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In recent events, the residences and establishments of prominent YouTubers and content creators in Kerala, including actress Pearle Maaney, were subjected to raids by the Income Tax (IT) division. These actions come as a response to the Income Tax Department’s initiation of numerous investigations into potential tax evasion involving social media influencers and content creators. Platforms such as YouTube and Instagram have been under scrutiny, with allegations surfacing that their reported incomes and profits do not align with their actual earnings.
With rapid mobile phone subscription growth and internet usage in developing economies that now mirror advanced economies, most activities have gone digital. It’s not just about how we connect, socialise, and interact with each other; technology now dictates how we do business and make money.
Talking of making money on the internet, for those looking to navigate the stock market with expertise, stand guided by the best site with the best stockbrokers in the UK who can provide valuable insights and strategies for successful investment in this data-driven era.
Due to this paradigm shift, tax agencies are grappling with how to handle digital products, content, and content creators. So, the fusion between tech and economy has created a new economy with opportunities and unique challenges to tax agencies.
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The Rise of the Digital Economy
Previous industrial revolutions include mechanisation, mass production, electronics, and automation. But we are now on automation, the Fourth Industrial Revolution that marks the rise of the digital economy, involving end-to-end digitization of physical assets. Data and information have become pivotal in the digital economy.
Digital economy results from the transformative impact of information and communication technology (ICT). Its spread challenges tax authorities to adapt and keep up with rapidly changing digital activities. Capacity in governance remains weak in many developing countries in Asia and the Pacific. So, its policymakers need to ensure that benefits from digital economy innovations are shared equitably.
It is evolving at unprecedented speed, growing exponentially, and disrupting global industries. The digital economy includes e-commerce, app stores, online advertising, payment services, cloud computing, and participative networked platforms.
The development of the digital economy included the rapid growth in digital storage: from 1% in digital form in 1986 to 50% in 2002, and improvements in downloading speed: from 26 hours for a movie download in 2001 to 3.6 seconds expected in 2020. According to Statista, there are 15.14 billion internet devices, indicative of significant changes due to the digital economy. Innovative financial services, improved business transactions, new knowledge transfer services, and emerging business models.
Today, data-driven companies are increasing in value and prominence, reshaping present and future businesses, creating the peer-to-peer economy, sharing economy, and gig economy, all utilising the digital economy as their platform.
Case Study: Action Plan on Base Erosion and Profit Shifting (BEPS)
In Europe, the Action Plan on Base Erosion and Profit Shifting (BEPS) tries to match tax rules with today’s economy. The challenges BEPS seeks to address are:
- Tricky agreements.
- Telling how much a company makes in each country.
- Solving disagreements.
- Bad tax practices.
Getting politicians interested in worldwide taxes is hard, but making things easier for prominent digital companies can get them to pay more taxes.
The Organization for Economic Cooperation and Development’s action plan on BEPS aims to align tax rules with today’s economy, fixing problems in global tax laws that let big companies move profits to places with lower taxes.
BEPS knows the whole world is connected digitally, and some digital things worsen the money-shifting problem.
It also wants to change how companies are taxed. Some rules about where companies exist need fixing, and how they decide prices when trading within the company. They also want to make sure big foreign companies don’t hide money. But digital stuff makes taxes trickier, like where a company belongs, data, and how to tax online shopping.
Potential tax policy strategies contemplated within the Task Force on the Digital Economy (TFDE) involve altering the permanent establishment status, introducing an equalisation levy/excise tax, implementing withholding taxes on digital transactions, revising the VAT destination principle, and ensuring regulatory compliance. TFDE is a platform for knowledge exchange, employing a consensus-based approach to forge policy agreements.
As things change in the digital world, BEPS will change, too. They’ll watch and make sure their ideas work.
Countries in Asia need to learn from each other and make new tax rules to fix problems. They must also work together to ensure they all understand and do better.
Impacts and Challenges of the Digital Economy on Taxation
- Perception of less regulation and taxation in the digital economy is growing, fueled by scandals like the Panama Papers and EU investigations into digital companies.
- Companies in the digital economy paying minimal taxes create an uneven playing field, leading to an unfair advantage.
- Tax revenue is at risk, especially if traditional “tax-rich” activities are replaced by new digital activities, impacting government revenue.
- The digital economy could formalise informal activities and create new tax revenue sources.
- The mobile and intangible nature of digital goods and services challenges traditional tax policies rooted in physical presence.
- Virtually conducted commerce disrupts the concept of a fixed place of residence for generating income.
- It’s difficult collecting VAT on cross-border trade in services and intangibles. The anonymity feature, lack of paper trail, and tax haven use worsen the matter.
- Uncertainty in treating workers in the peer-to-peer economy, like online taxi and food delivery drivers, as employees or independent contractors during taxation.
- Challenges related to data reliance, network effects, multi-sided business models, monopoly tendencies, and volatility.
- Increased cross-border movements of people, goods, and services pose logistical challenges for tax administrators.
Policymakers must adapt and reinvent policies to keep up with the evolving digital economy and its challenges.
Measuring Digitization
Monitoring and measuring changes in the digital economy hold paramount importance. International entities employ indicators like mobile phones, fixed telephone lines, broadband subscriptions, and banking access to gauge the trajectory of digitization trends. The pace of global digitization has surged, as evidenced by data from the International Telecommunication Union (ITU). Notably, in several nations, the count of mobile phone subscribers surpasses the resident population.
As exemplified by Cambodia, Indonesia, and Myanmar, developing economies have witnessed substantial mobile phone subscription growth. Worldwide internet usage has escalated nearly sevenfold from 2000 to 2015, embracing 43% of the global populace. Nevertheless, internet penetration within developing economies lags at 35%, contrasting with 82.2% in developed nations. Varied internet usage rates characterise Asia and the Pacific, with distinct patterns across countries.
Regarding modern banking access, key indicators encompass branch availability, ATM penetration, and the proportion of adults with bank accounts. Mongolia has excelled across all banking access metrics. While some economies have experienced moderate growth in branch availability, advanced nations observe a decline in physical bank branch usage. Notably, Thailand, Indonesia, and Viet Nam stand out with high ATM penetration and robust account ownership growth. The varying pace of digitization advancement among countries underscores the imperative of customised strategies.
Networked Readiness Index
The World Economic Forum’s Networked Readiness Index (NRI) measures a nation’s readiness to harness the burgeoning digital economy. This index relies on a composite indicator comprising 53 sub-indicators. According to the 2016 NRI data, Singapore stands atop the technological readiness and utilisation chart among the 139 assessed countries. Notably, considerable technological enthusiasm and usage discrepancies are apparent within the Asia-Pacific region, with Myanmar ranking 133rd.
The influence of the digital economy on individuals, enterprises, and nations hinges on their degree of digitization and preparedness. Countries must ascertain their standing on the NRI scale to ensure the formulation of pertinent policies and regulations, thereby averting the risk of lagging in the sweeping wave of digital transformation.
Benefits of the Digital Economy
- The digital economy provides excellent potential for knowledge accessibility to a broader population.
- Properly managed technology can drive innovation, leading to growth and social impact, improving global income levels and quality of life.
- Disruptive technologies could significantly impact the Association of Southeast Asian Nations (ASEAN) region, equivalent to 4%-12% of GDP by 2030.
- Individual economies stand to gain tremendous benefits by executing digital strategies effectively.
Risks of the Digital Economy
- Many countries with potential gains from the digital economy still need to be connected, limiting access to benefits.
- Most of the profits from the digital world are in the hands of consumers who can afford and access it.
- Challenges include privacy, cyber security, and technology potentially polarising labor markets.
- Fair taxation poses a significant challenge in the digital economy.
Parting Short
As the digital economy becomes more integrated into daily life, policymakers must quickly adapt. A “digital mindset” is crucial for dealing with the challenges posed by this new economy. Countries can ensure fair taxation and shared benefits by collaborating and implementing digital tax rules, making it easier for prominent digital companies to follow them.
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Disclaimer: The following content is provided for informational purposes only and does not constitute professional advice or legal opinions. The views and opinions expressed in this content are solely those of the author(s) and do not necessarily reflect the views of TaxGuru. Readers are advised to seek professional advice and consult relevant authorities for specific guidance on tax and legal matters.
