Digital Services Tax (DST) Plans Outside the US

New ways of doing business often challenge tax rules written for a different model. That is a concern expressed for many years by several countries. The concern is that it looks like companies that make money by other than selling tangible goods are profiting by activity in the country, but have no permanent establishment in the country, so owe no income tax. For example, a search engine company makes money when someone uses its search engine because it provides data to the company. And if the user clicks on an ad, the search engine company makes money. But no tax revenues go to the user's country.

The OECD, European Commission and others have been studying this for many years. The AICPA recently released a policy paper that explains the topic, issues and lists what some countries are doing or proposing. See AICPA Policy Report – Taxation of the digitized economy: A policy paper designed to educate, enlighten and stimulate discussion (October 2018).

The UK has also studied this issue and solicited comments on its suggestions. It now proposes to start a Digital Services Tax (DST) in 2020. In November 2017, the UK government released a discussion paper – Corporate tax and the digital economy: position paper; later updated in 2018. The position is that “a multinational group’s profits should be taxed in the countries in which it generates value.”  Also see the UK policy paper – Digital Services Tax: Budget 2018 brief. It states:

 “The DST applies a 2% tax on the revenues of specific digital business models where their revenues are linked the participation of UK users. The tax will apply to: search engines; social media platforms; and online marketplaces. That is because the government  considers  these business models derive significant value from the participation of their users.”

The UK DST will only apply to businesses with at least £500 of global revenues ($650 million USD).

Congressman Brady, Chair of the House Ways and Means Committee, stated his opposition to the UK DST – On 10/31/18, he released the following statement:

“The United Kingdom’s introduction of a new tax targeting cross-border digital services – which mirrors a similar proposal under consideration in the European Union – is troubling.  Singling out a key global industry dominated by American companies for taxation that is inconsistent with international norms is a blatant revenue grab. 

“The ongoing global dialogue on the digital economy through the OECD framework should not be pre-empted by unilateral actions that will result in double taxation. If the United Kingdom or other countries proceed, that will prompt a review of our U.S. tax and regulatory approach to determine what actions are appropriate to ensure a level playing field in global markets.”

Spain has also proposed a DST of 3%.  See DLA Piper Global Tax Alert 11/1/18.

Is a new tax the answer? Can existing income taxes be modified to address where income is generated? How easy it is to know where income is generated? I think technology makes it possible to know the location of the person clicking on a social media ad. The harder question might be where is that income generated for tax policy purposes. That has been a longstanding multistate question - where the costs of performance occur or at the destination, or perhaps some combination?

What do you think?

Digital Economy, Tax Issues and Due Diligence

We've been in the "digital economy" for some time, yet it continues to evolve with new business activities and ways of living. And, we see "old economy" businesses, like Ford Motor, move more into the new economy.

I define the digital economy fom the perspective of how people and businesses engage in it:

• Transacting business with virtual currencies, such as Bitcoin;
• Providing digital goods and services; and
• Transacting business enhanced by the Internet, such as finding customers, including working in the “sharing economy.”

There are numerous federal, state and local tax issues with these transactions usually due to the fact that existing tax rules were not written with these new ways of doing business in mind. 

I've got an article in CCH's Journal of Tax Practice and Procedure (May-June 2015) on "Taxation and Today's Digital Economy," with more details as to the issues.  It also includes a due diligence worksheet that hopefully tax practitioners will find useful.

What do you think? Any additional issues or due diligence tips?

New models challenge tax laws

You may have heard the news report that a women in Omaha, battling cancer, received about $50,000 from strangers after she set up an account with GoFundMe. It was also reported that the IRS is seeking $19,000 of income taxes from her on this amount. [See ABC8, 4/27/15 story and KETV.]

The power of the Internet includes to easily reach many people throughout the world enabling vendors to have a larger market, writers to have more readers, and people seeking funds to potentially raise a lot. Crowdfunding websites can generate funds for many purposes and many of these purposes result in taxable income to the recipient. However, not always. What the woman in Omaha received is a non-taxable gift under the income tax law.

A well-known US Supreme Court defines "gift" for tax purposes (Commissioner v. Duberstein, 363 US 278 (1960)). Per the Court:

"A gift in the statutory sense ... proceeds from a "detached and disinterested generosity," Commissioner v. LoBue, 351 U. S. 243, 246; "out of affection, respect, admiration, charity or like impulses." Robertson v. United States, supra, at 714. And in this regard, the most critical consideration, as the Court was agreed in the leading case here, is the transferor's "intention." 286*286 Bogardus v. Commissioner, 302 U. S. 34, 43. "What controls is the intention with which payment, however voluntary, has been made." Id., at 45 (dissenting opinion)."

Basically, if the giver expects nothing in return and the transfer is not for goods or services provided in the past, it is a gift. Clearly, the $50,000 was given with detached and disinterested generosity. The only tax consequences should possibly be gift taxes to the givers if the gift exceeded $14,000.

But, how does GoFundMe know that the transfers to the person in Omaha were a non-taxable gift to her?  GoFundMe is liable for penalties if it fails to report information under any rules it may be subject to. While the law is not entirely clear on what reporting is required by the crowdfunding sites, it likely issues a Form 1099-K to recipients of the funds because it handled the transfer of funds. 

It would be helpful for the IRS to create a new form or schedule allowing recipients of information returns that may be incorrect or improperly sent, to report them, explain them, AND back them out of their income. This would prevent the IRS computers from finding unreported income when it matches a 1099 with the recipient's return and sends out a notice. The new reporting form or schedule would prevent the computer from doing this.

New approaches are sometimes needed for new transactions and this simple solution should work here.  Congress also needs to update information reporting laws to make it clear to web-based businesses when they are required to issue a 1099 (and which type) for funds they collect and transfer to someone.  This would help many companies today beyond the crowdfunding platforms - for example, Uber, Lyft, Amazon Mechanical Turks, Task Rabbit, and more.

What do you think?

French Task Force Report on Taxation of the Digital Economy

In January 2013, a task force commissioned by the French Finance Ministry, released a "thinking outside of the box" report on new suggestions for taxation in the digital era. This 188 page report was only recently translated into English. Co-author of the report, Nicolas Colin, has allowed me to post this English version on my blog - here.  You may have seen Mr. Colin's summary of the report he posted on Forbes blog in January 2013 ("Corporate Tax 2.0: Why France and the World Need a New Tax System for the Digital Age").

I'm still reading through the English report, but wanted to share an introduction to the report now. I refer to the report as "out-of-the-box" thinking because the authors raise some points that I have not heard discussed elsewhere. Also, an economic shift, such as from the industrial era into the digital or knowledge era, should lead to some rethinking of tax systems - are they are in need of modernization (hence the title of my blog - 21st century taxation).  When we have bits and bytes moving across borders, perhaps the tax rules need to be different from the existing ones focused on moving widgets across borders.

I think the report will lead to a broader discussion of what international taxation should look like today.  Certainly, there is a lot of discussion going on regarding this topic in Congress and the OECD.  For example, Congressman Camp, chair of the House Ways and Means Committee, has a proposal to move to a territorial system. In February 2013, the OECD issues its BEPS report (Base Erosion and Profit Shifting) which should get further discussion by the G-20.

Well, back to the French report ... Three key themes/ideas:

•  Today, some companies, such as Google, can gather lots of data from citizens and companies in a country, but do not have tax liabilities there, even though it looks like they are at least virtually present. So, consider redefining permanent establishment for the digital age. Perhaps places where data is generated for use by the company should be a PE.

• Alternatively or prior to a PE change, consider a Pigovian tax on use of resident’s data if the company does not “comply with stronger privacy and user empowerment requirements” (aim is also to encourage the company to so comply so they won’t owe the tax).

• Reform R&D tax rules and definitions to better focus on the digital economy and its growth.

I had the opportunity to talk with Mr. Colin in October 2012 when he visited Silicon Valley to meet with people to discuss his ideas and learn more about the digital economy from perspectives of folks here. We had a very enjoyable discussion.  And it helped me think of a few tax ideas to explore. Be sure to see Annex 2 of the report for a long list of people the authors consulted with including the tax director of Google.

I encourage you to review the report. It addresses issues that we will likely hear more about from Congress and the OECD and that are important for reform of the U.S. tax system.

What do you think? Any "out of the box" ideas you have for a sound tax system for the digital era?