Taxation of Digital Economy
As businesses adapt to an increasingly digitized environment, tax authorities are placing more focus on businesses tax processes and control. Unlike traditional businesses, companies that are part of digital economy are able to generate significant revenues in other countries without the need of physical presence in that country. This is one of the main reasons tax authorities worry about the taxation of digital economy.
In order to address these challenges the OECD is considering several proposals that are organized into Pillar One and Pillar Two proposals.
Pillar One- to address the broader challenges of the digitalized economy and to focus on allocation of taxing rights through revised profit allocation rules and revised nexus rules
Pillar Two- to address the remaining BEPS risks of profit shifting entities, including an income inclusion rule and a tax on base-eroding payments.
Global Trends in taxing the digital economy:
Across the globe, taxation rules are being amended to ensure that foreign digital enterprises become liable to pay tax in the country where such enterprises are providing their services without having any physical presence.
| Country | Provision for taxation of digital economy |
| Italy | • The Italian Budget Law 2020, provides for new “Digital Services Tax” (DST) replacing the “Web Tax” introduced by the Italian Budget Law 2019.
• The tax rate is 3% and applies on the revenues from digital service generated on a calendar year basis, starting from 2020. • Taxable persons are required to pay the DST by 16 February of the calendar year and to file by 31 March of the same year, an annual return stating the amount of taxable revenues generated in previous FY. • Italy DST will apply only to organisations which, individually or as a group : > Record worldwide revenues equal to or greater than Euro 750 million; and > Obtain total revenues from domestic digital services equal to or greater than Euro 5.5 million |
| Israel | • Israel has expanded the definition of “Permanent Establishment”.
• Foreign companies having ‘significant digital presence’ in Israel could be deemed to have PE in Israel |
| Saudi Arabia | • Department of Zakat and Income Tax (DZIT) has introduced a concept of “Virtual Service PE”.
• According to “Virtual Service PE” concept, a nonresident is deemed to have a PE in the Kingdom if time period of service exceeding the threshold prescribed under the treaty. |
| United Kingdom | • UK has introduced “Digital Services Tax” (DST) at the rate of 2% on the revenues of business providing social networks, search engines and online marketplaces to UK users.
• Business will be liable to the DST when > Its annual worldwide revenues arising from relevant digital services activity exceeds GBP 500 million; and > More than GBP 25 million of these annual digital services revenues are attributable to UK users. • The due date of the tax is the day after nine months following the end of the accounting period. |
| France | • France is the first EU member state to have implemented a DST.
• France has introduced “Digital Services Tax” also known as “GAFA Tax” (an acronym of the main US targets: Google, Apple, Facebook and Amazon) at the rate of 3% on gross revenues derived from digital activities which has been majorly provided to French consumers. • Business will be liable to the French DST only when the group receives revenue in consideration of taxable digital services during previous year in excess of following: > Euro 750 million for taxable digital services supplied worldwide; and > Euro 25 million for taxable digital services supplied in France. Note: User’s IP address will be used to determine whether or not the user is located or present in France. |
| India | • India has introduced the concept of “Equalization Levy” vide Finance Act 2016.
• As per the said provision, where any resident or nonresident having PE in India makes a payment for specified service to a non-resident who doesn’t have a PE in India and aggregate consideration exceeds INR 10 lakh in a financial year. • This EL will apply at the rate of 6% on gross consideration for any specified service payable to non- resident. • Further, India has introduced “Equalization Levy 2.0” vide Finance Act 2020. • Under EL 2.0, a non-resident ecommerce operator is required to pay 2% equalization levy on value of e-commerce supply or service on quarterly basis. • Please be noted that the concept of “Equalization Levy” is a temporary measure on taxation of e-commerce as India has deferred the provisions of “Significant Economic Presence” (SEP) till AY 2022-23 as per budget 2020. • Furthermore, India classifies all digital products under a different head: Online Information Database Access and Retrieval services (OIDAR) • All such products and services under OIDAR are subject to an 18% GST and there is no threshold for tax registration. |
| Malaysia | • Malaysia has introduced “Digital Service Tax” which brought foreign suppliers of digital services into scope from start of 2020.
• If the value of services rendered exceeds the threshold of RM 500,000 for a period of 12 months, the foreign supplier is required to collect Malaysia service tax of 6% on their sales to Malaysia based customers. |
| Japan | • Digital supplies made by foreign enterprises to Japanese customers will be subject to “Japanese Consumption Tax” (JCT)
• Foreign businesses supplying digital services to Japanese consumers will have to account for 10% consumption tax |
| Singapore | • Singapore will impose goods and services tax (GST) at the standard rate of 7% on imported digital services.
• This will cover all digital services including downloads, subscription based media, software programs, electronic data management and support services performed via electronic means. |
| Australia | • Australia has introduced a 10% GST on sales of low value goods to its consumers by non-resident e-commerce companies.
• This includes digital services such as streaming or downloading of movies, music, apps and e-books. |
| Russia | • Russia has introduced VAT rate of 20% on all foreign enterprises that sell digital products to Russia based consumers. |
(The views expressed above are strictly the personal views of the author and do not represent views of any organization)
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