The digital revolution in today’s tax environment

In the above sense, we have analysed the following two challenges from international tax perspective:

• A clear example of the new challenges could be to demonstrate and place economic benefit in a digitized global context where companies play an important role in economies where they are not physically established. Taking the example of YouTube, a social network with millions of users that acts as an intermediary and facilitates the exchange between users who create contents and users who watch them, and that collect a large amount of data that can then be used and bring a benefit, how to demonstrate that benefit and especially, where to tax it?

• As defined in Art 5 OECD Model Tax Convention “For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried […]” it is obvious that the ability to establish relationships with customers remotely has eliminated in many cases, the need for physical presence and sales infrastructures in a given jurisdiction. The OECD has carried out several actions to implement important changes in order to integrate these new business models by adapting, for example, the concept of Permanent Establishment to integrate the digitalized economy into the international tax framework (BEPS Action 7). The mentioned changes have been aimed at preventing states from artificially avoiding the status of Permanent Establishment. 

How do jurisdictions adapt to these changes?

On the 23^rd of January 2019, the OECD published the Policy Note "Addressing tax challenges of the Digitalisation of the Economy" (see: OECD, 2019), this document is linked to a 2018 interim report (see: OECD, 2018) where several references are made to the impact that the BEPS action plan has had on the digitized economy. A clear example as mentioned above, are the changes on the so-called "trade structures" based on remote sales within online platforms; it is now difficult for digitized businesses, to remotely provide products or services to a market without falling into the new threshold of dependent agent Permanent Establishment.

The Interim Report, among many other aspects, analyzes the logic of value creation in three different fully digitized business models, i.e. it determines that value can be created by either transferring the product from the firm to customers (Amazon, Alibaba etc.), organizing and facilitating the exchange between users (YouTube, Facebook etc.) or solving different problems or user demands (Clouds etc.). Identifying the different digitized business models is a good starting point to identify the tax consequences that result from them.

In addition to the above, the OECD also takes into account the important implications of Intellectual Property in the digital economy, and the tax consequences derived from the location of the control and management of that Intellectual Property. It is now difficult to establish holding companies in low tax jurisdictions with the intention of avoiding advance tax on passive income. In addition, any tax ruling or similar agreement guaranteed by the tax authorities is now subject to exchange of information.

Some jurisdictions have taken particular measures to adapt their tax policies to the new times; India for example has introduced a new Nexus based on a concept of "significant economic presence", Italy levies a tax on Digital Transactions, Hungary implemented an advertisement tax and France initiated a tax on online and physical distribution of audiovisual contents. 

In Switzerland the State Secretariat for International Finance (SIF) published (see: SIF, 2019, under: SIF's updated position on the taxation of the digitalized economy, published 15 January 2019) an updated position on the taxation of the digitalized economy in 2019. The latter points to the importance of digitization and how committed the Swiss economy is to have the best possible framework for digital business and innovation. In this context, the Swiss position is clearly in favor of innovation, fair tax competition and to establish mechanisms against double taxation as well as over taxation. The profit must be levied where the value is created, in this sense, incentives are created to provide good conditions that allow companies to produce efficiently. At present Switzerland does not plan to introduce measures at the level of the digital tax proposed in the EU.

• In order to minimize the impact on our economy and on our companies as well as maximize the benefits resulting from digital evolution, we must adapt our business models to the digital economy and digital taxation.

• It seems certain that there will be no turning back, and the enterprises who lead the changes will more likely be prepared for the new challenges that the digital economy brings along.

Are you ready?