The rapid rise of the digital economy has raised a critical question for governments: how to devise a taxation regime that provides revenue without reducing the benefits that come from digitalisation.
To date, no government has developed an effective method, but investigations are under way; the latest move is a discussion paper circulated by the Australian Treasury, The digital economy and Australia’s corporate tax system.
The paper highlights the benefits that Australia has gained, and potentially will gain, from digitalisation. Australia has, by international standards, a high degree of internet penetration. According to figures cited from the Australian Bureau of Statistics, more than 95 per cent of businesses have internet access and 80 per cent of businesses with over 200 employees have a social media presence. Data from Deloitte Access Economics estimates that GDP per person in Australia is close to A$5000 higher due to the digital economy.
“There are some very thorny issues around this,” says Paul Drum, CPA Australia head of external affairs.
“It’s appropriate that the Australian Government is thinking about it, and even getting ahead of the curve in some ways, but the discussion paper reveals just how hard this is going to be.”
Key tax issues
Like any other business operating in Australia, highly digitalised businesses are subject to the Australian tax framework. However, many foreign-based, highly digitalised businesses have relatively small Australian-sourced profits because the majority of their profit-generating assets and labour are located outside Australia.
Most digital businesses also can access a market without having a large physical presence in that market. Digital businesses often rely on intangible assets such as algorithms, which can be located anywhere in the world.
The issues raised here are not new, but digitalisation has given them an additional intensity. There is also the likelihood of the erosion of the domestic tax base through disruption. The development of foreign-based ride-sharing services, growing at the expense of the local taxi industry, is an example.
Another question is the emergence of digital marketplaces that connect suppliers and consumers. Suppliers, consumers and the marketplace might be located in different tax jurisdictions, so it is difficult to determine the source of profits.
A connected issue is the monetisation of data. Even if the user data is sourced from Australia, the current tax framework does not easily recognise it as a profit-generating input.
One response to the jurisdictional issue has been to increase global co-operation, through the Organisation for Economic Co-operation and Development (OECD) and the G20. As G20 President in 2014, Australia played a key role in the first stage of the OECD’s Action Plan to combat Base Erosion and Profit Shifting by multinational enterprises (the BEPS Project).
The aim is to provide a common framework for countries to address tax avoidance by multinational enterprises. More than 115 countries have now joined the OECD’s Inclusive Framework on BEPS (although, significantly, not the US).
Australia has gone even further than the BEPS recommendations, implementing full country-by-country reporting and adopting a range of integrity rules such as the Multinational Anti-Avoidance Law and the Diverted Profits Tax.
Global consensus on the taxation rules to apply to digital enterprises is probably a long time off. One direction for longer-term reform, put forward by the European Commission, is to deem a digital platform that supplies digital services as a taxable ‘digital presence’ – a virtual permanent establishment – in an EU Member State.
It is not clear whether this proposal will be developed to implementation but it is an indication of the current thinking around this issue.
“Generally speaking, in Australia there is a deep-seated belief that companies, and especially multinational companies, do not pay their fair share of tax,” says Drum. “That’s the popular perception irrespective of whether it is true or not and the sentiment is strong.
“Given that, as well as the tax revenue imperative, the Australian Government is more likely to introduce its own interim measures rather than wait for a global consensus. Those measures will probably be more tweaking the existing system than a fundamental re-think.”
Questions put forward in the discussion paper include:
– Is user participation appropriately recognised by the current international corporate tax system?
– Is the value of intangible assets including ‘marketing intangibles’ appropriately recognised by the current international corporate tax system?
– Should existing nexus rules for determining which countries have the right to tax foreign resident companies be changed?
– From a tax perspective, is the digitalised economy distinguishable from the traditional economy?
– What indicators could be used to identify businesses that benefit most from user-created value?
The Discussion Paper can be downloaded from the site. Submissions can be made through the site. The closing date for submissions is 30 November 2018.
BEPS in the boardroom: Cracking down on multinational tax avoidance