The taxation system in digital economy

THE TAXATION SYSTEM IN DIGITAL ECONOMY
The taxation of the digital economy provides an excellent area for observing the attempt to govern globalization by way of legal tools as well as the difficulties in making such a perspective concrete.
Technology is being harnessed to redefine traditional business models and provide new ways for buyers and sellers to interact both locally and globally. The result has been the emergence of a handful of firms — the so- called tech giants — that are capitalizing on first mover advantages and network externalities to boost profitability, capture market share, and turn themselves into the world’s most highly valued companies. They have inevitably captured the attention of policymakers, and in the realm of international taxation, the debate has coalesced around a number of issues that are driving the debate over whether and how countries should be able to tax the returns to highly digitalized multinational businesses. More generally, an increasing number of firms are digitalizing, leading to several issues that raise or intensify challenges for the international tax system.
Over 130 countries have reached agreement in principle on the changes but new rules will not be in force until 2023 at the earliest. Some countries, including the UK, France and Spain, have taken unilateral action and introduced their own digital services taxes, which should fall away when the new international rules come into force.
Some countries want an increased share of tax on the profits of multinational businesses generated from users based in their countries. The Organization for Economic Cooperation and Development (OECD) has been considering global solutions to the problem.
Current international tax rules allow countries to tax profits of non-resident companies which are attributable to a permanent establishment in that country. Transfer pricing rules seek to ensure that a multinational group’s profits are divided between the group companies in accordance with each company’s contribution to the profits generated.
For example, technology companies with digital platforms such as search engines and social media platforms can make substantial profits through the sale of advertising. Adverts may be targeted at users of the platform in a particular country, yet the technology company may have no substantial physical presence there.
In recent years considerable media attention has focused on the fact that US owned technology companies have made large profits from interactions with individuals’ resident in the UK and other European countries but have paid low levels of tax in those countries, or indeed anywhere. The European Commission has tried to use the EU state aid rules to attack some of these structures. The US opposes action which significantly impacts on US companies and has ruled that a number of digital taxes unfairly target US companies.
Seeing the largest digitalized businesses paying minimal tax in the jurisdictions where they provide services, policymakers are raising questions about the adequacy of the current tax system in both generating a sufficient level of taxation from such highly digitalized businesses and appropriately distributing that taxation across countries. Resolving these issues is now becoming increasingly important as almost all businesses are steadily moving toward what might be termed a digital asymptote. A number of policy proposals have been put forward which seek to limit the scope of tax avoidance and tax competition, by attempting to pre- determine a distribution of taxable profits across countries. Many are predicated— implicitly or explicitly— on the idea that the user has a role to play in value creation, justifying the designation of source- based taxing rights to the jurisdiction in which they are located.