from Google and Facebook. In the meantime, the Director of OECD's Centre for Tax Policy has voiced concerns about the four EU countries' proposal, claiming that taxes on revenue might result in loss-making firms being forced to pay.

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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.

Events

Actors

(EC)

Over-the-top services, next generation networks, the collaborative economy, and artificial intelligence are am

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Over-the-top services, next generation networks, the collaborative economy, and artificial intelligence are among the issues the European Commission is paying particular attention to. The Electronic Communications Code proposed by the Commission in September 2016 plans to introduce some level of regulation for OTT services. Encouraging the deployment of NGN networks able to better support the provision of converged services is a priority for the Commission, as part of its Broadband Strategy and Policy. The EU executive body has also issued guidelines and policy recommendations for the collaborative economy, while its Digitising European Industry strategy identified artificial intelligence and robotics are cornerstone technologies to be supported.

(OECD)

Convergence is one of the digital policy issues that the OECD is paying attention to, especially in relation t

...

Convergence is one of the digital policy issues that the OECD is paying attention to, especially in relation to the challenges this phenomenon brings on traditional markets, and the need for adequate policy and regulatory frameworks to address them. In 2008, the organisation issued a set of policy guidelines for regulators to take into account when addressing challenges posed by convergence. In 2016, a report issued in preparation for the OECD Ministerial Meeting on the Digital Economy included new recommendations for policy-makers. Digital convergence issues have been on the agenda of OECD Ministerial meetings since 2008, and are also tackled in the regular OECD Digital Economy Outlook report.

(WTO)

The WTO’s involvement in e-commerce-related issues started in 1998, when the Ministerial Conference adopted th

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The WTO’s involvement in e-commerce-related issues started in 1998, when the Ministerial Conference adopted the Declaration on Global Electronic Commerce, which called for the development of a work programme on e-commerce. The programme, also adopted in 1998, provides a definition for e-commerce and sets out responsibilities for WTO bodies in e-commerce-related areas. Other e-commerce-related initiatives undertaken by the WTO include: a moratorium rendering electronic transmissions free of custom duties among WTO member states; a dispute resolution mechanism which addresses, among others, cases involving electronic transactions; and the annual WTO Public Forum. There are ongoing discussions among WTO member states as to whether the organisation should play an increasing role in e‑commerce.

G20
(G20 )

G20 pays particular attention to issues related to taxation in the digital economy.

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G20 pays particular attention to issues related to taxation in the digital economy. The G20 Hamburg Action Plan (adopted at the 2017 Summit) outlines the members’ commitment to the implementation of the Base Erosion and Profit Shifting (BEPS) Package (elaborated together with the OECD and which outlines actions for governments to tackle practices through which companies (including Internet ones) exploit gaps in tax rules to artificially shift profits to low or no-tax locations). The Plan also notes the importance of monitoring and evaluating the developments related to the digitalisation of the economy, and developing policy options to address related tax challenges.

(IMF)

The IMF is exploring the implications of new technologies for financial services.

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The IMF is exploring the implications of new technologies for financial services. A January 2016 paper on ‘Virtual Currencies and Beyond: Initial Considerations’ points at different challenges related to the regulation of virtual currencies and outlines the need ‘to calibrate regulation in a manner that appropriately addresses the risk without stifling innovation’. The organisation has an Interdepartmental Working Group on Finance and Technology and a High Level Advisory Group on Fintech, which study the economic and regulatory implications of developments in finance and technology. A June 2017 paper explores the possible impact of fintech on financial service and possible regulatory responses.

(EP)

In addition to its work on directives and regulations dealing with taxation issues (such as the

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In addition to its work on directives and regulations dealing with taxation issues (such as the rules against tax avoidance practices), the Parliament has also addressed taxation in the context of non-legislative documents. The Resolution on a European Agenda for the collaborative economy (June 2017) notes that similar tax obligations should be applied to companies providing comparable services, whether in the traditional or the collaborative economy. Taxation was also discussed with reference to robotics and artificial intelligence, when an initial proposal was made to consider introducing a ‘tax on the work performed by a robot’; the proposal was, however, not included in the final resolution.

Resources

Articles

The Anti Tax Avoidance Package - Questions and Answers (2016)
The Dawning of Digital Economy Taxation (2015)
Taxation and Today's Digital Economy (2015)
Withholding Taxes in the Service of BEPS Action 1: Address the Tax Challenges of the Digital Economy (2015)
A Policymaker's Guide to Internet Tax (2013)

Publications

Internet Governance Acronym Glossary (2015)
An Introduction to Internet Governance (2014)

Reports

e-Commerce in India: A Game Changer for the Economy (2016)
Virtual Currencies and Beyond: Initial Considerations (2016)
Addressing the Tax Challenges of the Digital Economy (2015)
OECD Digital Economy Outlook 2015 (2015)
Taxation and the Digital Economy: A Survey of Theoretical Models (2015)
Commission Expert Group on Taxation of the Digital Economy (2014)
Consumption Taxation of Cross Border Services and Intangible Property in the context of E-commerce: Guidelines on the Definition of Place of Consumption (2003)

GIP event reports

How the Digital Revolution Changes Our Work Life (2017)
Decent Jobs for All (2017)

Processes

Taxation on the Internet was discussed in a few sessions including the consequences of trade agreements (WS 7) and tax strategies (WS 200). One particular view on taxation was that it was considered a hindrance to access. A typical example offered by a Facebook representative during Revenue Streams that Grow & Sustain Internet Economies (WS 241) was that of connectivity taxes: import duties, sales taxes of devices and sales taxes on the purchase of data plans are being imposed at various points in the value chain between a user buying a device and actually being able to use it. ‘Typically, you tax things you want less of. If you want more connectivity and you’re imposing additional taxes, or you want more affordability and you’re imposing additional taxes, that’s a hindrance, not something that helps to facilitate what you’re trying to achieve.’

 

 

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