1 september 2015 ciat rome 2015 the inspection role in tax administration fiscal control of digital...

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September 2015

CIAT

Rome 2015

The Inspection Role in Tax Administration

Fiscal Control of Digital Economy

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SummarySummary

1. Business models of digital economy

2. Tax connection and revenues assignment

3. Characterization of the services provided by the internet

4. Payments to non-residents

5. Challenges in controlling digital economy companies

6. Conclusion

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Business models of digital economyBusiness models of digital economy

Key features of the digital economy: How companies can add value?

How companies make profits?

How are the concepts of source and residence related to business models?

How are characterized the earnings for tax purposes?

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Taxes involved: Direct taxes (on corporative income)

Indirect taxes (VAT on the commercialization of goods and services)

Customs duties on importing goods

Special taxes (excise tax)

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Digital economy coverage: E-commerce of goods

App Stores

Advertising and marketing

Cloud computing

Payment services

Participative platforms

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Digital economy evolution: Companies adapt their business and market it on the

network

Expansion of information and communication technology

Companies digitally born and new business models

The mobility of intangibles and multinational companies functions is strongly enhanced

BEPS phenomenon exacerbation

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Businesses that benefited from technological innovation: Retail

Transport and Logistics

Financial services

Manufacturing and Agriculture

Education

Healthcare

Communication (media and broadcasting)

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Data and business adding value: Content generated by users

Personal data, browsing preferences, geolocation

Value added that is difficult to measure

Pricing of companies’ value is more visible when start-ups are acquired or the companies are negotiated (merger, acquisition, etc.)

Mass of data is expanded with the “Internet of things”

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Content: Content produced by professionals with copyrights

Content produced by users without copyrights (videos, comments, products revision, etc)

Important asset to attract audience and advertisers

Platforms built entirely by users

Fundamentals to the network marketing

Content allocation: Paid by the user Paid by the brand owner

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Mobilities in digital economy: of intangibles: intra-company transfers

of users and consumers: make business anywhere in the world (connection)

of functions performed by the business: technology allows a remote central management of functions spread around the world and the access to markets without physical store (scale gain without large teams)

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Tax connection and revenue Tax connection and revenue assignmentassignment

Permanent establishment (PE):

• Rules foreseen in Art. 5 of the UN and OECD Model Convention

• Companies profit: Art. 7 of the Model Convention

• Specials rules: interest, dividends, royalties and capital gains

BEPS project (Action 1- Digital Economy) Changing the concept of PE (Action 7 of BEPS Project)

Did not defined “digital economy presence” for purposes of characterizing a PE

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Tax connection and revenue Tax connection and revenue assignmentassignment

Revenue assignment and taxation:

• Need to initially characterize the connection, for instance, as a permanent establishment

• Taxation on the source of certain transactions

• Attribution of presumed profit to permanent establishment:

• Fractional apportionment: fractionate the total profit in the light of digital presence. This methodology apparently has low acceptance

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Characterization of services provided Characterization of services provided by the Internetby the Internet

Cloud computing The activity is not mentioned in the comments of the OECD

Model Convention

Many categories of cloud computing, such as the Infrastructure-as-a-Service (IaaS)

The IaaS can be characterized as services (Art. 7 of the OECD Model)

The IaaS can also be characterized as an equipment rental, equivalent to royalties (Art. 12 of the OECD Model) in some tax treaties

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3D printing, consultancy of architects, engineers and programmers:

Can be treated as services (Art. 7 of the OECD Model)

Can be treated as remuneration of technical services that, in some tax treaties, are equivalent to royalties (Art. 12 of the OECD Model)

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Telecommunications network: Internet Service Providers (ISP): operate the Internet

infrastructure and are often geographically restricted

Over the Top – OTT: Companies that operate and offer services on broadband. It uses the existing infrastructure and have global action

Taxation of OTTs: May not be taxable in market countries

Compete in unequal conditions, which favor them in relation to market country companies

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Payments to non-residentsPayments to non-residents

Companies’ revenue in the digital economy Revenues based on advertising

Rent or sale of digital content

Sale of goods, including virtual items

Revenues based on subscription

Sale of services

Content and technology licensing

Marketing of data from users and customized market research

Hidden fees or losses embedded in the operation

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Difficulties in the operation characterization: In the seller identification: it cannot be expected the register

or any type of identification in the market country

In the consumer identification: delivery addresses, credit card information, IP

In the determination of activities extension: amount traded by the non-resident company in the market country

In the exchange of information with foreign countries: due to the difficulty of identifying the country to request assistance

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Online payments services Credit cards (especially in B2C)

Intermediaries: establish a trust relation in the transaction between the client and the supplier (especially B2C)

Intermediaries can be characterized as SaaS (Software-as-a-Service), service offered in the cloud

Others payments options: prepaid cards (cyber-wallets)

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Confusion in the identification of the client: In B2C transactions, the client mobility on the planet can

complicate his localization

In B2B transactions, there may be payments flows that do not correspond to the flow of services provision. Example: consultancy services provision to subsidiaries of a parent company in various countries. There may be a confusion in identifying the localization of clients when the payment is centralized in the parent and the service is delivered in many countries.

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Digital economy structure in levels In digital economy, the information and communication

technology (ICT) is structured in superimposed levels, being the ICT infrastructure the inferior level, while the superior is the final consumer.

Each level has its hardware, software and peopleware

One company that operates in a level is usually paid by a superior level entity, the one that makes payments to inferior levels entities.

Multiple localizations and difficulty in characterizing services

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Challenges in controlling digital Challenges in controlling digital economy companieseconomy companies

BEPS phenomenon in the digital economy Minimization of taxation in the market country, avoiding to

characterize the taxable presence

Low or non-existent withholding tax

Low or null taxation of company in low-tax intermediary country (intra-group transactions) or with preferential arrangements.

Legal arrangements for non-taxation of a parent company results (residence country)

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Combating the BEPS phenomenon in direct taxation CFC rules: combat intangibles mobility

New limits on the permanent establishment concept

Transfer of intangibles and transfer pricing adjustments

Exchange of information among tax administrations in relation to businesses and functions performed by subsidiaries and affiliates of multinational companies.

Rules more burdensome for transactions with preferential tax regimes without substance.

Neutralize hybrid instruments and interest payments effects

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VAT in cross-border transactions The destination principle: tax due in the final consumer

country

Need to identify the country of destination

B2B and B2C transactions: different strategies possibilities of tax collection in the trade of goods and services

Collection timing in the trade of goods VAT on the import of goods: usually charged during the

payment of customs duties.

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International trade of small value goods: Countries grant exemptions for small values

Cost-benefit to effectively charge low values

Brazil: General rule: only remittances between individuals up to

US$ 50 are exempted. Remittances of goods sent by companies are taxed regardless of the value

One team of five people controls one hundred thousand objects per month

Tax collection effectiveness for small value goods (custom fees + VAT)

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B2B services trades: Withholding income tax

Relative ease to impose taxation in withholding income tax, requiring the service user to retain the tax

Brazil: intermediary (financial institution) verifies the withholding income tax to carry out the payment transfer to the non-resident service provider

VAT The compliance of VAT legislation can be more complex if

there are taxes to be charged in sub-national level (states or municipalities)

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B2C services trade: Can drastically reduce the supply chains (wholesalers,

distributors, retailers and intermediaries)

Difficulty on imposing the legislation to the consumer, in case of withholding income tax

Payments usually done by credit card, Paypal and others

Good practice: non-resident registration in the market country, so the VAT can be collected and delivered

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ConclusionConclusion

The digital economy is still an opened theme: Implementation of BEPS Project measures

Monitoring the effectiveness of BEPS Project measures in relation to the digital economy

Domestic legislation: registration of non-resident companies that provide services in the market country

Withholding income tax for digital or electronic services

Future reassessment of the permanent establishment concept (digital presence in the market country)

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Thank you!!!

1 september 2015 ciat rome 2015 the inspection role in tax administration fiscal control of digital...

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