death of the alp in a digital world going the way of the...

All Rights reserved © Sam Sim 2019

FIT Mumbai 2019

Death of the ALP in a Digital World – Going the Way of the Polaroid?

Sam Sim

Research Fellow, SMU Center for Artificial Intelligence & Data Governance

Updated from Research at Vienna University


Framework

1. Align Taxation to Value Creation

2. Value is Created by Data and User Participation

➢Significant Consumer Engagement

3. Nexus = Who can Tax vs TP = How much to Tax

➢Apportionment vs Valuation

➢Arm’s Length Principle as an objective valuation method➢Commensurate with income, marked to market, fair market value

2Source: https://hbr.org/2019/11/how-should-we-measure-the-digital-economy


Target Significant Consumer Engagement – Justified?

3Source: McKinsey


Targeting Consumer Facing Taxpayers – Justified?

4


Online Consumer Facing Platforms Predominate

5


Targeting Consumer Facing Taxpayers – Justified?

6


Why Only Align Corporate Income Tax?


Rates Trending Down

8


Redesigning a Smaller & Smaller Slice?

9Source: https://www.oecd.org/tax/tax-policy/about-global-revenue-statistics-database.pdf; https://taxfoundation.org/publications/sources-of-government-revenue-in-the-oecd/

https://www.oecd.org/tax/tax-policy/about-global-revenue-statistics-database.pdf


Corporate Tax Relative to Other Taxes

10


True Challenge to the ALP

➢Formulary apportionment cf CCCTB experience

➢You cannot tax what you cannot measure

➢Shaking the Foundation - Classical economics free market a) Tangible vs Services and Intangiblesb) Technologyc) State Capitalism



Value Creation in A Digitalised World- Data and Active User Participation


US - China – India Interests Converge as They Dominate the Global Digital Economy

13All rights reserved 2018 Sam SIM

Internet users/Mobile phones (US cf China): 293m, 252m cf 829m, 783m


India – AI Superpower with Global Reach

©TYSim

India produced a whopping 2.6 million STEM graduates in 2016, second only to China and more than 4 times the graduates produced by USAhttp://niti.gov.in/writereaddata/files/document_publication/NationalStrategy-for-AI-Discussion-Paper.pdf

Indian immigrants leading companies such as Adobe Systems, Nokia, Global Foundries and Mastercard, Google (Pichai) and Microsoft (Nadella), Amazon (SVP Amit Agarwal, part of Bezos’ S-team)By 2012, nearly 16% of start-ups in Silicon Valley had an Indian co-founder even though Indians represented just 6% of the region's populationhttps://www.latimes.com/business/la-fi-indians-in-tech-20150812-story.html, https://timesofindia.indiatimes.com/city/bengaluru/amazon-india-head-is-now-global-senior-vice-president/articleshow/57681203.cms

Top 5 of the Foremost 50 India AI developers Hedgehog Lab – Newcastle, UKThirdEye Data – Santa Clara, USAKnoldus Inc – CanadaHubspire – New YorkQuovantis Technologies – Pasadena, USAhttps://themanifest.com/in/artificial-intelligence/companies

http://niti.gov.in/writereaddata/files/document_publication/NationalStrategy-for-AI-Discussion-Paper.pdf

https://www.latimes.com/business/la-fi-indians-in-tech-20150812-story.html

https://timesofindia.indiatimes.com/city/bengaluru/amazon-india-head-is-now-global-senior-vice-president/articleshow/57681203.cms

https://themanifest.com/in/artificial-intelligence/companies


17https://www.statista.com/topics/2157/internet-usage-in-india/; https://www.ibef.org/uploads/industry/Infrographics/large/Ecommerce-Aug-2018.pdf

460m internet users, India is the second largest online market, ranked only behind China and above the US. Only 26% penetration with much greater growth potential

Number of Internet Users end 2017 (millions)

India – The Other ‘Saudi Arabia’ of Data

https://www.statista.com/topics/2157/internet-usage-in-india/

https://www.statista.com/statistics/262966/number-of-internet-users-in-selected-countries/


“Oil Producers” of the Digitalised World

18


https://www.vox.com/2018/5/30/17385376/mary-meeker-kleiner-slides-code-conference-chinese-tech

China – Low "Extraction Costs”?


Tempering the Exuberance – Refining the New ‘Oil’

©TYSim

UK Treasury Paper – ‘The Economic Value of Data’

a) Data is ‘non-rivalrous’ - single piece of data can be used in multiple algorithms and applications at the same time. > means difficult to establish the rights to use, exclude and transfer data.

b) Data can generate positive externalities - While data can reveal new findings and insights if it is aggregated, linked and analysed, the benefits might not be directly foreseeable and may not always accrue to the data creator or controller. As a result, valuable data may be under-exploited or under-share

c) Data exhibits economies of scope - Merging two complementary datasets may produce more insight than keeping them separate. Means that the potential value of data may not always be foreseeable to the data controller

Source: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/731349/20180730_HMT_Discussion_Paper_-_The_Economic_Value_of_Data.pdfhttps://hbr.org/2016/09/bad-data-costs-the-u-s-3-trillion-per-year

Data Curation a DEMPE function? Harvard Business Review/IBM: Bad/poor quality data cost an $3.1 trillion yearly in the US (2016)50% —time that knowledge workers waste in hidden data factories, hunting for data, finding and correcting errors, and searching for confirmatory sources for data they don’t trust.60% —time that data scientists spend cleaning and organizing data

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/731349/20180730_HMT_Discussion_Paper_-_The_Economic_Value_of_Data.pdf

https://hbr.org/2016/09/bad-data-costs-the-u-s-3-trillion-per-year


One Cannot Tax What One Cannot Measure

Let the Market Speak- 3rd Party Arm’s Length Transacted

Value of Data and Users


What Value – Data & User Participation ?

©TYSim

World Economic Forum: Global data economy is pegged at $3 trillion. The fundamental issue “Who owns the data and has intellectual property rights on it”? Forbes Technology Council: Over 4% of all jobs in the U.S., along with over 5% of national output, come from the contribution that data makes to the economy.Europe: every new data center built drives between £397 million and £436 million a year in new value for a country.

Source: https://www.weforum.org/agenda/2017/09/the-value-of-data/https://www.forbes.com/sites/forbestechcouncil/2018/10/03/how-to-realize-the-value-of-your-data/https://hbr.org/2016/09/bad-data-costs-the-u-s-3-trillion-per-yearhttps://medium.com/permissionio/how-much-is-your-data-worth-c28488a5812e

https://datamakespossible.westerndigital.com/value-of-data-2018/dawn-of-data-marketplace/

Accenture

Value of Personal DataWordstream, in 2017, the average cost per Google AdWords click was $2.32. Dark Web (KeeperSecurity.com)Bare details of a credit card (name, card number, expiry date) = 0. Add in the owner’s address and email or diver’s license = $20-$25. 1 debit card, 2 credit cards, driver’s license, email, physical address = $100. Netflix password = $3.00. Spotify password = $2.80. Bank account with $15,000 or more password = $1000. Complete medical record = $1000Breach of personal data- insurance company paid 75,000 users $100 per person

https://www.weforum.org/agenda/2017/09/the-value-of-data/

https://www.forbes.com/sites/forbestechcouncil/2018/10/03/how-to-realize-the-value-of-your-data/

https://hbr.org/2016/09/bad-data-costs-the-u-s-3-trillion-per-year

https://medium.com/permissionio/how-much-is-your-data-worth-c28488a5812e

https://datamakespossible.westerndigital.com/value-of-data-2018/dawn-of-data-marketplace/

https://keepersecurity.com/how-much-is-my-information-worth-to-hacker-dark-web.html


Independent Market View - Value of Data & User Participation

Source: Various Sources; Lyft FORM S-1 REGISTRATION STATEMENT https://www.sec.gov/Archives/edgar/data/1759509/000119312519059849/d633517ds1.htm#toc633517_11

https://www.sec.gov/Archives/edgar/data/1759509/000119312519059849/d633517ds1.htm#toc633517_11


Sense & Sensibility: Value Creation & User Value “Eyeballs”, “Page

Views”, “Clicks”

(Wall Street Dot Com Era analyst reports on internet companies lacking assets)- In a report entitled “Yahoo, Yippee, Cowabunga …,” Mary Meeker asserted that “forty million unique sets of eyeballs andgrowing in time should be worth nicely more than Yahoo’s current market value of $10billion.” Just four months later, the fact that Yahoo’s pageviews had risen 25% topped Meeker’s “five key financial highlights” — above revenue growth and changes in expenditure.

Source: Blood on the Streets by Charles Gasparino on page 65; https://m3publishing.co.uk/how-do-you-assess-the-value-of-a-click/; https://www.adweek.com/brand-marketing/when-procter-gamble-cut-200-million-in-digital-ad-spend-its-marketing-became-10-more-effective/; https://www.kdnuggets.com/2016/06/walker-linkedin-microsoft-value-user-data.html, Silicon Dragon

Market Cap/M&A Value per User(Capital markets, M&A - Jun 2016)

• LinkedIn: $26.2bn acquisition price from 443 MM users = $59.14 per user

• Facebook: $323bn market cap from 1.65 B users = $195.76 per user

• Twitter: $11.01bn market cap from 310 MM users = $35.52 per user

• Google: $401bn market cap on 1.2bn searchers = $334.17 per searcher

• Yahoo: $5bn offer price from 800 MM users = $6.25 per user

VC investment 2010 cf 2018 US – 46.4bn, 111bnChina – 5.6bn, 105bnAlipay, WeChat pay -900m users, Pinduoduo –Social commerce app – 300m users

https://m3publishing.co.uk/how-do-you-assess-the-value-of-a-click/

https://www.adweek.com/brand-marketing/when-procter-gamble-cut-200-million-in-digital-ad-spend-its-marketing-became-10-more-effective/

https://www.kdnuggets.com/2016/06/walker-linkedin-microsoft-value-user-data.html


Shaken not Stirred- Classical Core of the ALP


Questioning the Economic Foundations of TP

1. Classical Economics➢Labour, Land, Capital + X?

➢Functions, Assets, Risks + X?

2. Problem is Dealing with Technology➢Solow growth model, Schumpeter – creative destruction

➢Measuring ICT - Contribution of the information sector as a share of total GDP has barely budged since the 1980s, hovering between 4% and 5% annually and reaching a high of only 5.5% in 2018. To paraphrase the economist Robert Solow, we see the digital age everywhere except in the GDP statistics

➢Micoeconomics level – value of data, user participation, free internet service

3. Free Markets Assumption➢Challenge of State Capitalism



Consumer Surplus by Digital Category


Consumers value some digital categories more than others. Search engines, email, and maps, for example, have no comparable off-line substitutes, propelling them to the top of the list


Economic Freedom of the World: 2018 Annual Report

28Source: https://www.fraserinstitute.org/studies/economic-freedom-of-the-world-2018-annual-report


State Capitalism

29Source: https://voxeu.org/article/state-owned-enterprises-global-economy-reason-concern


State-Owned Enterprises – Relevant to Carve-out?

30Source: https://voxeu.org/article/state-owned-enterprises-global-economy-reason-concern


Blockchain – Restoring the Pure ALP?

1. Verified Trust = Cooperative compliance

2. Micro-transaction data yields CUPs, overcome lack of comparables = restoration of pure arm’s length principle

31

Source: IBM Research, Whitepaper Blockchain/DLT: A Game-Changer in Managing Multinational Corporations’ Intercompany Transactions?


Things Fall Apart, the Centre Cannot Hold?

Broad Church that has survived the Test of Time➢1920s to today

➢Trade in tangibles to services & intangibles, served globalization well

➢Three Traditional Methods lack comparables, add Profit Split & TNMM

➢Internet Dot-com Boom-Bust 1990s-2000

➢Mobile Capital: Attribution of Profits to PE

➢Mobile Intangibles: DEMPE

➢Blockchain and the restoration of transactional level comparables

But It is Not A Silver Bullet to Political Determinations32


Sam Sim

33

Education

» New York University School of Law (LL.M. Tax), admitted New York attorney-at-

law

» Cambridge University (B.A., M.A. Economics)

» Singapore Management University (Master in Professional Accounting), CPA

» National University of Singapore (LL.B.), admitted advocate & solicitor of the

Supreme Court of Singapore

Background

» Member, Income Tax Board of Review & International Association of Tax Judges

» Senior Advisor, Vienna University, Global Tax Policy Center

» Research Fellow, SMU Center for Artificial Intelligence & data governance

» Member, UK Chartered Institute of Taxation, ADIT committee

» IBM, Geo-leader, Europe, Middle East, Africa, Asia-Pacific, Greater China &

Japan

» Standard Chartered Bank, Deputy global head, Transfer pricing

» Tax Executive Institute, Regional VP for EMEA, AP and Latin America

22 Faber Terrace, Singapore 129017, Singapore

Phone: + 65 9234 4608Email: [email protected]

[email protected]

mailto:[email protected]


https://www.ibfd.org/IBFD-Products/Asian-Voices-BEPS-and-Beyond

https://shop.wolterskluwer.com.sg/items/2082SS

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Broad Church

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