TAX ISSUES FOR DIGITAL BUSINESS

Joanne Dunne, PartnerMinterEllison

Outline of session

Case study: including an introduction to Fitzroy from a Melburnian

Issues for an Australian based retail small business, with Australian customers, moving to have a digital presence Legal / other issues to consider Tax issuesTax issues

Issues when the Australian business grows internationally Legal / other issues to consider Tax issues OECD issues – potential future change to PE concept

Bitcoins ATO approach Some comparatives The blockchain

Case study

Meet Paul and Jane from It’s the New Black Ltd – head office: Fitzroy, Melbourne

An Introduction to Fitzroy

Case study

Meet Brian Block – ITNB’s IT guy, as he looked day 1 when he joined the company

Case study

Brian Block following his grooming and fashion makeover (Fitzroy-style) by Paul and Jane

Case study: ITNB’s goes digital in Australia

It’s the New Black LtdSupply of

clothing and advisory services

Hosting services

Aus based interstate customers

Aus based servers and website hosting

company

Case study: ITNB goes digital in Australia ITNB aggregate turnover = $1.7 million Australian based servers and hosting of website,

Australian customers, Australian designer gear, inventory with Australian stores

Software adaptations made to off-the-shelf software; App developmentdevelopment

Broadcast rights of overseas fashion shows via a live stream – payments to Paris and London fashion week companies

Advisory fees, website access fees, commission from designers

Website design by Australian company in return for a fee

Legal/other issues to consider when going digital Structuring Website hosting options IP law – domain names, protection of IP, ensuring no

infringement Consumer law issues Terms and Conditions – including for tax related reasons Security and privacy law issues Cyber insurance SPAM Advertising and social media policy Employees – if a start-up digital business, how to reward

Tax issues ITNB = small business as aggregate turnover is less than

$2 million Income from fees Deductions: Website establishment costs

New business structure – capital limitation? Hosting fees, domain name re-registrationg g Depreciating assets –TR 93/12; Australian Copyright

Council December 2014 Information Sheet Section 328-180 ITAA 1997 Subdivision 328-D Division 40 – software development pool In-house software and R&D

CGT assets (small business concessions) Section 40-880 – Private Ruling 1011958172383 – design

fees, legal costs

Tax issues - continued

Off-the-shelf software and computer hardware –deductions, depreciation

Innovations to software and App development R&D offset – evidence needed – “new

algorithms/methodologies”, progressive experimental process

“In-house software” depreciating asset? (same points as before)

Payments for live streaming – section 26-25, Royalties? Seven Network case (on appeal 2016)

GST Tax record keeping and website functionality: TR 2005/9

Case study: ITNB’s digital business goes global

It’s the New Black Ltd

Australia100%

ITNB Singapore Ltd

Singapore

Legal/other issues to consider when going global Appropriate country to operate from Structuring – local tax, regulatory issues of each entity

option, separate entity needed? Local law issues – eg privacy, SPAM, security, consumer

laws Funding Funding Staffing – will Australian staff go to the new location to set

up on the ground? Tax issues Website functionality – will the new entity have its own

website, or will it be a link to the Australian company website? Website hosting?

For the case study – ability to access inventory, customer base and residence of potential customers

Case study: ITNB’s digital business goes global

It’s the New Black Ltd

Australia100%

Aus based customers

Supply of Aus Inventory;

ebsite

ITNB Singapore Ltd

Singapore

Asian based customers

website functionality

Website hosting

Tax issues

ITNB attributed income – ITNB Singapore Ltd as a CFC Singapore not a listed country Active income test Potential for tainted services income (any Australian

customers), tainted sales income (how is Australian inventory accessed), tainted royalty income (royalties from

t ?)customers?) Difference if CFC resident in a listed country

Is ITNB Singapore Ltd Australian tax resident? Control of voting power in Australia or central management

and control and carrying on a business in Australia

Tax issues (continued)

Factors to consider when determining where a digital business like ITNB Singapore Ltd is ‘carrying on a business’ Website is not a place of business per se Place where contracts made Place of payment or where goods are deliveredp y g Place where assets are located –eg goods, bank accounts Place where profits arise Nature of activities undertaken in Australia Place of server (to some degree) Where customer support is provided from, whether there

are agents/representatives in Australia Sensible to have governance / management / business

protocols: but note Bywater Investments case (2015)

Tax issues (continued)

ITNB Singapore Ltd – source and nature of income The double tax treaty Source – importance of terms and conditions Royalties vs business profits: Tech Mahindra case (on

appeal 2016) Section 6C ITAA 1936

Permanent establishment Current law – ‘the cloud’, section 6(1) ITAA 1936 definition Multinational anti-avoidance law OECD: potential future change to permanent

establishment concept Proposals in BEPS 1 Proposals in BEPS 7 BEPS 15 – multilateral instrument by December 2016

Tax issues (continued)

Transfer pricing Royalties paid by ITNB Singapore Ltd to ITNB (?) and

withholding tax GST

“Netflix” proposals from 1 July 2017International VAT/GST changes International VAT/GST changes

Bitcoins

ATO view: not money or currency or foreign currency CGT asset

Assuming not for personal use, gains subject to CGT or assessable as business/ordinary income

GSTNot ‘money’ Not money

Barter transaction - $A value received to be returned for GST purposes

When bitcoin converted – additional GST arises

Bitcoin GST example

Example: ITNB sells dress for $1650 inclusive of GST – it accepts

bitcoin from its customer ITNB returns $150 GST (ie 1/11 x $1650) ITNB then converts the bitcoin to A$ and receives

$1633.50, paying a 1% commission GST liability is $148.50 (ie 1/11 x $1633.50) (less the input

credit for the commission) Total GST liability from accepting bitcoin = $298.50 If cash was paid – total GST liability = $150

Senate Report (2015) International comparatives Blockchain – what it means

Top 5 tax tips for a digital business Get the Terms and Conditions right – eg where are

contracts made/concluded can be critical to determining issues such as source, and where business is being carried on

Hosting arrangements need to be carefully considered to determine issues such as whether there is a permanent

t bli h t i ti l j i di itestablishment in a particular jurisdiciton Ensure that you are aware of the nature of income or

unexpected results can arise – consider the contractual arrangements carefully

If a digital business is going to operate extra-territorially consider the CFC issues, transfer pricing issues

Keep aware of law/Tax Treaty changes – eg those pending to GST, VAT/GST changes globally and the BEPS project

Questions

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© Dunne, MinterEllison 2016

Disclaimer: The material and opinions in this paper are those of the author and not those of The Tax Institute. The Tax Institute did not review the contents of this presentation and does not have any view as to its accuracy The material andInstitute did not review the contents of this presentation and does not have any view as to its accuracy. The material and opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own interests.