By K. Treppides & Co Ltd
Same as the industrial revolution and the invention of electricity radically changed entire industries, the digital revolution has and continues to transform the way business is carried out. Impact of this digital revolution is not only social and economic but also has a significant effect on attribution of taxes. How can one attribute value to users’ contribution and tax companies in countries where there is no physical presence whenexisting tax rules tend to concentrate on the importance of physical presence as a value driver for determining tax liabilities?
The Report on Action 1 of the Base Erosion and Profit Shifting (BEPS) Project issued by the G20 and OECD back in October 2015, aimed to identify and tackle these tax challenges raised by the digital economy. The general consensus in the Report was that because the digital economy is increasingly becoming the economy itself, it wouldbe difficult, if not impossible, to ring-fence the digital economy from the rest of the economy for tax purposes. There are however broader tax challenges posed by the digital economy that can be grouped in 3 categories
- Collection of VAT on the provision of goods and services to private individuals by overseas suppliers who have no physical presence in the country where the customer is located
- Imposition of tax on income generated by companies from countries where there is minimal or even no physical presence.
- Attribution of value to user generated content and data collection for the value creation of digital businesses
The VAT aspects have been largely addressed at an EU level through an agreement to impose VAT for B2C supplies at the rate of the country of consumption
For the other two categories, the European Commission (“EC”) issued in March 2018, a proposal for new rules for fair taxation of digital economy across the EU. The proposal includes 2 legislative proposals as follows:
- A common reform of the EU's corporate tax rules for digital activities
- An interim tax on certain revenue from digital activities (Expected date into force 1 January 2020)
Under the interim measure, the EC proposes a Digital Service Tax (“DST”) of 3% on gross revenues from certain services, including selling online advertising space, sale of data generated from user-provided information, digital intermediary activities which allow users to interact with other users and which can facilitate the sale of goods and services between them(online marketplace). The DST will apply to companies with total annual worldwide revenues of €750 million and EU revenues of €50 million and therefore should not affect smaller start ups.
The long terms measure suggests a common reform of tax rules for digital activities by introducing the concept of a taxable 'digital presence' or a virtual permanent establishment in a Member State for a digital platform, if it fulfils one of the following criteria:
- It exceeds a threshold of €7 million in annual revenues in a Member State
- It has more than 100,000 users in a Member State in a taxable year
- Over 3000 business contracts for digital services are created between the company and business users in a taxable year
The proposals will be submitted to the European Parliament for consultation and to the Council for adoption, with the agreement of all EU Member States required in order to pass the proposals. There are various questions raised by the above proposals (e.g. elimination of double taxation, imposition of DST even if company is loss making etc) that will need to be explored further prior to implementation. The only thing certain is that the digital economy will continue to evolve and transform our lives, and as it evolves so will tax challenges, so adaptation of the international tax system and continuous monitoring is of essence.
K. Treppides & Co Ltd, the largest independent consulting firm, with established international presence and offices in London and Malta, offers a full range of legal, tax, accounting, consulting and financial advisory services to international Investors that are operating within a wide range of industry sectors. The company possesses many years of experience and a team of experienced members of staff who remain on hand to assist individuals and businesses throughout the entire investment process, in and through Cyprus.