We read with astonishment on reports from the likes of Alibaba, Amazon, Apple, Facebook and Google announcing billions in sales and profit year on year, never in history has there been companies like these digital businesses have grown to such mammoth sizes in such short span. That’s the phenomena of the internet world!
But there is a dark side to these companies, what they all have in common is that most of them pay very little tax to and often placing their business offices in low taxing countries to do so. While we admire their tenacity and innovative business model, the dated tax system these companies operate and take advantage is flawed. A more transparent model needs to be designed for these digital giants who will have to pay taxes based on the countries they operate physically or virtually.
Taxing The Digital Business
Dr Kuek Tee Say is a Senior Lecturer in Taylor’s Law School, Faculty of Business and Law, at Taylor’s University, specialising in taxation illustrates further while digital business platforms generate billions of dollars in revenue, many digital enterprises are not liable to pay tax. Tax authorities worldwide are reviewing the ways to collect taxes from digital enterprises under the current international rules. Currently, the international tax law are lagging behind the business models in the digital era. The reason is international permanent establishment rules are used to determine how much a company should be taxed based on a threshold of its activity in a given country. The concept is mainly based on physical presence (‘permanent establishment’) such as the existence of offices, factories, warehouses etc. in a country.
The keys to classic business models are of little relevance for Silicon Valley giants like Google, Amazon & others. Today, digital businesses are able to have significant economic presence without necessarily having a substantial physical presence. For instance, in July 2017 the French Government has failed to recover 1.1 billion euros (US$1.3 billion) for years 2005 to 2010 from Google as there was no permanent establishment in France.
There is increasing pressure on governments to ensure that digital business owners pay their fair share of tax. Current taxation concepts for international cases were basically developed for the world in the early 20th century. OECD und EU are examining alternative taxation concepts for digital business models. The US government is also keen to find transparent ways of taxing the new digital economy and is watching EU’s plan closely. The Malaysian government is also studying the possibility of collecting taxes (GST and income tax) from foreign companies that offer digital services in Malaysia.
According to the World Bank Group, tax imposition on the digital economy will allow diversification of the Malaysia’s revenue sources. The Government had already formed a team to study the development of taxing on the digital economy. Currently there is no common action to tackle the taxing of digital business globally and each country is making its own proposals. There is a need for a global solution to the question of how, what and where to tax the digital economy.
Conclusion
The taxation of the digital economy is a complex and multidimensional issue. Effective approach to the taxation of the digitalized economy will be best achieved through multilateral action at the global level instead of different national approaches. Double taxation treaties, domestic tax incentives and commitments to international trade agreements will have to be reexamined to ensure compatibility and alignment with global proposals and efforts. A global coherent strategy will prevent uncertainty, destabilization of level playing field and new tax abuse through new loopholes.
The Malaysian Government has indicated that Malaysia would have to wait for the model adopted by EU to be used as a guide to prevent avoidance by digital business. The EU will be examining the OECD’s interim report on the taxation of the digital economy to the G20 due in early 2018. Perhaps, Malaysia can then integrate OECD/EU’s appropriate and meaningful solutions in her legislation to tax digital business. Inevitably, the taxation of international digital business models will change significantly.
Dr Kuek Tee Say is a Senior Lecturer in Taylor’s Law School, Faculty of Business and
Law, at Taylor’s University, specializing in taxation, constitutional and administrative
law.
