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Taxation of the Digital Economy

Adrian Gaina

31 March 2015
The emergence of a digital economy presents challenging tax questions. The non-tangible nature of the new technologies affects the ability of the tax authorities to successfully tax digital transactions and leads to a shortfall in fiscal revenue. Governments are therefore trying to reform their tax rules in order to be able to tax part of the profits made by digital companies.
Taxation of the Digital Economy

OECD Developments. At the international level, the OECD and G20 countries adopted in 2013 a 15-point Action Plan to address tax base erosion and profit shifting (BEPS), the number one action being addressing the tax challenges raised by the digital economy. In its 2014 deliverable for Action 1, the OECD provides several potential actions to deal with the digital issue, the key ones being: (i) an update of the permanent establishment definition that would take into account the nexus based on "significant digital presence"; (ii) the creation of a withholding tax on certain digital transactions; (iii) the introduction of a bandwidth or "Bit" tax; and (iv) the request for non-resident suppliers to register and account for value-added tax (VAT) in the jurisdiction of the consumer.

EU Developments. At the EU level, changes have been made on VAT rules. As from 1 January 2015, all telecommunications, radio and television broadcasting, and electronically supplied services rendered to a non-taxable person are to be taxed in the Member State in which the customer resides, regardless of where the taxable person supplying those services is established. In the past, the sale of a digital book by a French supplier to a Belgian customer was subject to VAT at the place of supply, i.e. French VAT at the rate of 5.5%. As from 1 January 2015, such a transaction would be subject to VAT at the place of consumption, i.e. Belgian VAT at the rate of 21%.

At the national level:

-       UK. In the UK, Part 3 of the Finance Bill for 2015 has introduced a new diverted profits tax at the rate of 25%, applicable as from April 2015. It is aimed at large multinational enterprises with business activities in the UK who enter into contrived arrangements to divert profits to tax havens.

-       France. In France, a report titled "Taxation and the digital economy: a survey of theoretical models" (La fiscalité du numérique: quells enseignements tirer des modèles théoriques), dated 26 February 2015 and ordered by France Stratégies, a think tank under the authority of the French Prime Minister, develops several recommendations that tackle the digital issue, notably the creation of two specific taxes.

The first one would be an ad valorem tax based on revenues (sales or advertising) generated in France. The tax rates would be different according to the origin of revenues: those generated by one-time access (e.g. sale of an item) should be taxed at lower rates than revenues generated by data exploitation (e.g. sale of search data to third parties).

The second one would be a tax based on activity (number of users, flow of data or number of advertisers). It would be based on the collection of data and be calibrated at very low rates.

In this respect, the French report is inspired by the OECD's recommendation of introducing a bandwidth or "Bit" tax. According to the OECD, such a tax would be based on the number of bytes used by the site, although different tax levels would apply depending on the enterprise size or turnover.

The Association of Community Internet Services (Association des services internet communautaires, ASIC) has criticized the proposed French tax measures. It points out that, because the digital economy is increasingly becoming the economy itself, it would be difficult, if not impossible, to ring-fence it from the rest of the economy and subject it to special purpose taxes. Furthermore, they argue that a tax based on a platform's activity and number of users would push French entrepreneurs to launch their start-ups in countries free of such taxes.

Such concerns have been acknowledged by the report's authors, who insist on the necessity of conducting more empirical research before implementing any of their recommendations.

In addition to the above-mentioned measures, the French government contemplates the adoption of a Digital Law that contains data protection provisions. For instance, the law considers the creation of a right to be forgotten and delisted from search engines. Its application would be automatic for minors who, unlike adults, would not have to provide grounds to obtain the deletion of the data relating to them. The first draft of the Digital Law will likely be presented before Parliament in the summer of 2015.

Adrian Gaina

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