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Tax Theory Applied to the Digital Economy: a Proposal for a Digital Data Tax and a Global Internet Tax Agency

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Tax Theory Applied to the Digital Economy: a Proposal for a Digital Data Tax and a Global Internet Tax Agency Tax Theory Applied to the Digital Economy: A Proposal for a Digital Data Tax and a Global Internet Tax Agency Tax Theory Applied to the Digital Economy: A Proposal for a Digital Data Tax and a Global Internet Tax Agency Cristian Óliver Lucas-Mas and Raúl Félix Junquera-Varela © 2021 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 24 23 22 21 This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepan- cies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorse- ment or acceptance of such boundaries. Nothing herein shall constitute or be construed or considered to be a limitation upon or waiver of the privileges and immunities of The World Bank, all of which are specifically reserved. Rights and Permissions This work is available under the Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) http:// creativecommons.org/licenses/by/3.0/igo. Under the Creative Commons Attribution license, you are free to copy, distribute, transmit, and adapt this work, including for commercial purposes, under the following conditions: Attribution—Please cite the work as follows: Lucas-Mas, Cristian Óliver, and Raúl Félix Junquera-Varela. 2021. Tax Theory Applied to the Digital Economy: A Proposal for a Digital Data Tax and a Global Internet Tax Agency. Washington, DC: World Bank. doi:10.1596/978-1-4648-1654-3. License: Creative Commons Attribution CC BY 3.0 IGO Translations—If you create a translation of this work, please add the following disclaimer along with the attribution: This translation was not created by The World Bank and should not be considered an official World Bank translation. The World Bank shall not be liable for any content or error in this translation. 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All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: [email protected]. ISBN (paper): 978-1-4648-1654-3 ISBN (electronic): 978-1-4648-1655-0 DOI: 10.1596/978-1-4648-1654-3 Cover image: © blojfo/shutterstock.com. Used with the permission of blojfo/shutterstock.com; further permission required for reuse. Cover design: Sergio Andrés Moreno, World Bank Group Library of Congress Control Number: 2020924823 Contents Foreword ix Preface xi Acknowledgments xiii About the Authors xv Executive Summary xvii Abbreviations xxiii Chapter 1 Introduction to Taxing the Digital Economy 1 Lessons from the Origins of International Taxation 1 G-20 Mandate on Taxing the Digital Economy 4 Market Jurisdictions’ Tax Claims: On What Basis? 7 Back to Basics: Philosophy of the Report 9 Organization of the Report 11 Notes 12 Bibliography 13 Chapter 2 Tax Challenges of Taxing the Digital Economy 17 Digital Elements of Economic Transactions 17 Tax-Disruptive Aspects of Digital Elements 18 Tax-Disruptive Digital Business Models 20 Network Effect of Multisided Digital Platforms 24 Lack of Physical Presence and Scale without Mass 26 Note 28 Bibliography 28 Chapter 3 Tax Principles Applied to Taxing the Digital Economy 29 Horizontal Equity 29 Benefit Principle 34 Neutrality Principle 37 Tax Sovereignty 40 Administrative Feasibility 42 Notes 45 Bibliography 46 v Contents Chapter 4 Economic and Legal Issues of Taxing the Digital Economy 47 Avoidance of Double Taxation 47 Tax Impact of Legal Structures 49 Tax Dimension of Monetization Strategies 52 Value Creation versus Revenue Recognition 53 Double Revenue Threshold Mechanism 55 Bibliography 57 Chapter 5 Tax Policy Issues of Taxing the Digital Economy 59 Digital Impact on Taxing Rights 59 Sales Threshold as a New Nexus Rule 62 Routine versus Residual Profits 65 Income versus Turnover Taxation 67 Other Types of Digital Income 69 Bibliography 71 Chapter 6 Tax Administration Issues of Taxing the Digital Economy 73 Tax Registration of Foreign Digital Companies 73 Assessment and Accrual of Digital Taxes 75 Application of Presumptive Digital Taxes 77 Effective Tax Collection of Digital Taxes 80 Tax Enforcement of Digital Tax Claims 81 Bibliography 83 Chapter 7 Tax Proposal for Taxing the Digital Economy 85 Creation of a New Global Internet Tax Agency 85 Introduction of a New Digital Data Tax 89 Mandatory Registration of a Digital Presence 96 Tax Collection, Enforcement, and Clearinghouse Mechanisms 98 Case Study: Global Digital Data Tax Collection and Clearinghouse Mechanisms 99 Benefits of the Digital Data Tax Proposal 100 Notes 102 Bibliography 103 Conclusion 105 Boxes 1.1 Background on the Relevance of the Permanent Establishment Notion 2 1.2 Evolution of the Concept of Permanent Establishment in Tax Treaties 3 1.3 Summary of Direct Tax Measures That Target the Digital Economy 6 1.4 Is There a Need for a New Paradigm of Value Creation? 8 vi Contents 1.5 The OECD’s Programme of Work: Pillars One and Two 10 2.1 South Dakota v. Wayfair: A New “Economic Nexus” 26 7.1 Comparison between the Digital Data Tax Proposal and Federal Schemes 86 7.2 Previous Proposals for Creating a Global Tax Authority 88 7.3 Bandwidth Explained 89 7.4 Comparison of the Proposed Digital Data Tax to a Bit Tax 91 7.5 Would the Digital Data Tax Be Creditable? 94 Figures 3.1 Interaction of Tax Principles as Applied to Digital Business Models 44 5.1 Allocation of Taxing Rights as Applied to Digital Business Models 60 7.1 Tax Design of Global and National Modalities of Digital Data Tax 95 Tables 2.1 Typology of the Digital Elements of Transactions 18 2.2 Categorization of Transactions and Business Models 21 2.3 Taxonomy of Tax-Disruptive Digital Business Models 23 2.4 Network Effect in Tax-Disruptive Digital Business Models 25 2.5 Scope of Application of a Revised Notion of Permanent Establishment 27 3.1 Comparison of Economic Circumstances of Business Models 34 3.2 Scope of Benefit, by Type of Business Model and Tax Residence 36 3.3 Taxable Digital Business Models Based on the Neutrality Principle 40 4.1 Potential Revenue Recognition Issues of Business Models 54 7.1 Information Relevant to a Global Digital Data Tax (by GITA Member Countries) 99 7.2 Global Digital Data Tax Revenues Collected (by Collaborating Entities) 99 7.3 Step 1: Fractional Apportionment (by GITA) of Global Digital Data Tax Collected 100 7.4 Step 2: Allocation (by Country) of Global Digital Data Tax Collected by GITA 100 7.5 Step 3: Clearinghouse Mechanism (by GITA) of Global Digital Data Tax Allocated 100 vii Foreword Digitalization affects the entire global economy. The impact of this new technological wave can neither be ring-fenced to specific sectors of the economy nor be circum- scribed to specific countries or regions. As a consequence, the use of new digital technology has not only transformed traditional business models but has also enabled the appearance of new digital-based business models that pose challenges to how economies have traditionally been taxed. A major breakthrough has been the ability to conduct business activities in a territory without having a physical presence there; in addition, the increasing reliance on intangibles has made it more difficult to differentiate value across different business functions, risks, and assets. Altogether, digitalization has contributed to a new borderless world economy, which, in turn, has brought to the fore how increased world trade affects the ability of country governments to tax economic activities to fund public priorities. Increased international digital trade has put in check established tax rules, and they need to be updated. In the absence of an international digital tax system and a global tax authority, the digital debate demands multilateral cooperation mechanisms and compromise from all parties involved—mainly from digital producer and consumer countries but also from multinational corporations in the digital services sector. Unless a coordinated global solution is reached, a proliferation of unilateral tax measures could fuel trade wars and negatively affect investment decisions, both cross-border and domestically.
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