Taxation of the Digital Economy
With the advent of the computer, the economy has changed dramatically. Companies such as Google or Facebook make billions in profits with purely digital services. However, the countries in which such companies operate often do not see any taxes on these profits. The international community is now working on solutions.
Business Models Are Changing
Basically, collecting taxes from companies has been a pretty easy task to date: a company interacts with customers of a country by setting up its registered office, or its physical place of doing business, in that country. It is where turnover is generated and added value created. The country in which the operations are located levies tax on the company’s sales. This taxation principle is applied on an international scale.
Nowadays, however, many companies do not any longer need to be based in a country in order to do business there. Often does the interaction with customers take place only electronically. Physical operations would only produce costs; therefore, one can dispense with them without thinking twice about it. Then the countries in which these companies conduct their business see none of corporation tax as it simply flows away into the countries where a company has its physical presence.
A Joint International Solution Is Needed
Therefore, a number of countries have taken some short-term measures by introducing a so-called ‘Netflix tax’, which is to be seen as an extension to value-added tax. These taxes are not covered by double taxation agreements, however, so they might result in over-taxation. For this reason, the OECD and the EU are tinkering with long-term solutions.
One concept of how companies could be taxed introduces the idea of ‘virtual place of business’. This solution is being considered especially by the EU. In a draft directive, the EU Commission describes the virtual place of business as ‘a significant digital presence’, which would come to existence once a company has generated more than €7 million in turnover, has more than 100,000 users or has signed more than 3000 online contracts in any EU member state. If any of these prerequisites is fulfilled, revenue from such digital services is going to be taxed. By incorporating these virtual operations into the current taxation of companies with physical places of business, this concept would be a pragmatic solution.
OECD Report is Expected in 2019
For Switzerland, where many international companies are based and which, as an OECD member, is also participating in the development of an international solution, a change in international taxation rules would have enormous implications. First results are expected to arrive in 2019.
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