By Channing Flynn, International Tax Partner and Global Technology Sector Leader – Tax
Global tech companies from Silicon Valley to Ireland to Tel Aviv to Singapore are used to accusations that they pay less in tax than activists want. Likewise, they’re well informed and prepared by their in-house tax professionals and external tax advisors about national and international efforts to make them pay more.
“The digital economy tax debate is fast-moving, but some authorities are increasingly eager to put talk into action.“
The re-energized base erosion and profit shifting (BEPS) Action 1 agenda from the Organisation for Economic Co-operation and Development (OECD) to “address the tax challenges of the digital economy” included soliciting feedback from taxpayers, which was due on 13 October. One hot-button issue — an “equalization levy” that allows countries to tax digital advertising revenue earned in their countries even if the company doesn’t otherwise have a taxable presence there — is expected by many to be recommended unless a quick alternative path to higher tax payments is found.
The “equalization levy” concept is already in place in India, which sees its new consumption tax as a way to balance the tax treatment of foreign-based and Indian digital companies. In Europe, meanwhile, according to The Wall Street Journal, “France, Germany, Italy and Spain are seeking to convince the bloc’s executive body to establish an ‘equalization tax’ on revenue generated in Europe by digital companies. It is aimed at reflecting what they believe companies should be paying in corporate tax.”
Surprises await traditional companies
The focus on taxing revenue from digital operations may catch many companies that don’t consider themselves “digital” enterprises by surprise because they, too, may be affected. Owing to the penetration of digital technology into many aspects of their operations, companies that have been in business since before computers were invented are suddenly “converging” with the digital economy and suddenly qualifying as taxpaying members.
This convergence has been one of the most important themes of global business operations for several years. Tech companies are competing with traditional companies, while at the same time traditional companies are going digital by buying digital companies and developing digital products and services.
The public has been made aware of tech companies “disrupting” traditional business sectors by launching competitive ventures but the public still sees traditional companies in their traditional roles: automotive giants still design and manufacture cars; global oil companies still drill for oil, etc. But tax collectors now look at those traditional companies differently, and of course we as tax advisors do, too.
Probably every one of those companies now earns a considerable amount of taxable “digital” revenue and qualifies for more tech-related tax deductions, such as more taxable income from intellectual property, higher deductions for research and development expenditures, and qualifying for incentives such as lower rates of tax, withholding tax abatements, and R&D incentive regimes such as “patent” or “innovation development” boxes, among other things.
From the perspective of national tax authorities, and also international authorities like the OECD, those traditional companies could end up being “part of the digital economy” and needing to comply with new tax laws that are allegedly targeted at global high tech.
Traditional but now digitized companies might not be as attuned to the digital tax world as the born-digital companies.
Here are four questions that companies undergoing a digital transformation should be asking themselves:
- How can I make my tax function more digitally effective? A big-picture assessment will determine the firm’s risk profile, focusing on digital asset nexus and digital tax due diligence.
- Is my firm ready for new digital demands from tax administrations? We know that e-filing requirements are moving from indirect tax to direct. But what about e-accounting, e-matching, e-auditing and e-assessing? The increasingly digital enforcement approaches of tax authorities can arrive with aggressive demands and tight timelines.
- How can I get the most from digital tax technology? To manage compliance, reporting and planning in a digital world, a digital tax reporting and analytics platform is a must, and a robust adoption of robotic process automation (RPA) is next. Looking ahead a bit further, firms need to be thinking about emerging blockchain and artificial intelligence (AI) services.
- How big is tax big data? No matter how much data firms think they’ll contend with next year, it’s usually an underestimate. Structured and unstructured data must be extracted, transformed and loaded into a valuable enterprise asset that can improve visibility and provide insight to facilitate strategic business decisions.
The digital economy tax debate is fast-moving, but some authorities are increasingly eager to put talk into action. This is most evident in the EU’s transformative proposals that surfaced at the Tallinn, Estonia, ECOFIN meetings in late September, as well as the important outline of the interim G20 report, which is not coy about broadening the definition of digital companies: “including the impact of digitalisation on a number of traditional tax bases.”
This just goes to show that businesses of all kinds — not just those that consider themselves to be “digital” — need to be engaged.
How we can help: Digital tax