By Bernard BEMPONG
In today’s world economy, many businesses have adopted or integrated one digital element or another into their operations.
Indeed, something is said to be digital if it uses a modern technology or application which enables the transfer of data or sharing of information in practically real time. In that regard, any element of an economic transaction that relies on a data-encoding technology is considered a digital element.
It can also be said that economic transaction or a business model that comprises one or more digital elements (digital communication, digital content, digital automation, digital distribution or digital payment) is considered part of the digital economy.
Digital Services Tax
A Digital Services Tax (DST) is a tax on selected revenue streams of multinational digital companies. It is usually targeted at social media platforms such as Google, Apple, Facebook and Amazon and is thus termed as the “GAFA tax”. Revenue streams that may be taxed (by a country) include advertising, intermediation and digital marketplaces and data transmission. Digital Services Tax (DST) is a strategy aims at taxing profits that are generated in a country but then shifted offshore by digital multinational enterprises (MNEs).
The Digital Services Tax (DSTs) implemented to date generally have a very high tax-free threshold which ensures that the tax only applies to large multinational enterprises (MNEs) which are thought to make a significant amount of profit in the domestic country. As of 2021, fifteen (15) of the thirty-eight (38) countries in the Organization for Economic Cooperation and Development (OECD) had proposed or implemented Digital Services Tax (DSTs). This is because most share uniform characteristics and apply to gross revenues from digital advertising sales, the provision of digital services (including the maintenance of a digital platform or marketplace) and the sale of user data. To ensure they apply only to the largest digital firms, Digital Services Tax (DSTs) have minimum thresholds for global and domestic revenues that must be met before firms are subject to taxation.
For tax purposes, it is important to distinguish between the use of digital technology to enhance existing business functions (communication, money transfer) and the core role of digital technology in the advent of tax-disruptive realities.
With regard to existing business functions, digital technology has been used to improve communication and money transfer that were previously fulfilled through traditional channels (for communication, person-to-person, telephony, radio, television, postal mail, newspapers, money orders, traveler’s cheques, magnetic stripe bank and non-bank credit cards or bank cheques).
Tax-disruptive realities include intangible content, online platforms, online delivery, zero marginal cost supply) that did not exist previously and may render tax norms inexplicable.
Tax-disruptive digital elements such as digital content, digital distribution and digital automation are only present in digital business models since they are interconnected and operate together.
The crux of the matter is that digital content can only be delivered online through digital distribution, and supply of and access to digital content are mostly digitally automated. Moreover, digital distribution uses the internet as a delivery channel, which also operates as an element of digital communication.
Tax Norms
Traditionally, tax principles have informed and guided the development of tax systems. As such, some tax principles are intended mainly to address tax policy considerations (equity, benefit or neutrality) while others aim to facilitate tax administration (certainty, simplicity or enforceability).
Consequently, the former have greater importance than the latter, since, for example, an unfair tax will never be admissible based on its enforceability or its simplicity. Nevertheless, it has also become known that not all tax principles have the same impact on the taxation of the digital economy.
For example, vertical equity is normally applied to personal taxation, while the digital economy is business-centered, where progressive taxation is absent.
Furthermore, horizontal equity provides that two taxpayers with equal ability to pay should pay the same amount of tax. It also implies that two taxpayers with similar economic circumstances should receive an equivalent tax treatment.
This also brings to the fore the principle of fairness. Indeed, fairness requires treating equally those that are equal and differently those that are different. In that regard, the first step is to determine whether two taxpayers are equal or different for tax purposes.
Consequently, before we measure their ability to pay, it is necessary to assess the economic circumstances of the taxpayers and their respective business models. Unless this is done, there is a risk that we might try to apply the horizontal equity principle to taxpayers that do not share similar economic circumstances and that, therefore, are not comparable from a tax perspective.
Challenges of Taxing the Digital Economy
It is worthy to note that Digital Services Tax (DSTs) have come under scrutiny since their conception. Businesses have also criticized Digital Services Tax (DSTs) for leading to multiple taxation. Taxes applied to gross revenues, like Digital Services Tax (DSTs) do not allow for cost deductions.
The same input may be taxed multiple times if even an enterprise made operating purchases within a country. Digital elements are considered tax-disruptive when they increase the complexity of traditional tax administration and tax enforcement practices.
For some elements (communication, payment), digitalization has improved their functionalities (network bandwidth capacity, data transfer, data compression, identity verification, data security, customization of consumer experience).
For other elements (content, distribution, automation), the spread of digital technology has enabled new economic realities that have altered the traditional business environment and prompted the rise of tax-disruptive digital business models.
Aside from that, the use of financial sector-based digital payment methods (electronic funds transfer systems, like credit and debit card payments, automated teller machine (ATM) transfers, wire transfers, stored-value cards, online bill payments) barely disrupts traditional business and tax practices, since similar methods of transferring money have been used in traditional transactions for decades.
In fact, financial sector-based money transfer payments provide tax authorities with greater control and monitoring mechanisms. As a result, digital payment methods based on electronic funds transfer need not be considered a tax-disruptive digital element.
Similarly, on its own, the communication channel has limited impact on tax enforcement since digital communication does not differ significantly from the established traditional telecommunication channels such as telephony, postal mail, radio, newspapers or television.
Assuming that the other elements to the economic transaction are not digital, using the internet to communicate with customers to arrange a physical transaction does not pose major tax challenges- the tangible nature of the content of the transaction and the channel of distribution allows effective control and taxation by the tax authorities.
In contrast, using the internet to attract users and to influence customers raises some tax concerns because the internet functions as a digital channel for delivering online advertising content. In that sense, the internet is not just a digital channel for communicating with customers. Therefore, using the internet as a digital communication channel is not considered as a tax-disruptive digital element. The digital automation of business processes has enabled digital business models to reach scale without mass at zero marginal cost.
The physical workforce (human workers) have been replaced by the use of digital innovation to streamline business processes and maintain a competitive edge. Digital automation intervenes in the supply of digital content (media-streaming platforms) and is only present in tax-disruptive digital business models. Moreover, it always requires the internet as a communication channel. So, digital automation is considered as a tax-disruptive digital element.
Bernard is a Chartered Accountant with over 14 years of professional and industry experience in Financial Services Sector and Management Consultancy. He is the Managing Partner of J.S Morlu (Ghana) an international consulting firm providing Accounting, Tax, Auditing, IT Solutions and Business Advisory Services to both private businesses and government.
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