DIGITAL ECONOMY TAXATION: A Modification or a Rebirth?

Abstract

The digital economy is becoming more and more intertwined. It influences how people behave socially, manage their finances, enjoy themselves, and even trade and invest. The economy will be valued at $5 billion and is projected to increase by between 20 and 35% annually. The question of how the ecosystem should be positioned is raised in light of the expansion’s quick pace. When some of the most profitable companies in the world, such as Google, Facebook, and Amazon, expand into developing countries like India, the question of how a government might generate revenue from cross-border services emerges. More payment options are available in India now than there were seventy-five years ago. It is possible that cards were formerly employed to combat push payments. Nevertheless, UPI is still in use today. Additionally, as it recognizes the crucial role that supply and demand side elements play in an enterprise’s ability to generate income, taxation of the digital economy is a process that is always changing. The author of this study divided it into three parts. The primary direct and indirect tax impacts of digital income are discussed first. At that time, it becomes clear to us that such tax consequences would apply in some situations. Another important recent development was the pillar plan agreement reached by 136 countries to address the tax issues brought on by digitization.

Introduction

The virtual economy has given a way not only to unimaginable types of digital transactions. Also to a completely new economic arena consisting of multiple business participants. Smartphone usage has become the primary source of content consumption, encouraging new avenues of the digital economy like online advertising, and data monetization, leading to an all-inclusive becoming.

“A tax is a fine for doing something right”

 In addition, it is not just e-commerce that is being propelled by the Internet. Rapid digitalization is affecting all aspects of our lives and how value is created and exchanged. In terms of numbers, reports indicate that the consumer digital economy in India is expected to reach $800 billion by 2030 from around 85 to $90 billion now, but internet usage trends vary across the globe. So for instance, while more than 80% of Internet users and some European countries shop online, in many lesser-developed countries; the corresponding share is below 10%. Moreover, if we talk about the taxation of the digital economy, it is a constantly evolving process because it acknowledges the fact that the demand side factors are also significant contributors to the revenue generation for an enterprise just like the supply side factors. In addition, a key component of such demand side factors is data the next point; it is not this backdrop that the evolving technology for digital transactions and e-commerce needs to be understood. [1]

-Digital Company Taxation: How Is It Done?

“Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media corporation, generates no content. Something significant is taking place.”

– Mr. Tom Goodwin

There is and has long been something significant. For more than 20 years, information and communication technology (ICT) has altered how organizations operate and how money is made. It is difficult to imagine a significant firm that has not thought about how evolving business models may affect its bottom line. Since tax collection is a serious business, it is not surprising that tax authorities from all around the world joined to determine how these advances were affecting their tax collections.[2]

Is it necessary and required to implement concepts such as equalization levy and big economic presence, which India was the first to adopt?

Let’s take a step back and look at how, you know, the global globally countries have been wanting to tax you know, the digital economic companies, because the current Treaty Framework falls short on any of these companies, because companies are creating footprints in other countries without physical presence, taxation framework, and we can talk about it as we go along. When that is the case, it becomes extremely difficult for any country to truly, you know, bring in a digestible taxation framework, you know, from the existing Treaty Framework to what should be the optimal form of taxing. India’s answer has been that, although the OECD is attempting to do whatever they are attempting to do at the central level, all G 20 nations are, you know, gathered there. India’s reaction to my concept was immediate, desiring to tax and excavate the share there. Nevertheless, you know, the researcher believes that at the same time, one needs to be balancing out, not cutting the drinking too rapidly, and perhaps looking at ways to not just develop a structure for supporting these two growth percentages that you indicated in this $35 billion.

Can India adopt a taxation regime that aims to tax everything from the start?

 No, it does not. As a result, the researcher believes that there is a need to implement some kind of taxing system, which we can discuss as we go.[3]

The Position as of December 2022

Where are we right now?  In space right now, a lot is happening. Where there has been a lot of action about taxes. As of December 17, 2022, where we stand in terms of taxing the digital economy.

Domestic Law: An Indian Standpoint

We are all aware of the substantial alterations to business paradigms.

 “Now that those days are gone, conducting business requires your actual presence. You are aware of the revenue stream for the territory. You simply need to be virtually present in that space to make money now that everything is going place on the cloud. Every occurrence has an impact on other systems and online digital networks.”

India has previously enacted unilateral measures in the form of an equalization levy, which is intended to tax the supply of products and services made available through e-commerce. It intends to tax internet commercial transactions in one way or another. Additionally, India embraced the SEP idea in 1961 with the introduction of section 9 of the domestic Indian income tax, which addresses revenues presumed to accrue or derive in India.

International Front: Its Relationship to and Interaction with the Indian Framework

 On the international front, we all know OECD has already come up with the BEPS (Base Erosion Profit Shifting) action plans. One of the action plans is of Digital Economy.

The OECD also developed the ideas of pillar one and pillar two.

• Pillar 1 discusses the new Nexus that is constructed. It discusses how earnings will be shared across market jurisdictions by market jurisdiction. The researcher is talking about all of the nations where marketing and sales take place. Based on the 20 over 10% approach. It also emphasizes the significance of residual revenue.
• Pillar 2 discusses global minimum taxes. Recently, the G7 countries, which include the United States, the United Kingdom, France, Canada, Germany, and Italy, reached an agreement to establish a worldwide minimum tax rate of 15%. Wherein a 15% tax would be levied on each MNC in each nation in which they operate, not simply the one in which they are based. It has prompted various concerns about nations such as Ireland, which currently have lower tax rates than 15%. For example, the UAE has granted particular 100% exclusions to different firms. The United Nations Tax Committee, on the other hand, has proposed a new article 12 B dealing with automated digital services. ADS i.e., services that require little or no human intervention. In ADS article IN 12B, a non-resident is not permitted to have a PE. Unlike Article 5, there are no thresholds.

Therefore, MLI is another advancement that exists to amend tax treaties. Following that, there is a lot of stuff going on. The author simply stated how overall, we have the Indian Income Tax Act.

We have tax treaties in place. We have had MLI, BEPS, and the OECD’s pillar one and pillar two reports. It is not likely to be a deal breaker in India. India is supposed to assist because, you know, they are already major economies and the entire OECD is engaged, so the researcher does not see how India can go against that. They will, however, be concerned from the Indian side. When we discuss how we want to allocate revenues to the Indian side.[4]

The 20 Over 10% Approach

For example, the group’s income is in the region of 1000 crores INR. India holds 10% of it, for 100 crores INR. There is an overall profit-before-tax margin on sales. Assume you have a 40% gross margin. Therefore, I will divide 30% of my time between non-routine and routine work. Take a 20 over 10% method, which means keeping 10% of that 40 person’s profit and the remaining 30% will be non-routine or residual income or residual income percentage.

What will be done now is for India to contribute 10% of global income. This 30% will be distributed in the same proportion as the 10% allotted to India. India will tax the attributable portion of the non-routine activity at the domestic tax rates. The author realizes that it’s complex, but that is the way it is. Since there is a lot that is expected to happen in the international tax area, particularly in the taxation of the digital economy. This is where we are right now when it comes to digital taxation.

Taxation of the Digital Economy: Its Importance

The first question that typically emerges is why digital taxes is such a hyped and discussed issue.

Well, the explanation for all of this hype might be several.

• Primarily, as you can see, this image is quite recent in comparison to the others.
• Second, the rate at which the digital economy has expanded is likely to increase. It’s unfathomable.
• Third, the drivers of growth and the contributors to the digital economy are not the same.

As well as those conventional economic areas. Therefore, for example, in digital economic aspects such as fast bandwidth, internet penetration, smartphone usage, and all the crucial elements such as inexpensive labor, raw materials location, and so on.

As a result, determining the jurisdiction and the period in which value may be established becomes exceedingly complex. For all of these reasons, the current set of tax regulations, which were largely predicated on physical presence and access, have become inefficient and inadequate for digital. In addition, because e-commerce users are a significant income generator, existing tax systems have to be changed so that many countries could tax profits, which is an integral virtue.[5]

Key Events In Digital Taxation: The Journey

Looking back on the major events in the digital taxation journey, the researcher believes it is fair to say that this

• OECD Beps Project Action 1 is the most important foundation in the field of digital taxes. Action 1 will describe how the Eclipse project dealt with the tax consequences of digitalization. It also compels nations to implement any of the three possibilities for domestic tax law as additional safeguards against BEPS in addition to their present treaty obligations.

1. First and foremost, ACP is a new Nexus with a significant economic footprint.
2. Secondly, the imposition of ongoing taxes on certain categories of digital transactions, or
3. The third action is the imposition of a brand-new tax known as equalization.

However, interestingly no stone unturned has adopted all these groups to tax the work.

Taxing digital services: Issues

1. Policy Rationale: The main problems are predicated on the idea that consumers add value to some digitally transformed organizations. The study contends that users by themselves do not produce value; rather, it is businesses that do so by tapping into user networks, hence the policy justification for these taxes is open to question.
2. Neutrality: Apart from the justifications for these levy triggers, neutrality is a problem.  Since digital service taxes only apply to a restricted group of digitalized enterprises, they can adhere to the concept of neutrality, which is also stated in the constitutions of many nations. Currently, anytime a government introduces a tax, that tax must be as neutral as possible. For instance, this idea of neutrality is present not only in Switzerland but also in all other nations.
3. Tax Treaty Problems: These levees cause certain problems with tax treaties at the same time. Therefore, by enacting such digital services taxes and claiming that tax treaties do not cover those, nations are evading their treaty commitments. There are very compelling grounds to support the claim that implementation levies or DSPs are subject to tax treaties and should thus be turned off, regardless of whether it is a stance that can be sustained.
4. EU Tax Law Issue: The fact that you cannot discriminate against non-resident firms within the EU and that these taxes are primarily relevant to non-resident enterprises with significant revenues or with a worldwide turnover of between $7 and $50 million raises several EU tax law difficulties at the same time. It may potentially lead to problems with covert discrimination.
5. WTO Law/Trade Law Difficulties: These levies may simultaneously give rise to WTO and specific trade law issues. Now let us focus on the major issue with these digital service tariffs, which is that they might potentially put an end to international trade conflicts. Now, there will undoubtedly be some form of backlash from additional countries if no agreement is made on the OECD’s unified strategy and if all nations start doing whatever they want to do, especially when introducing digital services and taxes.[6]

Conclusion: Taking Forward Work On Tax And Digitalization

Tax authorities acknowledge that the world is changing quickly and in unexpected ways and are working to implement policies that provide stability for businesses, encourage investment, and promote development. The digital revolution has given tax administrations many new chances to increase efficiency and streamline taxpayer interactions with the tax system, but it has also brought about several new risks. Making sure that our tax systems are prepared to handle the changes brought on by the digital revolution, as well as to capitalize on its advantages and mitigate its potential hazards, is a crucial problem. This study will have important implications for MNEs, governments, and the future of our tax systems with a primary focus on the modification of international tax policy in light of the effect of digitization.^[7]

[1]‘Taxation of Digital Economy’ (Taxmann, 16 Oct 2021)    <https://issuu.com/taxmann9/docs/taxmann_webinar_on_taxation_of_digital_economy?utm_source=YouTube&utm_medium=YouTubeVideo&utm_campaign=WebinarPPT.> accessed 17 December 2022.

[2] Seun Adu, ‘Taxation in the digital economy –How much will things change?’ (Pwccom, 2020) <https://www.pwc.com/ng/en/assets/pdf/tax-watch-april-2016-tax-in-the-digital-economy.> accessed 17 December 2022.

[3] Harshul Bangia, ‘Digital Taxation in India: A Need of present Time? ‘ (Taxguru, 13 Jun, 2022) <https://taxguru.in/income-tax/digital-taxation-india-present-time.html.> accessed 17 December 2022.

[4] OECD (2020), Tax Challenges Arising from Digitalization – Report on Pillar One Blueprint: Inclusive Framework on BEPS,
OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, [Accessed 17 December 2022]. Available from: https://doi.org/10.1787/beba0634-en.

[5] Kat R, “Global Symposium for Regulators” (ITUJune 2015) <https://www.itu.int/en/itu-d/conferences/gsr/pages/gsr.aspx.> accessed December 17, 2022.

[6] Kennedy J, “Digital Services Taxes: A Bad Idea Whose Time Should Never Come” (ITIFMay 13, 2019) <https://itif.org/publications/2019/05/13/digital-services-taxes-bad-idea-whose-time-should-never-come/.> accessed December 17, 2022.

^[7] OECD (2020), Tax Challenges Arising from Digitalization – Report on Pillar One Blueprint: Inclusive Framework on BEPS,
OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, [Accessed 17 December 2022]. Available from: https://doi.org/10.1787/beba0634-en.