Digital economy and corporate income tax
The digital economy is making people, organizations, devices, data and processes more closely connected through technology and the Internet of Things (IoT). Hyper connectivity has changed the way we live and do business. Traditionally, selling a product or service has required a physical store that is as close as possible to potential customers. For online businesses, brick and mortar business is no longer an obstacle. For example, online shopping allows customers to review their purchase options online and make payments using mobile banking. But digital business goes beyond that. Multinational technology companies, namely Google, Amazon, Facebook and Apple (GAFA), use technology and the internet as input and platform to provide customers with digital services such as online advertising, data transfer and the sale of user data. As the way companies make their profits has changed, so has the way taxes are collected.
According to the Organization for Economic Co-operation and Development (OECD), corporate income of a foreign company is taxed on net income – gross income minus deductible tax expenses. This corporation tax only applies in a country if that foreign company has a permanent establishment in which this income is generated. The term “permanent establishment” is of enormous importance here in the Digital Services Tax (DST) as it determines whether or not a digital multinational is subject to daylight saving time.
Permanent establishment and digital services tax
Permanent Establishment (PE) refers to the physical existence and ongoing revenue-generating activities of a company. Since a company is only taxed in an area if it has a PE there, a company’s digital presence has become a controversial issue. Many European governments have started to implement the unjust practice of international taxation. While value is created through the data of their citizens, companies are taxed by other countries (tax canopy).
Before diving deeper, the definition of the “Digital Services Tax” (DST) must be defined. Put simply, daylight saving time is a tax on digital services, which include search engines, social media platforms, online advertising, online marketplace, and sales of user data, among others. For example, a person in France uses Google to search for tourist accommodation in Monaco. As soon as the user clicks on the commercial advertisement for a resort in Monaco, France would treat the income generated from this online advertisement as summer time, even though this transaction was only between Google and the resort in Monaco. Is summer time a trend phenomenon in many countries around the world? Is this legally correct?
International tax law and criticism
International tax law provides that corporate tax is applied where a product is made, not where consumers are physically located. While the digital economy has enabled businesses to make profits overseas, they are not subject to corporate income tax if they are not physically present in that jurisdiction.
In contrast to corporate income tax, whose tax base is net income, DST is structured to tax gross income, which has been criticized as an inefficient and anti-growth mechanism. For businesses with low profits, gross income taxation is a big loss as other related costs, such as deductible tax expenses, are not deducted prior to tax calculation. For example, emerging companies with insignificant capitals could be affected by summer time and prevented from entering the market. More importantly, as the OECD stated, it is impossible to separate the digital economy from the traditional one. More and more production lines are connected to the internet, so differentiating which line falls under daylight saving time becomes a complicated task. To settle the debate, the OECD launched a series of summer time negotiations involving more than 130 countries and decided to oblige multinational companies to pay part of their income taxes where their consumers are.
The US reaction and what to expect
Since GAFA originated in the United States, the US government will not be silent. After France decided to put its daylight saving time on GAFA in July 2019, the U.S. Commercial Agent (USTR) investigated daylight saving time and found it to be discriminatory under Section 301 of the U.S. Commerce Act 1974. Therefore, the US is allowed to retaliate against this discriminatory measure. To fight back, the US planned to impose tariffs of $ 2.4 billion on cheese, cosmetics, handbags and china. Fortunately, that trade tension cooled when France decided to postpone its tax collection until 2021 and continue to work on taxing the digital economy through the OECD. While this is a positive sign, the future is not promising as long as daylight saving time is developed and raised by European countries. Therefore, the conflict of interest between the EU and the US could create tension in multilateral trading communities and ultimately affect international trade.
Digital Services Tax and its Impact in Cambodia
However, collecting and collecting daylight saving time requires a full feasibility study, strict adherence to the international tax system, and extensive expertise in drafting and implementing this new tax law. Therefore, Cambodia should keep an eye on the DST rules, particularly those proposed and developed by the OECD, and learn from the success stories of other countries in implementing this new tax.
SUN Molika is a research fellow at the Center for Inclusive Digital Economy (CIDE) of the Asian Vision Institute (AVI). This article was originally published through the Center for Inclusive Digital Economy (CIDE) of the Asian Vision Institute (AVI).
- Keywords: digital economy, taxes