Taxation of the digital economy

The issue of taxation of the digital economy has become a priority for Colombia, as a country that aspires to be part of the Organization for Economic Development (OECD). This is because such international organization established, within its "Action Plan Against Tax Base Erosion and Profit Shifting" (hereinafter, by its acronym in English, "Beps"), that by September 2014 the member nations of the same would have developed efforts to ensure that countries where digital businesses are developed, can tax the income from them.

In a few years, the digital economy will be the economy itself. Already, the difference between it and the traditional economy is beginning to blur. However, the taxation of digitally conducted businesses is an unexplored universe, both for tax agencies and taxpayers. This is why, annually, countries involved in digital transactions -such as Colombia- fail to collect billions of dollars in direct taxes (income, Cree) and indirect taxes (VAT, excise tax, etc.).

There are three major problems regarding taxation in the digital economy; 1) the non-existence of a permanent establishment ("P.E.") that allows taxation of income from the country of source, 2) the impossibility of unanimously qualifying transactions by all countries involved, and 3) the risk of determining the country of residence by the place of effective administration of the virtual business.

The first problem arises because digital businesses do not require physical presence in the countries in which they are carried out. According to the provisions of Articles 5 and 7 of the OECD Model Convention for the Avoidance of Double Taxation (hereinafter the Mocde), only the country of residence may tax income from business profits, unless in the country of source there is an "E.P." to which such income may be attributed, in which case such country may tax such income. Although the OECD has considered that servers are fixed places of business that could constitute an "E.P.", or even could be considered as commission agents, digital businesses, in many occasions, are carried out without the need of a server.

The second problem is the difficulty in the qualification, by the different countries involved, of the nature of digital transactions. Thus, if a software or an APP is acquired -online- and for such transaction an electronic payment is made... How can it be qualified in the light of the Double Taxation Avoidance Agreements (DTA's); as a business profit (Art. 7 Mocde); as a royalty for the use of an intangible (Art. 12 Mocde); as a capital gain for the acquisition of an intellectual property right (Art. 13?5 Mocde); and as a capital gain for the acquisition of an intellectual property right (Art. 13?5 Mocde)? All of the above, under the framework of the DTAs would have a different tax treatment and would give one of the two countries (or both) the power to tax such income.

The third problem is, under treaties, that of defining the country of residence. This is complicated when the company selling the digital good or product is domiciled in a low tax jurisdiction, but the administration of the digital good or product is carried out from another country, which will want to tax the income based on the fact that the seat of effective management is there. This institution (the seat of effective management) acts as a tiebreaker rule in the Mocde, when two States claim to be the country of residence of a legal entity. The OECD has proposed the following solutions to solve the problem of taxation in the digital economy: 1) Modify the internal regulations of the countries in order to create a virtual PE, i.e., a center of attribution of income that takes into consideration the income received from digital businesses, 2) Establish, in the definition of PE, (3) Establish certain criteria to create a nexus of the company with the countries involved in the transactions, based on the "significant digital presence", and (4) Develop a special withholding tax system (to be paid by financial institutions) for payments made for the acquisition of digital goods and services.