Publish Date
Apr 28, 2024
Australia Bulletin
The rise of the digital economy has presented new challenges for tax authorities around the world. Traditional tax frameworks, designed for a physical, brick-and-mortar economy, have struggled to effectively capture the value generated by highly digitalized business models. This has led governments to explore new approaches to taxing the digital economy, often in the form of digital services taxes (DSTs) and other targeted measures.
The international Organisation for Economic Co-operation and Development (OECD) has been at the forefront of efforts to address the tax challenges posed by the digitalization of the economy. Through its Base Erosion and Profit Shifting (BEPS) project, the OECD has advocated for a coordinated, multilateral approach to ensure fair and effective taxation of the digital economy. The OECD’s Two-Pillar solution, which includes Pillar One for the reallocation of taxing rights and Pillar Two for a global minimum tax, has been endorsed by the G20 and is currently being developed and implemented by countries around the world.
However, the path to a global consensus on digital taxation has not been without its challenges. Some countries, dissatisfied with the pace of progress at the OECD level, have opted to unilaterally introduce digital services taxes or other measures targeting the digital economy.
Despite these tensions, the global landscape of digital taxation continues to evolve rapidly, with countries around the world seeking to ensure that the digital economy contributes its fair share to tax revenues. This article provides an in-depth look at the current state of digital taxation across the globe, highlighting key developments and trends in this rapidly changing landscape.
As noted, the rapid growth and evolution of the digital economy has presented significant challenges for tax authorities around the world where traditional tax frameworks do not effectively capture the value generated by highly digitalized business models. Some of the key challenges include:
Intangible Assets and Lack of Physical Presence
Many digital businesses rely heavily on intangible assets, such as intellectual property, data and algorithms, rather than tangible, physical assets. This makes it difficult to establish a clear physical presence and nexus for tax purposes, as digital companies can often operate across borders without a substantial local footprint.
Scalability and Lack of Correlation Between Value Creation and Physical Presence
Digital businesses can scale their operations quickly and serve large numbers of customers globally with minimal incremental costs. This creates a disconnect between the value generated and the physical presence of the business, challenging the traditional principles of source-based taxation.
Difficulty in Attributing Profits to Different Jurisdictions
The highly integrated and interconnected nature of digital value chains makes it challenging to accurately attribute profits to specific jurisdictions. Digital business models often involve the cross-border flow of data and user participation and the centralization of key functions, making it difficult to determine the appropriate allocation of taxing rights.
Evolving Business Models and Rapid Technological Change
The digital economy is characterized by constant innovation and the rapid emergence of new business models. Tax authorities often struggle to keep up with these changes, as traditional tax rules and frameworks may become quickly outdated or ineffective in the face of such dynamism.
Reliance on User Participation and Data
Many digital business models derive significant value from user participation, network effects, and the collection and analysis of user data. Capturing the value creation associated with these intangible factors poses a significant challenge for tax authorities, as traditional tax systems have been primarily based on the physical presence and sale of goods or services.
These challenges have led to growing calls for a fundamental rethinking of the international tax system to ensure the fair and effective taxation of the digital economy. The OECD’s efforts to develop a coordinated, multilateral approach through the Two-Pillar solution are a testament to the global recognition of the need for a comprehensive solution to these complex issues.
Pillar One of the OECD’s solution focuses on the reallocation of taxing rights to ensure a fairer distribution of profits from the world’s largest and most profitable multinational enterprises (MNEs), including highly digitalized businesses.
Key features of Pillar One:
By addressing the challenges of taxing the digital economy through a coordinated, multilateral approach, the OECD’s Two-Pillar solution aims to create a more stable and sustainable international tax framework. The reallocation of taxing rights under Pillar One and the global minimum tax under Pillar Two are designed to ensure that profits generated by digital businesses are subject to appropriate levels of taxation, regardless of their physical presence.
However, the implementation of the Two-Pillar solution has not been without its challenges. As noted above, some countries, dissatisfied with the pace of progress, have opted to unilaterally introduce digital services taxes or other measures targeting the digital economy, leading to increased tensions and the threat of trade actions, as seen in the case of the U.S. and several European countries.
Despite these ongoing tensions, the OECD’s efforts to develop a coordinated, global approach to taxing the digital economy continue to be a central focus for policymakers around the world as they grapple with the complex and evolving challenges posed by the digital transformation.
The following section provides an in-depth look at the current state of digital taxation across the globe, highlighting key developments and trends in this rapidly changing landscape.
Argentina: Provincial Turnover Taxes on Digital Services
In Argentina, various provinces have enacted turnover taxes that apply to digital services provided by nonresident companies. The provinces of Buenos Aires City and Buenos Aires have implemented these taxes, which generally apply a rate between 3 percent and 5 percent on the gross revenues generated from digital activities. Digital services are broadly defined to include activities such as the supply and hosting of websites, the provision of digitized products, remote maintenance and support, web services, software services, access to online content, and the provision of databases and other automated computer-generated services. The turnover tax thresholds vary by province, but the Province of Buenos Aires has issued regulations that consider the revenues generated by the nonresident service providers, the number of users domiciled in the province and the number of transactions with those users.
Australia: Focus on OECD Discussions, Pillar Two Implementation
The Australian government initially considered implementing an interim digital services tax, but ultimately decided to focus its efforts on participating in OECD discussions around the Two-Pillar solution for addressing the tax challenges of the digitalized economy. In the 2023–24 Federal Budget, Australia announced plans to adopt legislation to implement the OECD’s Pillar Two rules, effective for income years commencing on or after 1 January 2024.
Brazil: VAT Reform Proposal With Potential Digital Impact
The Brazilian Senate is currently analysing a tax reform proposal that would significantly simplify the country’s indirect tax system. While the details are still being finalised, the proposed changes could also have an impact on the taxation of digital services in Brazil.
Canada: Proposed Digital Services Tax
Canada has tabled legislation to implement a 3 percent Digital Services Tax (DST) on Canadian Digital Services Revenue derived from online marketplaces, online advertising and social media. The DST would apply to both resident and nonresident companies with consolidated revenue of at least EUR 750 million and Canadian digital revenue in excess of CAD 20 million.
Denmark: Cultural Levy on On-Demand Audio-Visual Media
Denmark has introduced a new cultural levy, effective 1 January 2024, that will be imposed on providers of on-demand audio-visual media services. The levy will be based on the gross revenues generated from Denmark, with a basic rate of 2 percent and a 3 percent surcharge for companies that invest less than 5 percent of their Danish revenues in Danish content. The law is not applicable to service providers with an annual total turnover of less than 15 million Danish Krone (DKK15 million) or with a small Danish audience (less than 1 percent of the total number of subscriptions on the Danish market).
European Union: Ongoing Discussions on a Digital Levy
At the EU level, there have been ongoing discussions about the potential introduction of a bloc-wide digital levy to contribute to the EU’s own resources. While initial plans were put on hold, the European Commission continues to explore options for a fair and sustainable tax system for the digital economy. The EU’s initial proposal defined the scope of the digital levy to include revenues from digital advertising services, the operation of multi-sided digital platforms and the transmission of user data, with thresholds of EUR 750 million in worldwide revenues and EUR 50 million in taxable revenues within the EU.
France: Comprehensive Digital Services Tax Regime
France has enacted a comprehensive digital services tax (DST) that applies a 3 percent rate on the gross revenues derived from certain digital activities, such as digital intermediation services (including marketplaces and networking), online advertising services and the sale of user data. The tax applies to companies with global revenues from taxable services of more than EUR 750 million and gross amounts received from deemed French taxable services of more than EUR 25 million.
India: Amendments to OIDAR Services and Online Money Gaming Taxation
India has amended its Integrated Goods and Services Tax (IGST) Act to address the taxation of online money gaming services. The amendments introduce a 28 percent GST rate on the amount deposited by participants in online money gaming activities. Additionally, the definition of Online Information and Database Access and Retrieval (OIDAR) services has been revised to remove the requirement of being “essentially automated and involving minimal human intervention.”
Indonesia: Offshore VAT Regime and Digital PE Thresholds
Indonesia has implemented an offshore VAT regime, requiring certain nonresident companies to register as VAT collectors and remit 11 percent VAT on their digital transactions with Indonesian customers. The scope includes e-commerce, digital platform-based businesses and other related services. The thresholds for the VAT collection are a transaction value exceeding Rp. 600,000,000.00 (600 million rupiah) in one year or Rp. 50,000,000.00 (50 million rupiah) in one month and/or the amount of traffic or access in Indonesia exceeding 12,000 in one year or 1,000 in one month.
Italy: Digital Services Tax Aligned With EU Compromise
Italy’s digital services tax (DST) largely follows the compromise text agreed upon by European countries. The tax applies a 3 percent rate on revenues from qualifying digital services, such as online advertising, the operation of multi-sided digital interfaces, and the transmission of user data, subject to global revenues of over EUR 750 million and Italian revenues from qualifying services of over EUR 5.5 million.
Kenya: Broad Scope of Digital Services Tax and Digital Asset Tax
Kenya has introduced a Digital Services Tax (DST) at a rate of 1.5 percent on the gross transactional value of digital services provided to users deemed to be located in Kenya. The scope of digital services includes online advertising, data services, services delivered through online marketplaces or intermediation platforms, digital content services, online gaming, cloud computing, and data warehousing, among others. Additionally, the government has implemented a Digital Asset Tax (DAT) at a rate of 3 percent on the transfer/exchange value of digital assets. There is no threshold test for these taxes.
Malaysia: Service Tax on Digital Services and Tourism Tax for Digital Platforms
Malaysia has implemented a Service Tax on Digital Services (SToDS), applying a 6 percent rate on the total value of digital services provided to consumers in the country. Digital services are defined to include activities such as the provision of websites, hosting, software, access to databases, digital content and online advertising. The threshold for the SToDS is a total value of digital services provided to a consumer in Malaysia exceeding RM500,000 per year. The country has also introduced a Tourism Tax (TTx) for Digital Platform Service Providers (DPSPs) offering online booking of accommodation premises in Malaysia, without a specific threshold.
New Zealand: Proposed Digital Services Tax as a Backstop
The New Zealand government has reinstated a Digital Services Tax (DST) Bill, which proposes a 3 percent DST as a potential backstop if insufficient progress is made toward the implementation of Pillar One of the OECD’s Two-Pillar solution. The DST would apply to digital services groups with global annual gross “taxable digital services” revenue of at least EUR 750 million and annual gross “taxable digital services” revenue attributable to New Zealand users or New Zealand land exceeding NZD3.5 million.
Nigeria: Significant Economic Presence Rules for Nonresident Companies
Nigeria has expanded the scope of taxation for nonresident companies (NRCs) performing digital services in the country. NRCs are deemed to have a significant economic presence (SEP) in Nigeria and are required to register for taxes and comply with the relevant income tax obligations if they derive gross income above a threshold of N25 million (approximately USD26,000) from activities such as streaming or downloading digital content, transmitting data about Nigerian users, providing goods or services through digital platforms, or providing digital intermediation services.
Spain: Multilayered Digital Services Tax Regime
Spain has implemented a digital services tax (DST) that applies a 3 percent rate on the gross revenues from certain digital activities, such as online advertising, the operation of multi-sided digital interfaces that allow users to find and interact with each other, and the transmission of user data. The tax applies to companies with worldwide revenues of EUR 750 million per annum and a total amount of taxable revenues obtained in Spain exceeding EUR 3 million per annum.
United Kingdom: Digital Services Tax with Consolidated Group Approach
The UK has enacted a Digital Services Tax (DST) that applies a 2 percent rate on the gross revenues from in-scope digital activities, such as the provision of search engines, social media platforms and online marketplaces. The thresholds for the U.K. DST are global revenues from in-scope activities of at least £500 million and UK revenues from such activities of at least £25 million per 12-month accounting period.
These are just some of the key developments in the rapidly evolving landscape of digital taxation around the world. As governments continue to grapple with the challenge of ensuring fair and effective taxation of the digital economy, the landscape is likely to continue changing in the coming years. Businesses operating in multiple jurisdictions will need to closely monitor these developments and ensure compliance with the various digital tax regimes.
At A&M we are well equipped to assist clients with assessing their global taxation needs, and our tax team is here to help as one firm. Contact us to learn more about how these taxes may affect your business.
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