Taxation in the Digital Economy – Recent Policy Developments and the Question of Value Creation

Abstract

The paper reviews the evidence on the challenges of digitalization for direct (corporate profit) and indirect (consumption) taxation. Based on both anecdotal and empirical evidence, we evaluate ongoing developments at the OECD and European Union level and argue that there is no justification for introducing a new tax order for digital businesses. In particular, the significant digital presence and the digital services tax as put forward by the European Commission will most likely distort corporate decisions and spur tax competition. To contribute to the development of tax rules in line with value creation as the gold standard for profit taxation the paper discusses data as a "new" value-driving asset in the digital economy. It draws on insights from interdisciplinary research to highlight that the value of data emerges through proprietary activities conducted within businesses. We ultimately discuss how existing transfer pricing solutions can be adapted to business models employing data mining.

Ring-Fencing Digital Corporations: Investor Reaction to the European Commission’s Digital Tax Proposals

“…Our analysis adds to the recent call in the literature for further empirical research on the proposed measures of taxing the digital economy and the adaption of the international tax framework to the digital era (Devereux and Vella, 2018;Olbert and Spengel, 2019). While prior studies have mostly focused on a technical evaluation of the DST and virtual permanent establishment concept (e.g., Nieminen, 2018;Becker and Englisch, 2018), the literature is largely silent about the real effects of such measures on firms.…”

“…The first draft aims to introduce a new EU-wide system of a turnover tax on certain digital services as an interim solution. The second draft focuses on a long-term solution, presenting rules and provisions for the corporate taxation of a Significant Digital Presence (e.g., Nieminen, 2018;Olbert and Spengel, 2019;Petruzzi & Koukoulioti, 2018;Sheppard, 2018).…”

“…First, revenues from supplying digital services to users exceed 7 million euro, second, the number of users of digital services supplied exceeds 100,000 or third, the number of business contracts concluded for the supply of digital services exceeds 3,000. With regard to profit allocation, the European Commission recommends the application of the profit split method as the most appropriate method (European Commission, 2018d; Olbert and Spengel, 2019;Sheppard, 2018).…”

“…In the same vein, distortion of competition is conceivable, as one competitor, slightly above a threshold, would have to pay the tax, while another competitor, slightly below the relevant threshold, would be tax exempt (Nieminen, 2018). As a consequence, large digital firms are ring-fenced, even though several scholars have shown the impracticability and distortive effect of such practice (Olbert and Spengel, 2019;Schön, 2018). Simultaneously, the broadly defined digital service revenue categories increase the risk that the scope of the proposed digital tax measures is overshooting.…”

National digital taxes – Lessons from Europe

“…Unlike any other phenomenon, increasing digitalisation has contributed to shaping the 21st century, which has inevitably led to meaningful changes in our everyday lives. Technological progress has created opportunities to offer and provide internet-based services to customers around the world without having to establish any type of physical presence in other countries (see Schön, 2018;Olbert & Spengel, 2019;Hidien, 2019, p. 268).…”