It would be a severe understatement to say that the digital economy presented new and previously unknown challenges to tax policymakers around the world. Until recently, the tax rules that are currently in effect were designed for use by brick-and-mortar businesses, not those without a physical presence in their country. Making matters even more complicated for these tax systems is the heavy dependence of digital companies on intangible assets, the often complex nature of transactions by digital businesses, and the resulting difficulty that policymakers have in qualifying activities, assets, and types of income.
The purpose of this article is to outline the challenges that are being faced by policymakers in their creation of and enforcement of tax rules in the present tax systems. For more information about these actions, it is recommended that readers check www.bswllc.com.
The Changing Nature of Taxation and the Digital Economy
For anyone to believe that keeping pace with the ever-changing nature of business isn’t an all-consuming pursuit by tax policymakers is to show a profound ignorance of tax creation and enforcement history. It would be unfair to say that tax authorities’ primary purpose is to look for new ways to tax citizens. Still, the fact remains that the government has always played the game of catch-up with business and its ever-evolving mission to develop and sell new products and services to the masses. As a result, the increasingly complex digital economy and all of its ramifications are only the latest in this struggle.
A prime result of these efforts to impose taxes on the digital economy would be to reduce much of the competitive advantages that have so far provided served to feed the phenomenal growth of this sector. However, the fact remains that technology companies face a significantly lower tax burden than competitors in the traditional economy. Unfortunately, this has served to distort competition and increase the economic power of these technology giants. On the other hand, raising taxes on the digital economy would forgo taxes levied on less volatile elements of the economy.
It has always been the position of government leaders that the exponential growth of the digital economy, as well as the digitalization of the traditional economy, has led to a need to impose new tax rules, which increases the gap between the economic reality and the existing tax system, which did not follow the development of new business models that created them.
Unilateral Tax Measures: Constraints and Tax Policy Guidelines
From legal as well as ethical standpoints, the only actual constraint on the introduction of new tax regulations is the need to make tax on the digital economy comparable to that on traditional business. Unfortunately, this problem is a lot like comparing apples and oranges. One possible solution to this is to avoid separation between digital and non-digital activities. Making this difficult (but providing some promise in the future) is that even the non-digital economy is becoming more and more digital every day. Further, some companies are increasingly engaged in both the physical world as well as the digital economy at the same time.
One solution that may help clear the way until a more comprehensive solution is found is to impose new taxes on the digital economy as a temporary measure to balance the tax burden and avoid overtaxing either the digital or traditional economy. This approach would serve to limit the amount and costs of implementing new tax solutions before a permanent system can be implemented. This would also give systems more time to grow into what they will become in the future. Indeed, new business models could be developed in the meantime.
Approaching a Tax on the Digital Economy
It’s no secret that imposing new taxes on the digital economy and those who manage it would be a severe blow to the growth that makes it such a vital force in the American economy. A considerable part of this issue is the idea of the virtual presence of the digital economy and the problem of taxing people and businesses that don’t always exist except in a virtual world. How does a government tax these citizens and their activities, and at what rates? Some countries have addressed this problem by imposing across-the-board taxes on both digital and physical business enterprises. Those who are taxed in this method argue that this is unfair since those in the digital economy can not only afford the taxes that are imposed upon them, but also have the means of avoiding some of these taxes altogether by their very nature. This is easy to understand since those who argue this viewpoint have industries such as music streaming services as well as online video services to point to as examples. Making matters worse, it would be virtually impossible to monitor these businesses for tax purposes since they have millions of users compared to those who must enforce the tax regulations.
Another essential element that must be considered when discussing the taxation of the digital economy is the phenomenon of virtual currency. Unfortunately, many of those who are already involved in that business find it difficult to keep track of their assets, and this doesn’t include the trouble that would be encountered by tax enforcers to do the same thing. Considering that any taxation on these sectors would no doubt require regulations, it would be challenging to put a handle on, much less enforce.
At least for the time being, there is very little case law to support how governments could best work with the digital economy to impose and enforce new tax codes. Making matters worse is the constant growth of technology itself–marketplaces, 3D printing, streaming, and cloud computing and others–making the digital economy so challenging to keep pace with, much less compare it to the traditional economy keep pace with to tax it. This leads to much speculation on both sides of the debate, and probably or many years to come.