Taxation of the digital economy

Digitalization has been observed to be the most significant development in the global economy since the industrial revolution. Recent technological advances have driven dynamic changes in how and where companies do business and this pace of change seems unlikely to slow.

Digitalization has also been the catalyst for drastic changes to international and domestic tax systems around the world as tax authorities seek to adapt to these new developments. This period of significant global tax reform, coupled with the continued pace of digital change, is creating uncertainty for all businesses particularly those operating across taxing jurisdictions.

What is the impact of digitalization?

• the digital economy facilitates cross border sales of goods without the need for physical offices
• services are increasingly able to be provided remotely, existing only in the cloud and capable of being accessed from anywhere in the world
• it expands the ability to monetize online user and customer communities, virtual marketplace environments and content sharing forums

How does digitalization relate to tax reform globally?

• tax authorities are concerned that income attributable to activities in their jurisdiction is escaping taxation, political and media pressure to ensure that multinational businesses pay their fair share of tax in the countries where it is perceived that value is being generated
• individual jurisdictions are increasingly adopting unilateral measures to address the digitalized economy, potentially leading to double taxation

Key projects and developments

• Action 1 of the OECD BEPS project is seeking international consensus on tackling the digitized economy
• the European Commission has written a proposal on the fair taxation of the digital economy, including the proposed interim Digital Services Tax
• the UN has created a subcommittee on Tax Challenges Related to the Digitalization of the Economy also targeted at achieving international consensus and has recently proposed amendments to the UN Model Double Tax Convention to include a source-based taxation rule for automated digital services
• significantly, the Biden administration in the US has made new proposals for the OECD to consider as part its Pillar 1 / Pillar 2 initiatives that align with new domestic tax reform in the US which may increase the chance of international consensus on digital economy tax measures

What are the challenges in this area?

• the absence of a consensus approach and the increasing number of unilateral measures results in significant uncertainty for businesses operating in the current environment
• very divergent views at an international level about how to reform tax systems, or indeed whether reform is required at all
• questions regarding whether it is appropriate or even possible to ring-fence the digitized economy for tax purposes
• delays in reaching consensus approaches at the OECD, EU and UN have resulted in unilateral domestic measures that are not consistent and could lead to double taxation
• turnover-based tax proposals could have a significant impact on businesses profitability
• double taxation may arise where some new digital tax proposals sit outside the scope of exiting double tax treaties

Our Tax Team

We advise on all aspects of corporate and commercial taxation, with a particular focus on advising multinational businesses on their international tax affairs and cross-border transactions.

We have particular experience advising businesses operating in the global digitized economy on the application of existing tax measures and the impact of digital tax reform measures.