Introduction
It is notably important to recall the most advantageous roles of taxation in any economy to any government in the world.
Tax Play an important role in funding public infrastructure and services funding education, taxes are used for social development and defining welfare program, it helps to secure the country’s boarders, funds the salaries and pensions of government employees- and above all help to pay the principal and interest on any government debts. Therefore given the above roles played by taxation in any economy in the world, Political leaders, media outlets, and civil society around the world have expressed growing concern about tax planning by multinational enterprises that makes use of gaps in the interaction of different tax systems to falsely reduce taxable income or shift profits to low-tax jurisdictions in which little or no economic activity is performed.
The catalyst, which have helped MNES to maximize these gaps in the taxation systems of different countries, is the wave of digitalization. It has been identified as one of the major trends changing society and business. Digitalization causes changes for companies due to the adoption of digital technologies in the organization or in the operation environment.
The impact of digitalization is very big; it has been compared to the industrial revolution Digitalization is referred to as a more fundamental change than just digitizing existing processes or work products.
Therefore, due to digital transformation, there has been a development and the wide spread of the digital economy, which also poses challenges for international taxation. The digital economy is characterized by an unparalleled reliance on intangible assets, the massive use of data and the widespread adoption of multi-sided business models capturing value from externalities generated by free products, and the difficulty of determining the jurisdiction in which value creation occurs. The digital economy is equivalent to 15.5% of global GDP and is growing two and a half times faster than global GDP over the past 15 years, according to the World Bank. (Elizabeth S. Shingler etal )
It is therefore important to note that this enormous development in digital transformation has created digital taxation systems notably the Digital service tax in the world.
As earlier seen in our first episode, most of the Digital service taxes that have been proposed and executed have similar physiognomies and are aimed to be temporary measures.
The Digital service tax are comprised of gross receipt taxes and transaction taxes that apply at rates ranging from 1.5% to 7.5% on receipts from the sale of advertising space, provision of digital intermediary services such as the operation of online marketplaces, and the sale of data collected from users.
Threshold in Digital Service Tax
In some countries like the UK Digital service tax has been applied to groups with global revenue on a consolidated basis from digital services of over 500 million GBP and the digital service revenue in the UK arising from these are taxed at 2%.
These thresholds have been seen in France, Austria, and Indonesia where a threshold has been capped in revenue from their digital services coming from users and any amounts or revenue below that will not be taxed.
Digital Service Tax and the Value Added Tax
We need to appreciate that businesses involved in the sale of digital services should also consider their foreign value added tax (VAT) obligations. The provision of digital services by a nonresident to individuals creates an obligation to register for, collect, and remit VAT, even if there is no a local presence for instance permanent establishment or the entity has nonprofit status.
Thus many businesses are presently prone to these VAT rules than are subject to DSTs. In either case, therefore businesses may be subject to both VAT and DST, where the tax burden may be increased.
One Important thing to understand is that the Digital service tax is not an income tax that is it is not capped on profits, it’s not also tax capped on an online sales nor is it a value addition tax that’s (VAT). However, it’s a tax on any gross revenues occurring outside of any treaties via electronic services or digital service which are services being delivered via an online or digital network by a supplier from a place of business outside any country to a recipient in another country.
How do we go about digital service taxes?
There is no need to worry about the presence of the Digital Service Tax, be it in Uganda or in the rest of the world.
The most important thing to prepare for the DST is to model its impact. Companies need to mind about the DSTs and any related taxes. The moment you realize that your company is likely to do business in more than one or two countries then the DST Modelling need to be designed.
Robust systems must be put in place to forecast what will be coming in throughout the year or above that period. On the side of multinationals there is a need to come up with a better model of seeing this through because there is a high chance that Digital Service tax will shake such companies whether any agreement has been reached on under the OECD or not.
Digital service tax Vs International double tax treaties.
Double Tax Treaty or agreements are ones that are designed to mitigate or help companies that do business in cross boarder or more than one country not to be taxed more than once. That is in their domicile place and in places where economic activities take place. These treaties are designed between two or more countries to avoid international double taxation of their income and properties they are intended to promote investments to create fiscal certainty and stimulate trade among countries.
Therefore, if all countries introduced DSTs at the same time, double taxation would arise. This may not be only on income tax but also between the DSTs, it’s self.
Note that as we speak now the DSTs are unilateral measures and this may mean that the double taxation may not be lifted at all. Where such unilateral taxation takes place without a consensus, it opens up rooms to a nonappearance or lack of solid steps in solving any dispute in cases of double or multiple taxations and thus the final consumer or tax payer will be more likely burdened.
Let’s hope that the introduction of these DTS, will not be seen to large extent as a political strategy which will create an arbitrary system that will only be targeting some MNEs in some countries and in the end will create revenge and may hinder neutrality as one of the principles of taxation.
In the existing taxation systems under the treaties, there has been tax credits allowed to be utilized against the taxes to be paid in the country where the service provider resides. The question remains not answered if the DST tax paid is not a final tax and its credit will be used at some stage or forfeiture for good.
As a taxation pundit the below questions would help us think forth on the taxations systems of the Digital service tax which have been introduced for the purposes of revenue mobilization and generation by our states
- Do you think that the Digital service tax, which have been introduced, should continue to suffice or operate?
- Should the OECD normalize and pass a resolution under its BEPs:
- Do you think the existing DST would be cancelled at the consensus level and what will happen to the already collected taxes under DST:
- Do you think the tax if any collected already should be refunded to the taxpayers and if so, what was then the essence of the interim measures for such?
How will BEPS under OECD help to normalize the taxation of the Digital Economy?
The OECD came up with 15 Action Plans that are concerned with the digital economic activities, in the context of erosion of the tax imposition popularly known as the Base erosion and profit shifting where by Action #1 was to address the tax challenges of the digital economy.
The main cause is to identify the main difficulties that the digital economy poses for the application of existing international tax rules and develop detailed options to address these difficulties. Other Actions ranging from 2-15 are also paramount in multinational transactions.
DST Incidence/ who is the ultimate person to pay for DST?
Like seen and observed in other tax heads, it is the final consumer who pays the taxes. Take for instance in VAT trail, all the intermediaries are agents who collect theses taxes on behalf of any government. The Input and output phenomena is benefited by these agents but the consumer who does not claim back these taxes is the one who really pays for such taxes.
It has been seen that taxes on gasoline, alcohol and other beverages, steel and the rest are borne by the final consumer. Therefore in view regarding the DST, it will be the consumers in the user country who will bear the tax burden because the prices are raised to factor in the DST rate imposed. Therefore, it is a consumption tax, where by the more you consume a product or service the more you pay such a tax and vice versa, hence, it can typically be referred to as it is a regressive tax.
Conclusion
The Regulatory policies being made and those to be made be it in Uganda or other countries the policy makers must bear in mind that the digital tax policy is very much needed in order to increase the state revenue.
These must be aligned with the structural, economic and long-term goals or policies. In addition, these must comply with the canons or principles of taxation. Any arbitrary tax policy can be detrimental to the country as it can cause massive economic distortions there by hindering the economic growth and state revenue generation
The writer is a Certified Tax Advisor and a Member of the Institute of Certified Public Accountants of Uganda.
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