What is the digital economy? Who is part of it? What type of goods are sold in one? Companies in digital economies must still pay hard-currency taxes, but to whom?
Data collection, social networking and advertising tech businesses are valued in the hundreds of billions of dollars and have intangible revenues and profits that are easy to shift between countries. Every tax authority wants to be sure to collect its fair share of tax revenue. However, creating a fair model and set of rules to deal with the global digital economy is proving nearly impossible.
There is still such a large gap on what exactly defines “digital economy” that the topic was granted its own special committee at the 2014 OECD International Tax Conference in Washington DC last week.
Does “digital economy” specifically mean global businesses selling a digital product, such as SaaS (software as a service) or data? Or does it refer to the global economy’s adoption of technology throughout its traditional business model, which changes the game for everything from employees to production to customer relations and sales?
Think about self-driving cars or washing machines that send out data from one region to another – these all challenge the concept of territory domain. As one panelist put it, the digital economy is really the innovation economy. And in the opinion of some, we’re all inevitably a part of it.
Before you even scratch the surface, it becomes clear that the “digital economy” combines some of the toughest issues for revenue authorities.
Intellectual property seems to be one of the biggest value drivers. Based on intellectual capital, revenue and profit becomes highly mobile, and a business might not have a physical nexus in the country where product value is created or where the product is consumed. And this is only one example among the endless possibilities of business models to be considered by the OECD.
Consider another example. If a company gathers data through a mobile application or website in one country and then sells that data in another country, the country where the data is gathered does not make any tax revenue. Does this make sense? Or is the real value not in the data itself, but in where the data was sorted and made usable? How do you put value on various countries’ populations? Is there a way to use profit splitting to address this? This conflict is a major challenge, and one that seems to have varied support among the members of the OECD.
Thanks to all of these issues (and more) the OECD is now planning to produce a list of options for managing the digital economy, instead of a fully developed plan as originally intended. In this, the committee will dive deeper into the issue of intellectual property and how to manage it. The OECD has its work cut out as it attempts to define and place controls on the concept of a digital economy which evolves and grows at a pace that seems to lap our ability to understand it. We look forward to the final paper in 2015 to manage a constantly changing environment.
Brian Tully is the vice president and head of transfer pricing at Thomson Reuters.
