Digital EconomyIts Tax Implications

SUBMITTED BY:

Mallavarapu Neelima Devi

LLM 2012-20

SUBMITTED TO:

Digital Economy

Neha Pathakji

TABLE OF CONTENTS

PAGES

INTRODUCTION……………………………………………………………………..2-3

CHAPTER I: CONCEPT OF DIGITAL ECONOMY………………………………..3-9

1.1 Meaning & Definition1.2 The Characteristics & Dynamics of the Digital

Economy1.2.1 Profound innovation and systematic quest

of rapid growth.1.2.2 Venture capital financing.1.2.3 Special relationship with users.1.2.4 Reinvested rather than distributed as

dividends.1.2.5 Multi-sided business model orientation.1.2.6 Free services are cardinal preferences.1.2.7 Rise of Virtual currencies

CHAPTER II: PE CONUNDRUM IN INTERNET ENABLED ECONOMY……….10-12

CHAPTER III: TAX IMPLICATIONS OF DIGITAL ECONOMY………………….13-17

CONCLUSION………………………………………………………………………….18

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BIBLIOGRAPHY……………………………………………………………………….19

INTRODUCTION

The dogma of traditional trade and commerce throughout its

history were traded in a physical form subjecting to

constraints and barriers imposed by the nature and as well as

man-made borders i.e., jurisdictional lines. The digital

revolution, however, created a new medium for the trade and

commerce i.e., the virtual market place. This unique platform

created an era of unprecedented change. The recession and

financial crisis ended in 2009 also accelerated market trends

already set in motion by the internet and other market forces

(i.e., greater consumer consciousness, transformation of

industries, globalisation of markets and greater business

uncertainty and risks) caused a seismic shift that has

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reshaped the global business landscape.1 Economic growth and

technology are inextricably linked i.e., key technologies

adoptions are transforming the business and sparking a new

wave of wealth creation (Digital Economy).

The digital revolution has taken place long time ago but it

has given birth to a new concept of value creation i.e.,

digital economy which is challenging the conventional system

of value creation in the ecosystem. It has transformed

consumption patterns, production relationships, and the

dynamics and shapes of both corporations and government

agencies. Entertainment, shopping and production are now

taking place in a digital economy which is a part of daily

life. Therefore, it has become an integral part of many

individuals life including consumers, creators, payroll

employees and self-employed workers.

The digital economy in the virtuous circle is also speeding up

the pace of change due to collegial market linkages through

which a significant share of its value added has been shifted

out of large countries to the accounts of companies set up in

tax havens. Therefore, it’s not merely created a new medium or

distribution channel but affecting or will affect every sector

of the economy and radically challenges the two dimensions of

tax law: functional analysis of value creation and the rules

that determine how taxation powers are divided between

countries.

1 Contributions of Oxford Economics, The New Digital Economy –how it will transform business, Pg. 5, Para 1

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In February 2013, the Organisation for Economic Co-operation

and Development (OECD) published its report addressing Base

Erosion and Profit Shifting through its action plans which is

underlying a comprehensive analysis relating to causes and

consequences of the artificial profit shifting strategies

adopted by MNE’s to minimise their tax bills.

Issues to be examined by OECD include the ability of a company

to have significant digital presence in the economy of another

country without being liable to the lack of nexus under

current international rules, the attribution of value created

from the relevant data in a marketable location through the

use of digital products and services, the characterization of

income derived from new business models, the application of

related source rules and how to ensure effective collection of

VAT/ GST.

Focusing on primary issue of BEPS i.e. Action Plan I –

Challenges of Digital Economy, this paper will introduce the

reader to the concept of digital economy - its tax

implications, how it is creating a PE conundrum and BEPS

policy impact on developed and developing countries like

India.

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CHAPTER – I

THE CONCEPT OF DIGITAL ECONOMY

In the era of digital revolution, Internet is the sparkling

innovation which has shaken the pillars of the conventional

ecosystem by creating a robust medium of information exchange.

It has given rise to digital economy that challenges our

concept of value creation because of dynamics and scale of

externalities induced by its business models. It has connected

billions of people but the risk of technological and political

disruption now overshadow at very large scale which need to be

addressed with appropriate forms of governance of this medium.

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A preliminary step, before analysing the characteristics and

dynamics of the digital economy, is to define the digital

economy.

1.1 Digital Economy

There is no specific definition for the digital economy but

to clarify the concept, it has been explained as: digital

economy companies are the software publishing companies,

computers service companies, web agencies and

telecommunications operator. Other companies in sectors such

as advertising, information and entertainment have also

become primarily in digital market. More importantly,

digital economy companies come in all sizes, from start-ups

to global corporations serving hundreds of million users.

These companies are gradually and radically changing all

sectors of the company through:2

Their intense reliance on digital technologies;

Their innovative business models;

The abundant financing accessible to them, particularly

venture capital;

Through the continuous improvement in the design of

their interfaces and experiences that they offer

through their applications;

The special relationships they forge with the users of

these applications;

The use that they make of the data derived from the

user’s activities.3

2 The definition defined by the Collins & Collins in the report ‘TaskForce for Digital Economy’.3 Ibid.

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Digital economy business models confound classification at two

phases: firstly, in start-up phase, where innovation potential

is sustained by efforts to achieve distinction and systematic

seeking of disruptive model; then in the growth phase, once

goodwill is established, the technical infrastructure reaches

hefty, and then it is required to take up the position over

relevant markets to maintain the competitive advantage. It not

an easy task to ascertain the position of company in the web

of virtual market. Hence, the dynamic natures of these

companies letting the value creation skip from the grasp.

1.2 The Characteristics & Dynamics of the Digital Economy

To articulate the characteristics and dynamics of the digital

economy, a recent report of the France’s Inspectorate General

of Finances is taken into observation. The report explains the

reasons behind the difficulties to ascertain the scope of the

digital economy.4 Nearly 80% of the French economy is affected

by the digital economy by disseminating in various sectors.

This quantification of the digital economy is onerous but it

is still unsatisfactory for the tax purposes.

1.2.1 The digital economy is characterised by profound

innovation and systematic quest of rapid growth. Market

positions are precarious in this new economy due its

increasing pace of innovative technology and business

models. Google, with its innovative approach to indexing

4 Refer INSPECTION GENERALE FINANCES, Rapport de la Mission d’evaluation relative ausoutien a’ I’innovation, No. 2011-M-060-01, January 2012,http://www.igf.finances.gouv.fr/

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the Internet, overtook an entire generation of search

engines, including Yahoo!. MySpace was the first large-

scale social networking application, but it was overcome

by the rise of Facebook. Amazon, which now dominates the

online retail sales market, had to invest in powerful

software infrastructure over many years and change its

business model several times in order to beat its

competitors.5 And, Apple, especially, was on the brink of

bankruptcy in 1997, when Steve JOBS, one of the founders,

took over the reins again and brought radical

transformation to many sectors of the economy, including

the music industry.6 Therefore, there are no longer any

stable and long-lasting patterns of business models in

the digital economy on which to build the production

relationship, distribution networks and specification

channels which creates problem in levying tax.

1.2.2 The digital economy is characterised by its massive

receives of venture capital financing. Venture capital

fund is the key resource of finance for the development

of the digital economy companies. These fund are been

sanctioned to companies with new innovative designs, high

potential for rapid growth and can receive high returns

of scale in very short pace of time. Large scales are

attained by the recent start-ups because of their massive

allocation of these funds to research & developments,

5 Ibid. Collins Report on Digital Economy.6 Walter ISAACSON, Steve Jobs, 2011, http://www.aspeninstitute.org/ IDEA ProjectToward a Single Global Digital Economy.

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constructing appropriate software and hardware

infrastructure, interface designing with new improvement

and innovations, etc. which adversely effects the large

mature firms by game-changing innovations. Due to

emergence of new innovations at larger pace, the business

models are frequently changing and are creating

hindrances to tax system in identify the areas of

stability to assess the tax.

1.2.3 The strategic objective of developing special

relationship with the users. These firms are very far

from being confined to single market because of continuous

change in business strategies. The only constant strategic

objective is to create a platform which will address the

preferences and needs of the users. In order to become the

point of access of choice, they create user friendly

environment and based upon that they have to develop an

entire ecosystem. For instance, Apple Inc. maintains strict

control over the user experiences for the devices;

Google’s proclaimed mission is to “organise the world’s information

and make it universally accessible and useful”7 etc.

1.2.4 The business model of digital economy has been

constructed in the form wherein profits are to be

reinvested rather than distributed as dividends. This kind of

approach makes the firm effortless in shifting their

7 http://www.google.fr/about/company

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profits to more favourable tax jurisdiction. To

compassionate the given point, American corporate culture and

its existing tax system will be suitable to illustrate. Some

of the American companies have recently had very high

returns, leading to sudden increase in their cash holdings

specially American exporting companies due to

consolidated global earning tax system (check box rule)

wherein there is no need to report some of their foreign

subsidies/entities as corporations. This system

facilitates the groups to reserve their earning in the

foreign subsidiaries rather than repatriating it to avoid the

federal corporate income tax. This is notably bonafide in

the case of Apple, Microsoft, Google, Oracle and

Qualcomm. According to Moody’s, Apple alone accounts for

36% of the increase in major American group’s cash

reserves between 2009 and 2011. Without Apple, these

cash reserves would have diminished by 6 billion dollars

over the same period.8 By this we can draw inferences

relating to non-payment dividend to the shareholder:

using cash reserves to finance the capital

expenditure and acquisitions in U.S is more

comfortable because interest rates on borrowing

is less than amount levied on foreign earning

repatriations to U.S.

Digital economy companies accolade their

employees with massive stock option

8 Cardiff Garcia, “A US corporate cash update”, FT Alphaville, 14th march2012. http://ftalphaville.ft.com/

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distributions. When they exercise their

options, the number of shares increases and

dilute the holdings of other shareholders. But

in listed companies – this can have an adverse

impact and decline the share value. To

stabilise this, periodically, these companies

buyback their shares. Despite of various

constraints i.e. cost incurred in paying the

shareholders for buyback- it is a route to

avoid paying dividends.

Paying dividends is not an issue but it won’t

generate much of profits.

The combination of not paying dividend and ease

mode to shift the profit to lower tax

jurisdiction is more flexible for digital

economy companies rather any other mode of

business.

Therefore, their determination to reinvest all the

earnings in the innovation and expansion makes them

intimidating challengers in any market where they take up a

position.

1.2.5 A multi-sided business model is orientated by the

companies acting as an intermediary between different kinds

of customers and users. The value creation in this kind of

model is based upon the intercourse of customers and users on

the different sides of the model. The externalities of

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one side to another makes economic evaluation more

complicated because of price reflection relied upon the

effects of externalities. In this scenario, the

intermediary companies are taking the advantage of their two

sided business model to avoid the payment of tax i.e.

utilising the positive externalities generated by the

user (clicks on the links sponsored by the advertisers on

Google search engines which generates profits) on one-side of

the model and offsetting the negative externalities generated

by the intrusive and unattractive advertisement banners

(these activities lower the price or even no charge) on the

other side. In addition to that, the users of links sponsored

by the advertisers located in different nations, but the

contracts of advertisers, on other side of the model, are

officially signed by an Irish company that invoices and

collects the advertising revenue, and then file returns to

Irish tax authorities where tax rates are at minimal.9

1.2.6 Free Services are cardinal preferences. The “betrayal”

of money is a phenomenon that yields various

articulations and designs: offering free online services with

an objective to acquire new users or collecting personal or

behavioural data for generating economy on another side of

the business model or else producing the virtual

currencies. There is nothing new about free service model in

the conventional system of economics because it has been

used as tool for rapid growth in Media and Retail banking9 See Directives 2006/48/EC of the European Parliament relating to businesscredit institution and Articles L521-11 and the following articles of theFrench Monetary and Financial Code.

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sector from many years. But the significance of free service

in the digital economy is more prominent because it lowers

its marginal operating cost and expands the traction. Free

Services attracts the users who are reluctant to pay for

online access because requiring payment strategy will

deflect a substantial proportion of online traffic and

interrupt the user’s experience.

When company chooses to apply freemium design to

breakthrough its traction, revenue and appropriate profits

can be attained later. Facebook applied this analogy and

didn’t expand its sales of advertising tract until unless it

had succeeded in attracting one billions users to its

platform.

Seeking returns on capital as capital gains rather than

from operating revenue is not successful strategy for all

digital entities. But by choice or necessity, many of them

haven’t changed their initial business model (example,

Twitter or Instagram reached highest sales without subsequent

revenue), which was designed to attract traction.

However, such loss-makers are usually the subsidiaries of

large dominant groups and they cover the losses of these

companies by devaluating against the consolidate earning .

Eventually, it reduces the group’s overall effective taxable

income and the companies there by pays less than the law

mandates. The rise of non-monetary transactions and its

transformation of value chain make it strenuous for the tax

system to capture the digital economy.

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1.2.7 The Rise of virtual currency also has the lurking

effect on taxation. Issuance of these virtual currencies is

not regulated by central banks but by the private institutions

that may or may not be a profit organisation. The

fundamental principle of virtual currency is to make

commerce more fluid and accelerate circulation even in the

midst of liquidity from the world financial

institutions.10 An experience with alternative system of

currency is proliferating all around to promote customer

loyalty programmes in the form of coupons and miles

(Airline loyalty points). The rapid expansion of these

exchanges (trans-nationality) raised an intricate tax issues

with regard to VAT and Corporate income tax and skipped

from the grasp of national laws.

10 SANTRA MOATTI, Alternatives Economies, July 2006, http://www.alternative-economiques.fr/

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CHAPTER- II

PE CONUNUDRUM IN INTERNET-ENABLED ECONOMY

Article 5 of the Model Tax Convention on Income and on Capital

determines the general provision which lays down that right of

income taxation to those communities which served as the

origin of the income by virtue of providing the economic life

that made possible the yield or acquisition of the wealth.11 In

other words, taxable income needs to be attributed to place

where the value-creating activity is incurred. This concept

comes up with an assumption that the creation of wealth in any

specific place would require a physical existence in that

jurisdiction. The further interpretations to this provision in

the form commentary created more ambiguity and confusion

relating to the ambit of permanent establishment (for

instance, insertion of clause ‘at the disposal of’).

Hence, the long-running PE concept of OECD Model Convention is

periodically camouflaged by the developed countries (dominant

economic group i.e. US, UK and Germany) with narrow reading,

to support their capital exporting strategies (taxing rights

applying to company’s country of residence).12 With emergence

11 PE and Internet Enabled Enterprises: The Physical Presence and Contract Concluding Dependent Agent Tests, Gary D. Sprague & Rachel Hersey, 38 Ga. L. Rev. 299.12 Ibid. Tax notes

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of internet enabled economy, the companies started adopting

internet based business models to perform their functions

remotely by disseminating the goods and services. Due to which

the well-articulated attack on the deficiency of PE concept is

now emanating France, one of the pillars of the European Union

and in other dominated economies. “If France is talking about

digital tax, the tidal wave is coming right over the top,”

said Patricia Brown.13However, while the developed countries

have shifted to the importation side of the spectrum, but the

taxing rights have not followed suit.

At the core of the argument to change the approach to PEs is

the nature of data collection and the role that data plays in

value creation in the digital economy.14

A company's use of data collection now allows it to maximize

the value of its products and services by aiming on how its

users interact, so it can tailor advertising, customise its

product, and customise its prices, among other things. This

data can then be rebuilt and reused, creating further value

down the line. To a certain extent, this work is being done

for free by the user and creating value for the intangibles

parked in tax heavens.15 This process blurs the line which

separates consumption from production.

The State of Play

13 According to Patricia Brown of the University of Miami School of Law,speaking at the ABA/IFA Meeting.14 DE is creating PE conundrum, International Tax Review,http://www.internationaltaxreview.com/article/15 Ibid. ITR

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The OECD changed the commentary, a decade ago, on article 5 to

state that while server in place for long duration could

establish a physical presence (PE) unless it is a third party

server(Independent Agent). Mere entry into countries economy

through digital means might not create a PE.16

In the report leading to the further changes to the

commentary, the OECD obliquely suggested that intangibles

created by the information gathering belong to the server.17

Separation of data collection from the intangible is

indispensable. The companies cannot exist without voluntary

provided data. The essential customer data are collected in

high-tax jurisdiction and the profits are shifted to the tax

haven jurisdiction by separating intellectual property rights

from economic rights. The Digital economy turns business into

a Money ball game as Collin stated. Hence, no company that

sells digitally pays an appreciable amount of corporate income

tax to customer countries. In support of this proposition, a

couple of French bureaucrats who are commissioned by the

government have reported arguing that digital commerce should

be taxed in the country of residence of the customer because

the product is transformed when the customer uses it.18 As

Patricia Brown stated there shouldn’t be a PE in a particular

16 See OECD model commentary on article 5, paragraphs 42.1 - 42.1017 See OECD Technical Advisory Group on Monitoring the Application ofExisting Treaty Norms for the Taxation of Business Profits, ‘‘Attributionof Profit to a Permanent Establishment Involved in Electronic CommerceTransactions’’(discussion paper 2001).18 See http://www.forbes.com/sites/singularity/2013/01/28/corporate-tax-2-0-why-france-and-the world-need- a-new-tax-system-for-the-digital-age/

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country merely because a consumer is there. But the underlying

statement makes the argument for PE more convincing because

the value creation is different.

There is another question lying behind why collection of

personal information should be considered “preparatory or

auxiliary” under article 5(4) (e) when information gathering

is the whole business of digital based enterprises.19 Cockfield

in his paper concluded that OECD should adopt an economic

presence test for tax jurisdiction.

Well, to reconcile, no digital purveyor has a PE under article

5 of the OECD model treaty. The PE concept is antiquated

because it completely misses the digital economy.

19 See OECD Model Tax Commentary on Article 5, paragraph 42.

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CHAPTER – III

TAX IMPLICATIONS OF DIGITAL ECONOMY

The business model of dominant players in the digital economy

often structured from the inception in a way that allows them

to optimize the tax treatment of their income. The tax

planning of internet enabled corporations is not substantially

different from the tax planning in the conventional

enterprises. However, it is more intense and produces much

greater effects due to strategies of the companies driving

this economy (i.e. nature of their business and key role of

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intangible assets). In the digitalised era, non-resident tax

payers can derive their substantial profits from transacting

with customers located in another country, questions are being

posed on whether the current rules are fit for the purpose.

More importantly, this economy is not confined to given sector

whereas radically spreading to other sectors of the economy.

In other words, as Marc Andreessen quoted, “Software is eating the

world”.20

One of the key pressure areas identified by the BEPS policy

was the application of treaty concepts to profits derived from

the exchange of digital goods and services. It has created

havoc in the international tax system and the shaken the well-

established economies from the base. Therefore, taxation is

having a hard time keeping up with pace of change in the

global economic environment.

3. Inadequacy of national and international tax rules

for measuring digital economy : For the clear

understanding of the impact, we need to look into the European

Tax System and US Tax system.

3.1 International Tax: Characterization & Sourcing

Existing tax law was formulated primarily in a world of

physical goods and in-person services. Today, most of the

transactions performed digitally, which involves

transfers of property (e.g., online downloads of movies)

with limited licenses that are treated for tax purposes20 Marc Andreessen, “Why Software Is Eating The World”, The Wall Street Journal, 20 August 2011, http://online.wsj.com/

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as royalties, rentals or sales, depending on the extent

of the rights conveyed.

On the contrary, there are transactions known as service

transactions which involve access to content or systems

webbed in cloud (only access and for download).

Finally, any of these elements in the transactions may

allow access to other benefits in the form services and

creates exposures within the historic tax structures by

raising various queries like what impact do outsourced

services have on place of performance? For example, if a

US entity operates servers as a subcontractor, US

“effectively connected income” and withholding tax rules

could be implicated where services are purchased by a

customer located outside the US due to nexus created by

servers located in the US.21

A change in the type of transaction and entity earning

income may also affect the withholding taxes levied. For

example, Subpart F implications should be re-examined.

Companies licensing content through a foreign

distribution structure historically may have had US tax

deferral on royalty income. However, if the character of

the income streams changes to services, you must meet

different requirements to maintain deferral.22

3.2 Value Added Tax

For VAT collection, the place of taxation is determined

by the place of supply. The place of supply is where21 Tax issues in the new digital environment, Ernst &Young, www.ey.com22 Ibid Ernst &Young

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client receives the Electronically Supplied Services

(ESS). If a Delaware company provides ESS to a client in

France, the place supply, for VAT purposes, is France. In

addition to, VAT is chargeable on what the client pays,

not what the marketer (seller) receives. So, the seller

must collect VAT on the GSP (gross selling price), not on

the net amount withheld by the payment processors or

platform providers as fee. Therefore, VAT exposure can be

a significant trap for the unwary marketers of digital

content.

But, incomplete harmonisation of common VAT system in

European Countries and complex structured VAT system in

other Non-European countries created hindrances in

measuring the economic value on electronically supplied

services as per the study of Greenwich Consulting23. The

difficulty arises to determine the level of taxable

activity because of improper service rules and lack

uniform VAT rates24 which are harmful for the public

finances and for companies located in the member states.

Additionally, lack of broad interpretation of

electronically supplied services in European Laws

adversely affects the government revenue. As per the

laws, there is an incentive for companies located in the

member state with lowest tax rates and do business from

23 Greenwich Consulting commissioned by the French Senate, October 2009, http://www.senat.fr/24 Provision of electronically supplied services by an enterprise located ina member state to a person that is not liable to VAT residing in anothermember state are subject to VAT in the service provider’s state and inaccordance with the applicable rules in the state.

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those states by selling intangible “objects” (which are

actually services). This approach is adapted by various

digital companies like Amazon or Apple with establishment

of “bridgeheads” in such countries, specifically France.

3.3 Transfer Pricing

A fresh look appeared in the supply chain due to

technology intervention. As an illustration, companies

which deal with entertainment content convert traditional

content into a digital format. The revised and

reformatted content is likely to be marketed, sold and

distributed by other related entities and which

attributes valuable services and marketing intangibles.

Distribution channels for digital content differs from

the channels used for physical goods supply, and that

dramatically upset established transfer pricing analysis.

Tax departments will need to trail the contributions,

cost and locations of both old and new intangibles and

acknowledge their relative values and evolution over

time.

3.4 State and Local Tax (SALT)

The mode of delivery is extremely important and will

precept the imposition of sales tax in a jurisdiction.

Many companies devise ways to monetize new digital

distribution models wherein sellers dealing with new

intermediaries or dealing directly with end-users for the

first time. These changes may raise SALT issues which

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were previously not addressed by the seller before sales/

use tax fronts.

The laws formulated in this area inadequate, but states

are nonetheless moving forward to tap companies for

potential tax revenue. Historically, Media &

Entertainment Company’s content publishers were able to

avoid income tax nexus in states if they were not based

therein. They were protected by the Public Law 86-272 for

income tax purposes, because the approach of sales is

tangible personal property. But there is no clear answer

as to whether the law protects bits and bytes delivered

electronically.25

Furthermore, states are increasingly focusing economic

presence rather than a physical presence as a standard

for nexus which raise question of sales tax collection

responsibilities. Vendor need to determine whether

contractual provisions reallocate economic risk for tax

collection responsibility. Persuading where the customer

is ultimately receiving goods may be challenge. Consider

the customer who has a contract for his smart phone in

New Jersey, but downloads a movie while in Lowa. Is Lowa

tax due on the sale? New Jersey tax? Both? How do the M&E

Company obtain the data necessary for compliance?

It is unclear where the US Supreme Court will stalemate

the constitution line for assertions of economic nexus by

creating threshold limits. Therefore, asymmetrical mode

of sales tax nexus (economic nexus standards or physical

25 Ibid Ernst &Young

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nexus standard) creating ambiguity and chaos in the

business environment.

4. Impact of BEPS policy on developed and developing

countries: The OECD’s BEPS Action Plan is a cordial welcomeof long overdue step forward. It has clearly acknowledged the

seriousness of base erosion in depriving government revenue

and threat to the integrity of corporate income tax. It

provides unique opportunity to nurture the fundamental changes

to prevent double non-taxation of income effectively as well

as to prevent cases of non- taxation or low taxation

associated with TNC’s practices.

The traditional tax models that are used to calculate produce

exponential effects in the case digital economy. This could

lead to adverse tax base erosion in the country where

users/customers of the digital products and services are

based. While this could impact developed as well as developing

countries equitably, the effect on emerging economies, such as

India, which constitute a larger user base could be quite

significant.

Furthermore, it could result in asymmetry in favour of

countries where headquarters and/or ownership of

intangible properties of digital companies exist. Hence,

base erosion is relatively harmful for developing

countries, where tax revenues as a percentage of GDP are

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around half of that in OECD countries.26 Low level of tax

revenues limit states ability to fulfil the basic needs

(fundamental human rights e.g. right to food, education &

health etc.) of the population and stamp out prosperity

of the nation.

As many countries provide a significant user base to the

digital economy, the OECD and the G20 should invite the

other developing countries to participate in the BEPS

project on an equal footing. This mechanism is needed to

be effective as they are usually net capital of importers

of global economy and their interest is vital. By

enabling smaller developing countries to contribute their

interest and their specific context may lead to the

emergence of competing international standards, rules and

multilateral instrument by avoiding uncertainty and

promoting accord for global cause.

26 House of Commons International Development Committee, Tax in DevelopingCountries: Increasing Resources for Development, Fourth Report of Session2012-13, 16 July 2012, p5.

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CONCLUSIONS

Any review of the substantive tax policy, and tax

administration and compliance issues that arise in this area

must be navigated by basic tax policy principles and must also

take into account the technical and scientific characteristics

of the digital economy. A fundamental sway should be

neutrality. Neutrality requires that the tax system treat

economically similar income equally, regardless of whether

earned through digital means or through more conventional

channels of commerce. Magnificently, tax rules should not

affect economic choices about the structure of markets and

commercial activities. This will assure that market forces

alone regulate the success or failure of the digital economy.

The best means by which neutrality can be achieved is through

an approach which adopts and adapts existing principles—with

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required modification rather than formulating new separate

regulations or additional taxes. Recent technological

advancements in the digital economy may appear to be profound

innovations primarily as they have evolved within a relatively

short period of time. However, careful examination may very

well affirm that few, if any, of these emerging issues will be

so intransigent that their firmness will not be found using

existing principles, but appropriately adjusted.

The G20 and the OECD along with other bodies such as the UN

tax committee and the IMF should work with governments in

developed and developing countries, as well as with

independent tax experts, to address the challenges of digital

economy. BEPS Action Plan will require a thorough analysis of

the various business models, the ever-changing business

landscape and a better understanding of the value creation in

this economy.

The OECD action plan pursues to identify the main challenges

that the digital economy poses for the application of existing

international tax rules and develop definite options to

address these challenges, taking a holistic approach and

considering both direct and indirect taxation. Issues to be

addressed include the ability of a company to have momentous

digital presence in the economy of another country without

being liable to the lack of nexus under international law, the

acknowledgement of value created from the genesis of

marketable location-relevant data through the use of digital

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Digital Economy

products and services, the recognising the tone of income

derived from new business models, the application of related

source norms and how to ensure effective collection of VAT/

GST.

BIBLIOGRAPHY

The definition defined by the Collins & Collins in thereport ‘Task Force for Digital Economy’.

Refer INSPECTION GENERALE FINANCES, Rapport de la Missiond’evaluation relative au soutien a’ I’innovation, No. 2011-M-060-01,January 2012, http://www.igf.finances.gouv.fr/

Walter ISAACSON, Steve Jobs, 2011,http://www.aspeninstitute.org/ IDEA Project Toward aSingle Global Digital Economy

http://www.google.fr/about/company

Cardiff Garcia, “A US corporate cash update”, FTAlphaville, 14th march 2012. http://ftalphaville.ft.com/

See Directives 2006/48/EC of the European Parliamentrelating to business credit institution and ArticlesL521-11 and the following articles of the French Monetaryand Financial Code.

SANTRA MOATTI, Alternatives Economies, July 2006,http://www.alternative-economiques.fr/

PE and Internet Enabled Enterprises: The PhysicalPresence and Contract Concluding Dependent Agent Tests,Gary D. Sprague & Rachel Hersey, 38 Ga. L. Rev. 299

According to Patricia Brown of the University Of MiamiSchool Of Law, speaking at the ABA/IFA Meeting.

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Digital Economy

DE is creating PE conundrum, International Tax Review,http://www.internationaltaxreview.com/article/

See OECD model commentary on article 5, paragraphs 42.1 -42.10

See OECD Technical Advisory Group on Monitoring theApplication of Existing Treaty Norms for the Taxation ofBusiness Profits, ‘‘Attribution of Profit to a PermanentEstablishment Involved in Electronic CommerceTransactions’’(discussion paper 2001).

http://www.forbes.com/sites/singularity/2013/01/28/corporate-tax-2-0-why-france-and-the world-need- a-new-tax-system-for-the-digital-age/

See OECD Model Tax Commentary on Article 5, paragraph 42.

Marc Andreessen, “Why Software Is Eating The World”, TheWall Street Journal, 20 August 2011,http://online.wsj.com/

Tax issues in the new digital environment, Ernst &Young,www.ey.com

Greenwich Consulting commissioned by the French Senate,October 2009, http://www.senat.fr/

Provision of electronically supplied services by anenterprise located in a member state to a person that isnot liable to VAT residing in another member state aresubject to VAT in the service provider’s state and inaccordance with the applicable rules in the state.

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House of Commons International Development Committee, Taxin Developing Countries: Increasing Resources forDevelopment, Fourth Report of Session 2012-13, 16 July2012, p5.

o https://www.kpmg.com/Global/en/services/Tax/Documents/tax-in-digital domain

o http://articles.economictimes.indiatimes.com/2013-1125/news/44450132_1_white-paper-tax-base-transfer-pricing-litigation

o http://www.business-standard.com/article/opinion/beps- india-in-search-of-a solution/

o http://www.tax.org/www/features.nsf/Articles/ 686B11ADF362660985257BB9004C216E?OpenDocument

o http://timesofindia.indiatimes.com/business/india- business/Paper-out-onevolving-global-tax-policy-trends/articleshow/26362752.cms

o http://www.economist.com/news/leaders/21583994-indias-economy-its-tightest-spot-1991-now-then-answer-be-bold-how

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