The development of the information and communication technologies sector leads to significant changes in economic activity that require the introduction of appropriate instruments of state regulation, including tax and customs tariffs. At the present stage, it is important for the state to ensure taxation of transforming business processes and financial transactions. The formation of the digital economy is a process of global changes in all areas of activity, especially public administration. The emergence of the newest financial instruments based on digital technologies in the economies of countries requires solving a number of problems in taxation. Moreover, not only the state is interested in the prompt resolution of taxation issues, but also market participants – taxpayers. This is because the absence of specific legal aspects of the definition of digital money does not represent the possibility of amending the Tax Code and other legislative acts on taxes and fees.
The formation of the digital economy determines the need for appropriate development and improvement of the processes and mechanisms of state regulation. The area of taxation, tax policy and customs and tariff regulation are not an exception here, and even, on the contrary, require priority attention. Taxes, fees and customs duties, as well as the mechanisms for their administration, must be consistent with the transforming economic processes and technologies of financial transactions.
The active transformation of traditional ones and the creation of new sectors of the economy due to the rapid development of information and communication technologies require revision and rethinking of some principles and approaches of tax law. It implies consideration of the formation of the state tax policy. First of all, the digital economy is characterized by the predominance of intangible assets over tangible – these are the main product ‘manufactured’ by companies in this sector. For example, the so-called software as a service (SaaS) is popular. In this case, the consumer pays for the right to use, for a limited time, the capabilities of the software located in the virtual data storage (in the cloud) (Boccia & Leonardi, 2016). The first difficulty is connected with this – the mobility of intangible assets. In order to reduce the amount of taxes paid, companies prefer to formalize the rights to such assets to affiliated enterprises registered in offshore jurisdictions.
The most important component of the global digital economy is e-commerce, which includes e-trading, e-capital movement, e-data interchange, e-money, e-marketing, and banking. All the main problems of taxation of e-commerce are typical for the EAEU countries, the European Union and the United States (Haslehner, 2019). One of such problems relates to the taxation of digital products and online services in the B2C (transactions between end-users and enterprises) and C2C (transactions between end-users) segments.
First, it is difficult to carry out control of e-commerce. Nowadays, it is possible to establish the identity and location of the buyer only by the data of the bank card. However, if payment is made through an anonymous system, it becomes impossible to identify the buyer. The problem of the tax authorities’ inability to trace electronic transactions is unresolved for all states. The possibilities for tax evasion in the face of a lack of reliable technology seem endless (Olbert & Spengel, 2019). Therefore, it is necessary to develop new technologies to identify transactions in cyberspace. One of such identification mechanisms can be a cloud-based electronic signature, with the help of which people could register all their actions on the Internet, in particular, conduct and confirm transactions. Also on the agenda, there is the development of the smart contract blockchain technology, which provides guarantees for transactions and fixes all changes in the process of their registration.
Many countries are developing legislation for the taxation of Internet commerce on their own. However, this does not bring many results, since international trade is carried out on the Internet, and for its effective regulation, appropriate international rules are needed. Under the influence of the digital economy on the taxation system, the structures of tax legislation are becoming more complex. For example, EU Implementing Regulation No. 1042/2013 establishes special provisions that determine the location of the end-user of electronic services (Olbert & Spengel, 2019). Many governments are concerned that companies such as Apple and Facebook are accumulating profits in jurisdictions with low taxes, rather than where users are located. The Organization for Economic Co-operation and Development (OECD) has been studying this problem for several years. In February 2018, it presented for consideration three options for its solution. In October 2019, it outlined the main approach she proposed – companies must pay taxes in the countries where they make a profit, and not only at their place of registration (Haslehner, 2019). The OECD plans to come to an agreement on this issue by the end of this year.
Currently, the generally accepted approach to solving the problem of the mobility of intangible assets is to link the place of sale of services to the location of the buyer. For example, on January 1, 2015, Directive 2008/8/EC entered into force in the European Union, which established that the place of sale of electronic services is the location of the buyer. At the same time, this approach cannot be considered fully effective. In particular, it is difficult to apply in the model of multiple buyers (crowd-funding) in the case when several thousand users, who are residents of different countries, finance the creation of an intangible asset. Also, one of the features of the “digital economy” is that the number of buyers is not always equal to the number of users (Faulhaber, 2019). For example, Kaspersky Anti-Virus software can have one customer – an individual and two users (the company sells one license that can be installed on two devices). Another option is the possibility when there can be one customer – a legal entity with one hundred users of employees who can be physically located in different countries (jurisdictions). Another tax challenge in the digital economy is the definition of a permanent establishment. The Baseline Erosion and Profit Shifting Action Plan (BEPS) reflects the following approaches to a fairer and more efficient solution to this issue through (Englisch, 2016):
- Approval of new criteria for taxation based on the concept of “significant digital presence,” and not on the theory of permanent (physical) representation of the company;
- Exemption of offices from the status of permanent representations, if their only purpose is storage, display, delivery of goods or collection of information for the company;
- Approving a tax on digital transactions at the source (service provider) and limiting the ability of companies to show profits in countries in which they do not conduct real economic activity, but only own intellectual property.
Also, to solve the problem of establishing a presence in the BEPS jurisdiction, the concept of a significant economic presence was investigated, the main indicators and principles of which are as follows (Englisch, 2016):
- Availability of gross income received from buyers in the given state;
- Setting a certain threshold value for such income;
- Compulsory registration for companies receiving gross income from the state above the threshold;
- Presence of a local domain name;
- Availability of local website content oriented towards the internal buyer, payment options;
- Entering a value called MAU – monthly active users;
- The fact of the conclusion of contracts through the online platform.
In addition, it is necessary to recognize that some approaches and rules have lost their relevance. The obsolescence of the “market price” concept in the digital economy is one striking example. The practice of applying tax legislation should be revised taking into account the objectivity of the applied pricing policy. In the context of the development of new business models of the digital economy, it is necessary to harmonize the tax laws of the countries, to work out and consolidate legal norms. In order to implement the principle of certainty and reduce the risks of tax evasion, it is proposed to use the developed scheme for determining the location of the end consumer of electronic services (Boccia & Leonardi, 2016). The creation of new technologies and the use of modern tax administration tools will reduce the risks of tax evasion in transactions made in cyberspace.
From a tax point of view, e-commerce transactions should be divided into two components. The first one implies remote purchase of tangible goods (services) through virtual stores or platforms, but the delivery of goods (services) is carried out through sales channels mechanically with payment or electronic payment or in cash to the courier (representative of the seller). The second one requires remote purchase of digital content (including electronic services), the order, payment and delivery of which are carried out virtually using modern information and communication technologies. Tax problems in the first case are related to tax regulation and control of sellers’ activities (their profit from sales), but the movement of goods (services) can be tracked and subject to indirect taxes (Boccia & Leonardi, 2016). In the second case, digitalization of commerce complicates external control over the receipt of payments by sellers, as well as the fact of delivery of virtual content to consumers.
In the process of cross-border e-commerce transactions, the movement of goods and a number of services between countries can be tracked and monitored for the payment of the corresponding indirect taxes and fees (customs duties, VAT, excise taxes, which are usually shifted to the consumer), but the country where the buyer is located does not claim to tax remote income: a seller who is a resident of a foreign jurisdiction. At the same time, the jurisdiction of the final consumption of goods (services) may require remote retail exporters to pay VAT. Thus, modern tax administration tools would reduce the risks of tax evasion in transactions made in cyberspace.
This is done to equalize the conditions of competition, since in the case of distance selling, sellers from foreign countries may have unreasonable advantages in the market of the country of sale of products associated with compensation for VAT when exporting in the country of residence and the absence of a tax agent who pays VAT for them when importing. With cross-border supplies of digital content closely interconnected with intellectual property rights, as well as taking into account the rapid digitalization of services, it is also difficult to control the fact of delivery of such virtual products, which complicates taxation.
If remote ordering and virtual payment via electronic communication channels are used, in the case of delivery of tangible goods, the seller as an exporter is refunded the value of VAT, but he will have to pay export duties (if any) and excise taxes. Further, after the goods have crossed the border of the buyer’s jurisdiction, the buyer is responsible for paying the import duty for remote deliveries (without the participation of resellers in the country of destination). In some cases, especially for bulk deliveries for the purpose of subsequent resale, the buyer will also have to pay VAT (sales tax) and excise taxes (for excisable goods).
The specificity of modern international trade is that it is dominated by non-digital content. Currently, digital products account for less than 1% of the value of world exports and imports, and their share has even declined: in the early 2000s, it exceeded 2% (Haslehner, 2019). In addition, the issues of taxation in cross-border supply of digital content are quite well regulated: since 1998, the OECD has purposefully addressed this problem by proposing both criteria for classifying the place of origin of income from a sale and purchase transaction. Moreover, interpretation of existing tax agreements taking into account e-commerce transactions with digital products was carried out (Haslehner, 2019). Accordingly, the main tax problems in cross-border e-commerce transactions currently relate to the movement of tangible goods ordered using electronic communication channels between sellers and buyers.
At present, due to the not too noticeable absolute and relative importance of electronic commerce, including cross-border, the fiscal effect of taxation of its income and operations for national budgets is still insignificant. In such conditions, tax regulation of cross-border e-commerce should focus not on the tasks of increasing the collection of direct and indirect taxes in this area, but focus on the stimulating role of taxes. In turn, it would contribute to the dynamic development of a potentially significant virtual area of international trade. Low taxes on income and cross-border e-commerce transactions can even contribute to positive economies of scale driven by the growth of trade and related activities.
It is obvious that in the context of digitalization of both national economies and the entire system of world economic relations, significant changes will appear. Cross-border flows of goods, services, and intellectual property products, the movement of which is mediated by electronic channels of information exchange, will continue to grow. Due to e-commerce, in particular, the traffic of postal items in national and cross-border messages, in which goods ordered from online stores are sent, has significantly increased. This has a positive multiplier effect for the development of transport, communications and logistics centers, postal and forwarding services, it contributes to additional employment of the population as drivers, couriers and operators of the mail delivery system.
The corresponding additional income of business and the population, in turn, will be taxed on labor and capital, increasing the revenue side of state budgets. Undoubtedly, these consequences should be taken into account by the tax systems of all countries interested in the development of the world and international organizations involved in tax regulation. Among the main problems of tax regulation of cross-border e-commerce transactions, researchers include the following: 1) competitive advantages of foreign remote sellers of goods sold through Internet platforms over Internet retailers of the country where the buyer is located based on differences in national tax systems; 2) a high degree of buyers’ sensitivity to changes in taxation and customs regulations applied to foreign Internet sellers; 3) possible abuse in the field of B2B associated with electronic commerce by transnational business structures for tax optimization purposes; 4) imbalances in direct and indirect taxation in integration communities that stimulate cross-border trade based on differences in the rates of income taxes, VAT and excise taxes;
The task of tax regulation of electronic trade in goods is to create equal competitive conditions for internal and external online sellers. This is done by leveling the low tax burden of distance retailers from countries that actively stimulate exports. However, increasing the fiscal burden on imports through online shopping needs to be approached with caution, as higher prices due to higher taxes have a negative impact on consumers, reducing their disposable income. According to experts, the desire to regulate almost the entire spectrum of relations in the field of digitalization with the help of legislative acts deprives the corresponding legal array of flexibility (Boccia & Leonardi, 2016; Haslehner, 2019). In addition, in the context of large-scale “digitalization,” the possibility of regulating a number of social relations within the national jurisdiction of the state becomes very relative.
In this regard, the role of international legal regulators is noticeably increasing. Modern financial relations and their legal and tax regulation, most likely, are subject to in-depth research from the standpoint of defining the concept of electronic money for tax purposes. It implies consideration and study of the specifics of these legal relations as an object of taxation. Moreover, studies of foreign models of legal regulation of taxation in the digital economy are necessary, as well as creation of legal relations and their regulation in the taxation of crypto-currencies.
Based on the supranational nature of the crypto-currency, it can be assumed that there is a certain jurisdiction with a reasonably low tax burden, within which a number of taxes cannot be levied – at least in relation to the production of new units of the crypto-currency. The latter is popular due to low transaction costs; tax avoidance is not a factor in their development – offshores are in demand exclusively as tax havens. User anonymity makes crypto-currencies an analogue of offshore companies, and, despite the fundamentally different nature, the risks of erosion of the tax base due to crypto-currency are even higher due to the fact that they do not depend on financial intermediaries (Haslehner, 2019). Interaction with banks today allows the tax authorities to receive information on the movement of capital.
Based on the supranational nature of the crypto-currency, it can be assumed that there is a certain jurisdiction with a reasonably low tax burden, within which a number of taxes cannot be levied – at least in relation to the production of new units of the crypto-currency. User anonymity makes crypto-currencies an analogue of offshore companies. Often in different countries, the first initiatives to introduce crypto-currencies into the legal field were put forward in the context of tax regulation and tax administration before the official recognition of the status by the authorities. Gradually, the scientific community comes to the conclusion that crypto entrepreneurship is an income-generating activity that is subject to taxation.
It is important to note that the financial authorities have not formed an agreed position on the taxation of crypto-currencies in countries where mining is most profitable. It takes into account factors such as the cost of electricity, ease of doing business, availability of renewable resources, average Internet speed and average annual air temperature (Canada, China, Switzerland, Russia) (Faulhaber, 2019). In a modern economy, activities related to crypto-currencies need a preferential treatment, for example, the release of transactions performed in an insignificant volume, not exceeding a certain threshold. The arguments in favor of preferential taxation of mining are, firstly, activities related to crypto-currencies, based on promising blockchain technology, and secondly, reducing the costs of tax administration. The third factor is the growing international tax competition due to the fact that proposals are put forward abroad to soften the approach to taxation of crypto-currencies.
The era of digitalization, the digital economy, tax transparency force the whole world to keep pace with the times and develop new concepts and mechanisms to create a level playing field for all business entities in the tax area. Until the OECD developed a single concept that would allow all countries to play by the same rules, as in the case of the BEPS plan, some states have chosen their own path and adopted legislation providing for taxation of large digital companies (primarily digital corporations such as Google, Amazon, Facebook, Apple).
France became the first European country to impose its tax on digital services from American tech giants, and other European countries have followed suit over time. On July 11, 2019, the French parliament finally approved the legislation on the so-called GAFA tax, which stipulates that every large IT company with at least 750 million euros in profit, of which 25 million euros – from products and services sold in France, must pay 3% of the income of its local unit to the state (Haslehner, 2019). It should be noted that the introduction of such a tax caused an ambiguous reaction from the United States and the OECD. Italy also followed this path, setting a new tax of 3% in the 2020 budget (Haslehner, 2019). The last country to introduce such a tax is the Czech Republic – the government there has approved the introduction of an annual tax for Internet companies Google, Amazon, Facebook and Apple.
In general, the increase in the share of the digital economy in the volume of the traditional economy, with the inevitable inevitability, confronts the scientific and expert community and the state with the need to revise many well-established approaches to taxation. It can be assumed that the changes will affect not only many norms of the Tax Code, but also the provisions of conventions on the avoidance of double taxation, approaches to the regulation of transfer pricing. Obviously, tax systems need to be neutral with respect to various types of e-trading, as well as e-commerce and traditional forms of business.
Taxpayers carrying out similar transactions should be subject to corresponding tax obligations. At the same time, tax rules should be clear and easy to understand, so that taxpayers have the opportunity to determine in advance the tax consequences of transactions, including the time, place, and procedure for calculating the tax. Opportunities for tax evasion should be minimized while balancing the scope of action and the magnitude of the risks, but at the same time, the tax system should be flexible and dynamic and keep pace with developments in technology and commerce.
References
Boccia, F., & Leonardi, R. (2016). The challenge of the digital economy: Markets, taxation and appropriate economic models. Palgrave Macmillan.
Englisch, J. (2016). International tax law: New challenges to and from constitutional and legal pluralism. IBFD.
Faulhaber, L. (2019). Taxing Tech: The future of digital taxation. Va. Tax Rev., 145. Web.
Haslehner, W. (2019). Tax and the digital economy: Challenges and proposals for reform. Wolters Kluwer.
Olbert, M., & Spengel, C. (2019). Taxation in the digital economy: Recent policy developments and the question of value creation. ZEW Discussion Papers, No. 19-010.