Tax

Digital taxation risks double taxation for all businesses

Charles Marais Charles Marais

Governments and tax authorities are scrambling to keep pace with the increasing digitisation of the global economy, and as they respond in disparate ways it's businesses that will face the burden.

Businesses face huge risks from believing changes to legislation don’t apply to them or from relying on a reactive compliance-focused response. Your business doesn’t just need to comply with a multitude of new legislation, but also manage the impact on your value chain. A clear understanding of what’s coming and its implications is essential.

Download our latest article on taxing the digital economy [ 167 kb ] for the implications to your business and the actions you can take now to stay ahead. 

Digital taxation risks double taxation for all businesses [ 167 kb ]

Every business is affected, but nothing is clear

The main reason for the overhaul of digital taxation is the level of public pressure stemming from headlines about companies only paying a tiny percentage of corporate tax on their revenues and profits. Although a large proportion of revenue is generated by consumption taxes like VAT, the political sensitivities surrounding digital tax ‘fairness’ mean that governments need to be seen to be bringing in more corporate tax on digital transactions. The qualification for a taxable presence is therefore being extended from physical to virtual (eg online marketplace based in one country selling into another).

 

Download the full article Taxing the digital economy cover image

Implications

  • Physical presence is no longer the deciding factor
  • Tax revenues set to be more evenly spread
  • Shades of grey create double taxation risks

Actions for your business

  1. Review tax registrations as taxable presences expand
  2. Review your value chain, how do you create value within an increasingly digital economy?
  3. Minimise risks by being proactive in seeking advice on potential double taxation disputes.

Get ready for a bumpy ride

The bulk of businesses we speak to want certainty, simplicity and the avoidance of costly and protracted disputes, even if this means paying more tax in some jurisdictions or even more tax overall.

The speed with which individual countries are coming up with their own disparate set of solutions means that the OECD is under pressure to set a clear path forward rather than a ‘wait and see’ approach.

Whatever the OECD decides, however, these recommendations will struggle to get around the fundamental divergence in interests between different countries. For example, the significant economic presence approach is likely to maximise tax take in a giant consumer market like India, while the marketing intangible option preserves tax income in jurisdictions where a significant proportion of the intellectual property is generated and risks taken such as the US. The patchwork of approaches and the complexity and uncertainty they create will therefore almost definitely remain.

Implications

  • The arm’s length principle is under threat
  • Issues will arise for value generated inside as well as on the consumer-facing side

Actions for your business

  1. Take advantage of a simplified formulaic approach that could free up capacity and reduce compliance costs and risks.
  2. Lobby for real fairness to make sure the legitimate interests and concerns of mid-sized MNEs are not drowned out by the political clamour over taxing larger groups.
  3. Look at the big picture as these developments are part of the wider shake-up in tax. Perform a wider review of whether your current tax management is fit for purpose.

Digital businesses: Keeping tax simple

While the digital tax overhaul affects all businesses, it’s businesses with highly integrated digital business models such as platforms or online marketplaces that the tax authorities have most firmly in their sights. The results could be a complex and costly headache. How can your business ease the strain and steer clear of the potential pitfalls?

A clear understanding of what’s coming and its implications is essential. It’s also important to be proactive by taking advantage of opportunities to simplify compliance and putting in place safeguards such as pricing agreements.

If you would like to discuss any of the areas raised in this article, please contact your local Grant Thornton adviser or one of the contacts listed in the full article [ 167 kb ].

Our previous article focussing on digital taxation is also available below:

Lack of international consensus creates vacuum of uncertainty [ 143 kb ]