4 Reasons to Prepare (Now) for Digital Taxation

Is there such a thing as the “digital economy” anymore? Or is there really just “the economy?”

That question is becoming more urgent as companies ponder the likely impacts of proposals by the European Commission (EC) and the OECD aimed at revising the taxation of digital transactions. It’s one of the topics explored by my colleagues Michael Bernard, chief tax officer, and John Viglione, executive vice president, in an article about taxing the digital economy. The piece includes a thought-provoking quote from a PwC bulletin: “The digital economy increasingly is the economy, and it cannot be ringfenced. Any changes will, therefore, impact all businesses, however narrowly policymakers try to draw them.”

John and Michael indicate that tax leaders of multinational businesses should already be planning for both the immediate and the long-term future with these potential changes in mind. Among the top reasons to get ready right now:

1. It’s not just the OECD and the EC. Tax authorities around the world are looking for new ways to capture revenue from digital transactions, and some may not wait for a multilateral solution. That raises the specter of potential double, or even multiple, taxation.
2. New rules may impact transfer pricing. The transfer pricing practices currently used to determine the portion of profit each country receives may give way to formulary apportionments. While many enterprise tax leaders are aware of this possibility, they “should have serious concerns regarding the extent to which new rules will upend existing business models and processes.”
3. Tax policy revisions may mean wholesale changes to corporate tax systems. The new rules may spark disruptions in a variety of tax-management structures, ranging from data storage systems to the use of limited risk distribution subsidiaries.
4. There’s probably more to come. The OECD is considering taxing databases according to the country of residence of the citizens whose data those systems contain. This would represent a major change in the tax treatment of intangible assets. It could also force a growing digital company that has yet to turn a profit to confront a staggering tax burden, one that might compel its leaders to rethink their existing operating model.

One way that companies should start preparing is by reviewing their tax data management and control systems, especially for indirect tax, Michael and John suggest: “Regardless of how the digital economy taxation proposals from the OECD and EC progress, it seems likely that global tax authorities will increase their focus on transaction taxes as a key revenue lever.”