by ACI Partners

Finance, News, Publications7 May 20200 comments

Taxation of digital economy

Multinational digital platforms derive income from users abroad but, without a physical presence, might not be subject to a direct or indirect taxation in that foreign country.

The concerns regarding the direct taxation of digital economy are debated at international level. The Organisation for Economic Co-operation and Development (OECD) started and continues its efforts to adapt the international tax system by finding a consensus among different states.

Some states, however, have already introduced amendments to their national tax legislations and implement specific direct and indirect taxation regimes to digital players. The tax instruments used differ from state to state.

One of the approaches used by some states is to apply a digital services tax (DST) on selected gross revenue streams of large multinational digital companies. This approach is already implemented by France, where a 3% DST was introduced on intermediary services provided by a digital interface enabling users to enter into contacts and to interact with others, and on advertising services provided to advertisers that aim at placing targeted advertising messages on a digital interface based on data collected about users and generated upon the consultation of such interface.  Austria also introduced a DST starting with January 2020, levying with 5% the revenues from advertising services on digital interfaces or any type of software or websites rendered in Austria. 

Another approach, used, for instance, by Israel, India or Hungary, is to extend the territorial definition of a permanent establishment (PE), by introducing the new concept of digital PE.  A digital PE relies on the notion of “significant economic presence” of the non-resident platform determined based on factors such as number of active users, revenue, and frequency of contact with customers—to measure significant digital presence. 

Other states expanded the withholding tax (WHT) to certain types of digital transactions, including WHT on royalty payments for music streaming and image licensing transmitted through internet, new types of withholding taxes on income from online advertising, or form the payments made to digital platforms for the facilitation of connections between the platform participants.  For instance, Hungary imposes 1% WHT on gross amount of sale of goods / provision of service facilitated through digital or electronic facility or platform.  Slovakia imposes 5% WHT on payments to foreign digital platforms facilitating transport and lodging services in Slovakia. 

At a glance

• The reference to “consumer” and “B2C” generally refers to a private individual but might also include companies, organizations or other bodies which are not regarded as carrying on a business for VAT/GST purposes in the recipient country (which would need to be confirmed on a case-by-case basis)

• Under EU VAT law, electronically supplied services mean services delivered over the internet or an electronic network and the nature of which renders their supply essentially automated and involving minimum human intervention, and impossible to ensure in the absence of information technology. Similar VAT requirements apply in respect of telecommunication and broadcasting services.

• European Framework
  • Council Directive (EU) 2017/2455
  • Council Regulation (EU) 2017/2454
  • Council Implementing Regulation (EU) 2017/2459
  • Council Directive 2006/112/EC of 28 November 2006 on the common system of value-added tax

Equalization levy is also used by some states when taxing digital platforms.  The equalization levy tends to equalize the tax disparity between foreign and similarly situated domestic businesses in which the foreign businesses have significant economic activities in the country, but currently pay little to non-domestic corporate income taxes.  On the other hand, it also addresses the disparity between digital companies and traditional brick-and-mortar companies.  For instance, India imposes a 6% on gross amount of online advertising payments as an equalisation levy; and 2% equalisation levy on (i) online sale of goods owned by the e-commerce operator; (ii) online provision of services provided by the ecommerce operator; (iii) online sale of goods or provision of goods facilitated by the e-commerce operator; and (iv) on any combination of the above. 

Moldova did not announce yet its intention as to imposing direct taxes on digital economy players.  A first step, however, was made in relation to indirect taxation of digital services provided by or though foreign digital marketplaces.  Starting with April 2020, new rules on VAT registration and collection are implemented in Moldova, in trend with other countries from all over the world.  The VAT regime applicable on foreign digital platforms in Moldova is designed according to the EU model, with some differences.  For instance, Moldova did not provide any thresholds for VAT registration and did not establish any VAT on import of goods in transaction intermediated by platforms.  The similarities and difference between the regimes applied in EU (we selected France and Romania) and Moldova are reflected in the table below.