1 september 2015 ciat rome 2015 the inspection role in tax administration fiscal control of digital...
TRANSCRIPT
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September 2015
CIAT
Rome 2015
The Inspection Role in Tax Administration
Fiscal Control of Digital Economy
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SummarySummary
1. Business models of digital economy
2. Tax connection and revenues assignment
3. Characterization of the services provided by the internet
4. Payments to non-residents
5. Challenges in controlling digital economy companies
6. Conclusion
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Business models of digital economyBusiness models of digital economy
Key features of the digital economy: How companies can add value?
How companies make profits?
How are the concepts of source and residence related to business models?
How are characterized the earnings for tax purposes?
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Business models of digital economyBusiness models of digital economy
Taxes involved: Direct taxes (on corporative income)
Indirect taxes (VAT on the commercialization of goods and services)
Customs duties on importing goods
Special taxes (excise tax)
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Business models of digital economyBusiness models of digital economy
Digital economy coverage: E-commerce of goods
App Stores
Advertising and marketing
Cloud computing
Payment services
Participative platforms
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Business models of digital economyBusiness models of digital economy
Digital economy evolution: Companies adapt their business and market it on the
network
Expansion of information and communication technology
Companies digitally born and new business models
The mobility of intangibles and multinational companies functions is strongly enhanced
BEPS phenomenon exacerbation
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Business models of digital economyBusiness models of digital economy
Businesses that benefited from technological innovation: Retail
Transport and Logistics
Financial services
Manufacturing and Agriculture
Education
Healthcare
Communication (media and broadcasting)
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Business models of digital economyBusiness models of digital economy
Data and business adding value: Content generated by users
Personal data, browsing preferences, geolocation
Value added that is difficult to measure
Pricing of companies’ value is more visible when start-ups are acquired or the companies are negotiated (merger, acquisition, etc.)
Mass of data is expanded with the “Internet of things”
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Business models of digital economyBusiness models of digital economy
Content: Content produced by professionals with copyrights
Content produced by users without copyrights (videos, comments, products revision, etc)
Important asset to attract audience and advertisers
Platforms built entirely by users
Fundamentals to the network marketing
Content allocation: Paid by the user Paid by the brand owner
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Business models of digital economyBusiness models of digital economy
Mobilities in digital economy: of intangibles: intra-company transfers
of users and consumers: make business anywhere in the world (connection)
of functions performed by the business: technology allows a remote central management of functions spread around the world and the access to markets without physical store (scale gain without large teams)
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Tax connection and revenue Tax connection and revenue assignmentassignment
Permanent establishment (PE):
• Rules foreseen in Art. 5 of the UN and OECD Model Convention
• Companies profit: Art. 7 of the Model Convention
• Specials rules: interest, dividends, royalties and capital gains
BEPS project (Action 1- Digital Economy) Changing the concept of PE (Action 7 of BEPS Project)
Did not defined “digital economy presence” for purposes of characterizing a PE
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Tax connection and revenue Tax connection and revenue assignmentassignment
Revenue assignment and taxation:
• Need to initially characterize the connection, for instance, as a permanent establishment
• Taxation on the source of certain transactions
• Attribution of presumed profit to permanent establishment:
• Fractional apportionment: fractionate the total profit in the light of digital presence. This methodology apparently has low acceptance
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Characterization of services provided Characterization of services provided by the Internetby the Internet
Cloud computing The activity is not mentioned in the comments of the OECD
Model Convention
Many categories of cloud computing, such as the Infrastructure-as-a-Service (IaaS)
The IaaS can be characterized as services (Art. 7 of the OECD Model)
The IaaS can also be characterized as an equipment rental, equivalent to royalties (Art. 12 of the OECD Model) in some tax treaties
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Characterization of services provided Characterization of services provided by the Internetby the Internet
3D printing, consultancy of architects, engineers and programmers:
Can be treated as services (Art. 7 of the OECD Model)
Can be treated as remuneration of technical services that, in some tax treaties, are equivalent to royalties (Art. 12 of the OECD Model)
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Characterization of services provided Characterization of services provided by the Internetby the Internet
Telecommunications network: Internet Service Providers (ISP): operate the Internet
infrastructure and are often geographically restricted
Over the Top – OTT: Companies that operate and offer services on broadband. It uses the existing infrastructure and have global action
Taxation of OTTs: May not be taxable in market countries
Compete in unequal conditions, which favor them in relation to market country companies
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Payments to non-residentsPayments to non-residents
Companies’ revenue in the digital economy Revenues based on advertising
Rent or sale of digital content
Sale of goods, including virtual items
Revenues based on subscription
Sale of services
Content and technology licensing
Marketing of data from users and customized market research
Hidden fees or losses embedded in the operation
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Payments to non-residentsPayments to non-residents
Difficulties in the operation characterization: In the seller identification: it cannot be expected the register
or any type of identification in the market country
In the consumer identification: delivery addresses, credit card information, IP
In the determination of activities extension: amount traded by the non-resident company in the market country
In the exchange of information with foreign countries: due to the difficulty of identifying the country to request assistance
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Payments to non-residentsPayments to non-residents
Online payments services Credit cards (especially in B2C)
Intermediaries: establish a trust relation in the transaction between the client and the supplier (especially B2C)
Intermediaries can be characterized as SaaS (Software-as-a-Service), service offered in the cloud
Others payments options: prepaid cards (cyber-wallets)
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Payments to non-residentsPayments to non-residents
Confusion in the identification of the client: In B2C transactions, the client mobility on the planet can
complicate his localization
In B2B transactions, there may be payments flows that do not correspond to the flow of services provision. Example: consultancy services provision to subsidiaries of a parent company in various countries. There may be a confusion in identifying the localization of clients when the payment is centralized in the parent and the service is delivered in many countries.
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Payments to non-residentsPayments to non-residents
Digital economy structure in levels In digital economy, the information and communication
technology (ICT) is structured in superimposed levels, being the ICT infrastructure the inferior level, while the superior is the final consumer.
Each level has its hardware, software and peopleware
One company that operates in a level is usually paid by a superior level entity, the one that makes payments to inferior levels entities.
Multiple localizations and difficulty in characterizing services
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Challenges in controlling digital Challenges in controlling digital economy companieseconomy companies
BEPS phenomenon in the digital economy Minimization of taxation in the market country, avoiding to
characterize the taxable presence
Low or non-existent withholding tax
Low or null taxation of company in low-tax intermediary country (intra-group transactions) or with preferential arrangements.
Legal arrangements for non-taxation of a parent company results (residence country)
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Challenges in controlling digital Challenges in controlling digital economy companieseconomy companies
Combating the BEPS phenomenon in direct taxation CFC rules: combat intangibles mobility
New limits on the permanent establishment concept
Transfer of intangibles and transfer pricing adjustments
Exchange of information among tax administrations in relation to businesses and functions performed by subsidiaries and affiliates of multinational companies.
Rules more burdensome for transactions with preferential tax regimes without substance.
Neutralize hybrid instruments and interest payments effects
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Challenges in controlling digital Challenges in controlling digital economy companieseconomy companies
VAT in cross-border transactions The destination principle: tax due in the final consumer
country
Need to identify the country of destination
B2B and B2C transactions: different strategies possibilities of tax collection in the trade of goods and services
Collection timing in the trade of goods VAT on the import of goods: usually charged during the
payment of customs duties.
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Challenges in controlling digital Challenges in controlling digital economy companieseconomy companies
International trade of small value goods: Countries grant exemptions for small values
Cost-benefit to effectively charge low values
Brazil: General rule: only remittances between individuals up to
US$ 50 are exempted. Remittances of goods sent by companies are taxed regardless of the value
One team of five people controls one hundred thousand objects per month
Tax collection effectiveness for small value goods (custom fees + VAT)
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Challenges in controlling digital Challenges in controlling digital economy companieseconomy companies
B2B services trades: Withholding income tax
Relative ease to impose taxation in withholding income tax, requiring the service user to retain the tax
Brazil: intermediary (financial institution) verifies the withholding income tax to carry out the payment transfer to the non-resident service provider
VAT The compliance of VAT legislation can be more complex if
there are taxes to be charged in sub-national level (states or municipalities)
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Challenges in controlling digital Challenges in controlling digital economy companieseconomy companies
B2C services trade: Can drastically reduce the supply chains (wholesalers,
distributors, retailers and intermediaries)
Difficulty on imposing the legislation to the consumer, in case of withholding income tax
Payments usually done by credit card, Paypal and others
Good practice: non-resident registration in the market country, so the VAT can be collected and delivered
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ConclusionConclusion
The digital economy is still an opened theme: Implementation of BEPS Project measures
Monitoring the effectiveness of BEPS Project measures in relation to the digital economy
Domestic legislation: registration of non-resident companies that provide services in the market country
Withholding income tax for digital or electronic services
Future reassessment of the permanent establishment concept (digital presence in the market country)
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Thank you!!!