Just how to tax the digital economy has been a sore point for the international community since BEPS’ inception. And it was only one a year ago at the IFA Congress, that the OECD’s Pascal Saint-Amans and IFA President Porus Kaka were both lamenting the continued lack of global consensus on implementing BEPs Action 1.
In the meantime, this has meant that companies with a significant digital presence in the economy of another country, but no (or little) physical presence, have continued to avoid taxation, putting a serious dent in the revenue streams of many governments.
Closing this gap is now imperative – and at this year’s G20 discussions, global finance leaders seemed to be closer to reaching if not a consensus, then at least an agreement that unilateral solutions must be explored in the interim.
Australia’s digital tax plans
This is a view strongly felt by the Australian Government. On 2 October 2018, it released a discussion paper seeking views on options to strengthen the integrity of the corporate tax system in the age of the digital economy. As recently reported in our Weekly Tax Bulletin, Australia is particularly exposed to tax base erosion from digitalisation as we rely more heavily on corporate income tax than comparable OECD countries, with 20-25% of Commonwealth tax revenue (excluding GST) coming from company tax. The Government remains concerned that some very profitable, highly digitalised companies (Facebook, Google, Amazon, Apple), pay very little tax in the countries in which they do business because the majority of their profit-generating assets and labour are located offshore.
What are other international finance leaders planning?
More recently, Reuters has reported that the Chancellor of the Exchequer, Philip Hammond, signalled that the UK will unilaterally implement a digital service tax if there is no international agreement soon on how to tax big internet companies. Speaking at a Conservative Party conference on 1 October 2018, Mr Hammond said “the best way to tax international companies is through international agreements but the time for talking is coming to an end and the stalling has to stop”. Reuters reported that Mr Hammond said, “talks at an international level had been stalled by US tax reforms aimed at ensuring internet firms pay their taxes there”.
And in Europe, EU finance ministers are taking similar action with plans to adopt a tax on companies’ digital turnover by the end of the year, despite fears (echoing those of the UK) that with the number of tech giants based in US, the Trump administration might view this as an attack on their own digital economy. European Council representative to the G20 Hubert Fuchs, sums up the European sentiment with these fighting words:
“Taxation should be where the moneymaking is and if the digital economy is making the money all over the world it doesn’t really make sense if they only will declare their income in the United States.”
Aussie companies planning a global expansion – take note
And speaking of the United States, Australian headquartered companies currently trading or planning an e-commerce global expansion, particularly into the US, would be wise to take note of the recent upheaval in applying tax to digital transactions. The recent decision by the United States Supreme Court (South Dakota versus Wayfair Inc.) means that states in America can now lawfully tax any Australian ecommerce retailers on certain conditions such as:
- Sales of at least $100,000 from businesses outside of the State
- At least 200 individual sales transactions to the State
The ramifications are steep. Companies will need to make sure that their technology, financial systems, and compliance processes are capable of tracking delivery locations, determining taxability, identifying tax rates, ensuring appropriate accounting, and providing the information required to file returns.
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