How to tackle tax challenges of the digital economy

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Tax advisory and tax compliance

The spread of digital economy challenges the very structure of transnational taxation.

The traditional concept of Permanent Establishment (“PE”) elaborated by the international taxation requires the existence of an even minimum material or personal nexus to the jurisdiction demanding the imposition. Digital economy is able to establish relations with consumers in a country without having to establish any links identifiable as typical of a traditional PE in that country.

To this purpose OECD, in its Deliverable Action 1, modified the current definition of PE, introducing the concept of significant economic presence. Such concept excludes the material and personal presence and is based on the importance of the transactions carried out with counterparties of the state of source. The issue of the digital tax is connected with the difficulty to tax the profits made in the state of source. Ultimately, the changes in the taxation system proposed by the national and international institutions try to concentrate the imposition where the consumers live, regardless of the existence of a traditional fixed place of business.

Nonetheless, digital economy is difficult to catch without incurring in collateral damages (for instance, drops in investments or increases in prices) which eliminate the positive effects of taxation. The experience shows that systems that are creating the conditions are taking advantage of the digital economy, including an imposition on the attracting society, in favour of the spontaneous establishment of digital economy companies.

Digital economy is far from got caught up by the classical schemes of the international taxation or by new forms of imposition whose overall effects are not easy to evaluate. It radically challenges the traditional taxation and the national States based on the physical control of territories, that concern the way the fiscal sovereignty is conceived and the myths of the fight to the tax competition as a negative phenomenon.

Davide Attilio Rossetti is a member of the Research Group “Enrico Gustarelli” for corporate taxation of Bocconi University and partner of Morri Rossetti e Associati – Tax and Law Firm. The author would like to thank Dott. Davide Vecchione for his contribution to the text.