Digital transformations and technologies should be seen as an aid and not a hindrance to fair and efficient tax systems, argued participants at an international tax conference in Munich, Germany.
Tax authorities around the world are publicly grappling with the challenge of adapting revenue collection models to a global economy that is continually reshaped through transformative digital technologies.
In March, the European Commission released two legislative proposals for taxing of digital firms. A host of other countries, including India, Brazil, Colombia and Vietnam are also planning or proposed new taxes on the digital economy. A recent report from the Organisation for Economic Cooperation and Development (OECD) noted that more than 110 countries will work to build a consensus on digital tax by 2020 within the OECD/G20 Inclusive Framework on base erosion and profit-shifting (BEPS).
Last Friday, private sector representatives joined with policy makers and academics to discuss how digitalisation is shaping the future of taxation at a conference organised by ICC, Business at OECD (BIAC) and BusinessEurope in Munich. Here are three main takeaways:
1. Digitalisation holds huge gains for tax administrations
While often perceived as a threat or challenge to the collection of tax revenue, participants agreed that digital technologies also have the potential to revolutionise compliance and enquiry work. The OECD, in their 2018 report, shows how digitalisation has already had a threefold positive impact on tax administration: enhancing the effectiveness of tax compliance, improving taxpayer services and reducing tax compliance burdens.
For instance, greater amounts of third-party data available to tax authorities allows more reporting to be automated, saving both sides time and money, and can also be used to tackle underreporting, evasion or fraud. Data recording software adopted by several tax administrations that notes sales data at the time of a transaction—and can be submitted directly to tax authorities—has already increased some countries’ value-added tax (VAT) revenues by up to 20%.
“Digitalisation is obviously the buzzword of today,”
said Werner Brandt, President, ICC Germany.
“The change to the digitalised working world is a certainty that offers both opportunities and challenges for the tax function. Beyond being an efficiency measure, digitalisation can reduce the administrative burden for both taxpayers and tax authorities. The aim must be to ensure that key data provided by companies is processed in a timely manner as a driver of tomorrow’s tax function.”
2. Digital business models are transformative, but also pervasive
The way we work has already digitalised to such an extent that it is misleading to ‘ring-fence’ the digital economy from the economy at large. 95% of businesses in OECD countries benefit from a high-speed Internet connection and the volume of data created across the globe is expected to double each year. The emergence of new business models made possible through digital technologies, though, is compelling tax authorities to adapt their tax administrative systems as well as their approach to taxation of digitalised businesses.
“There is a real need to adapt our systems to the digital area,”
said Maria Teresa Fábregas, Director of Indirect Taxation and Tax Administration at the European Commission.
The Internet enables companies to scale across global markets without a significant physical presence—a feature that is notably helping small businesses to export to an unprecedented degree. Digitalisation is also often accompanied by the growing importance of intangible assets, such as intellectual property, and data.
Ms Fabregas noted that the European Commission’s digital tax proposals stemmed from the view that current tax rules are not fit for the digital economy.
Monika Wünnemann, Head of Finance and Taxation at the Federation of German Industries (BDI), argued that because it is impossible to ring-fence the digital economy, “every sector would be affected by the new tax rules”. The rules proposed would cause significant additional administrative burdens and pose a high risk of double taxation for companies.
“As digitalisation continues to be an important driver for global economic growth, policies related to taxation of the digitalized economy should seek to promote, and not hinder, economic growth and cross-border trade and investment,”
said Christian Kaeser, Global Head of Tax at Siemens and Chairman of the ICC Commission on Taxation,
“Any measures should be developed on the basis of international tax rules, through a comprehensive, coherent and co-ordinated approach.”
3. A global approach is needed to adopt tax rules to the digitalised world
The European Commission proposals include the introduction of an interim turnover-based tax (equalisation levy), where businesses would be taxed based on revenue as opposed to profits. The OECD report also discusses such interim measures and identifies the constraints they present, but specifically does not recommend them.
At the event, private sector participants were united in stating their concerns over the drawbacks of such short-term measures, such as the expected risk of double taxation and increased compliance and administrative costs, as well as the arbitrary thresholds for being subject to the proposed interim tax.
“We are only at the beginning of a digital revolution; the shape of tax systems will look very different in the coming years as the shape of the world economy changes dramatically.”
said Will Morris, Chairman, BIAC Committee on Taxation and Fiscal Affairs; Deputy Global Tax Policy Leader, PwC,
“The fundamental principle of taxing profit will change in the future, but we do need to start thinking about it now”.
Timothy Power, Deputy Director Corporate Tax, HM Treasury added:
“It is helpful that there is a clear commitment as part of the OECD Inclusive Framework to look into the more challenging questions in this context.”
While digitalisation presents new challenges and opportunities, participants agreed that the principles of a fair tax system— consistency, predictability, neutrality —are just as relevant as ever for both public authorities and business and that a global approach to taxing a globalised digital economy is what all stakeholders are aiming for.
Georg Geberth, Director Global Tax Policy at Siemens and ICC Taxation Commission member responsible for co-ordinating the conference concluded:
“An effective and consistent global tax system must be rooted in collaborative efforts to promote stability and certainty in global tax principles which are essential for business and cross-border trade and investment. The positive collaboration and wealth of expertise shared during the conference represents an important step in promoting a harmonised approach which is essential in strengthening global efforts to ensure that international tax rules remain relevant and applicable in an increasingly digitalised economy.”