Taxing the Digital Economy: CIT and VAT

Transcription

1 School of Law Taxing the Digital Economy: CIT and VAT RITA DE LA FERIA Professor of Tax Law, University of Leeds Global Tax and 2016 Outstanding Woman in Tax December 2017 Taxation in the digital Age fair and just, Austrian Federal Chamber of Labour, Vienna

2 OUTLINE I. General Considerations on Taxing the Digital Economy II. III. IV. I. What is the digital economy? II. III. IV. Substantive and enforcement jurisdiction Traditional vs modern tax systems Reactions to challenges Substantive Jurisdiction I. CIT vs VAT II. III. CIT: anti-avoidance measures VAT: allocation guidelines Enforcement Jurisdiction I. Costs of Fraud II. Crime Management in Taxation Digital Economy: Are we ready?

3 GENERAL CONSIDERATIONS ON ING THE DIGITAL ECONOMY Digital supplies / online shopping Sharing economy Digital Economy New economic structures Dominance of intangibles

4 GENERAL CONSIDERATIONS ON ING THE DIGITAL ECONOMY Jurisdiction to Tax Substantive Jurisdiction Enforcement Jurisdiction Legitimacy to tax, i.e. a connection between what is being taxed and the country imposing the tax that is sufficiently strong to legitimise that tax Ability to tax, i.e. whether the country has effective legal and implementing means of collecting the proposed tax

5 GENERAL CONSIDERATIONS ON ING THE DIGITAL ECONOMY Traditional tax systems - Territorial and physical - Clarity on substantive and enforcement jurisdiction to tax Modern tax systems? - Globalised and digital - Unclear substantive and enforcement jurisdiction to tax

6 GENERAL CONSIDERATIONS ON ING THE DIGITAL ECONOMY COUNTRIES THAT CONTRIBUTE TO PRODUCTION OF A SINGLE JAR OF NUTELLA

7 GENERAL CONSIDERATIONS ON ING THE DIGITAL ECONOMY Reaction to Challenges CIT VAT Protection of Status Quo External Pressures Protecting Revenues Internal Pressures Position of OECD and G20 members Budget deficit and austerity measures Media attention and public anger against MNE NGOs and tax lobbying groups Revenue capacity and business cycles imperviousne ss Old and unsuitable rules World spread of VAT

8 GENERAL CONSIDERATIONS ON ING THE DIGITAL ECONOMY

9 SUBSTANTIVE JURISDICTION TO G20 / OECD / EU Reform Proposals CIT VAT - BEPS - Conservative approach - Modifications to existing regimes - OECD Guidelines, VAT 2011 Green Paper - Bold approach - Adoption of new paradigm

10 SUBSTANTIVE JURISDICTION TO OECD Guidelines Soft law, but inclusive process Over 100 countries have signed-up Challenges on implementation New place of supply rules taxing at destination Challenges remain on physicality (PE concept), and supply/consideration nexus EC VAT Proposal DESTINATION PRINCIPLE

11 SUBSTANTIVE JURISDICTION TO ANTI-AVOIDANCE RULES NATIONAL EUROPEAN / REGIONAL INTERNATIONAL GAARS ADAT GAAR BILATERAL GAARS / SAARS TAARS / SAARS TAARS / SAARS BEPS

12 SUBSTANTIVE JURISDICTION TO BEPS Addresses symptoms, not causes of tax avoidance Always one step behind If incentives are not removed, symptoms will reappear

13 SUBSTANTIVE JURISDICTION TO Proposals for Fundamental Reform Formula Apportionment (or unitary taxation) Destinationbased Taxation Used nationally in US, Mexico; proposed in EU, as Common Consolidated Tax Base (CCCTB) Aim: consolidation of MNE profits, piercing corporate veil within group, revenue divided amongst countries involved in generating profits, according to a formula which contains several variables Many difficulties are directed at formula apportionment, mostly based on US experience (designing formula, lobbying, etc) In EU CCCTB process back on agenda, even though economic studies showed negative effects Main disadvantage is need for global agreement Initial proposals for a destination-based tax corporate tax system are 15 years old Breakthrough paper: Auerbach, Devereux, Simpson, (2009) Why would it be better than source or residence-based taxation? What is criteria to evaluate whether it is better?

14 SUBSTANTIVE JURISDICTION TO CRITERIA TO MAXIMISE TOTAL WELFARE MINIMUM DISTORTION TO ECONOMIC BEHAVIOUR to identify a location of taxation which creates minimum distortion to the economic behaviour of multinational companies, to the ownership of assets and to competition between companies selling in the same market; and JURISDICTION TO to identify a location of taxation that has jurisdiction to tax, from both a substantive perspective, and an enforcement perspective (legitimacy to tax, and possible to enforce taxation)

15 SUBSTANTIVE JURISDICTION TO SOURCE VS DESTINATION CORPORATE INCOME VAT SOURCE / REDIDENCE DESTINATION DESTINATION BRAZIL SOURCE AVOIDANCE / COMPETITION? LIMITED AVOIDANCE AND COMPETITION WARS

16 SUBSTANTIVE JURISDICTION TO DESTINATION-BASED CORPORATE Legitimacy Considerations Inter-Nation Equity Considerations - Is connection sufficiently strong to legitimise taxing rights? - Are sales not the real origin of corporate income? - Recent tax scandals involving Starbucks, Amazon or Google highlight significance of this connection - Not to say that destination is more legitimate than source or residence, but as legitimate as - Every tax reform results in gainers and losers - Impossible to say with certainty how revenues would be re-allocated too many variables - Paradigm shift will not necessarily be unfavourable to developing countries: Current international tax system is problematic also for developing countries Many developing countries already have destination rules, particularly on services Sub-Saharan countries import as much as they export Contra-factual is how much revenue collected under current system, but level of imports is still a good indication Countries with strong natural resources have natural resources taxes

17 SUBSTANTIVE JURISDICTION TO

18 ENFORCEMENT JURISDICTION TO POSITIVE DEVELOPMENTS New Technologies Enforcement Cooperation Behavioural Science Non-Cash Based Economy Certified Tax Software Electronic Invoicing Data Warehouses Enforcement Delegation (One-Stop- Shop) Data Gathering and Sharing / Automatic exchange of information Consumer Incentives (lotteries, PIT credits) Nudging

19 ENFORCEMENT JURISDICTION TO But positive developments not yet widespread. In the meantime. Revenue Loss Taxpayer Inequity Fraud Distortions to competition Subsidy to Organised Crime

20 ENFORCEMENT JURISDICTION TO FRAUD AS REVENUE LOSS CIT (1) Tax Amnesties (2) Tax Settlements (1) Penalties VAT (1) Third-party liability (2) Formalism (3) No enforcement on third-country SMEs

21 ENFORCEMENT JURISDICTION TO Combating Revenue Loss Existing Fraud Costs New Costs Does not resolve, and often worsens other costs, particularly inequity Potential decrease in compliance due to moral hazard Rule of Law risks: selective enforcement, aggravated responsibilisation, no mens rea

22 ENFORCEMENT JURISDICTION TO From tax fraud control to tax fraud management Risks of shift Rationale for shift Evidence for shift Difficulties combating organised fraud, so dispense with the problems it poses Costs of prosecuting high-profile cases Public finance difficulties AND public perception of companies has resulted in higher tolerance of dubious practices Excessive formalism, resulting in denial of tax rights Size of penalties beyond what would be reasonable as deterrent Proliferation of tax amnesties Responsibilisation of third parties, even if only remotely connected with fraudster Concerns over public finances used as justification for dismissal of rule of law Eliminating revenue costs of fraud deters combat to fraud, leaving other costs untouched

23 DIGITAL ECONOMY: CIT VS VAT Are Tax Rules Prepared for the Digital Economy? (P/)CIT VAT SUBSTANTIVE RULES No. Ongoing work will not be sufficient to address existing limitations. ENFORCEMENT Not yet. Progress, but focus on revenue loss only is limiting further progress. SUBSTANTIVE RULES Mostly, yes. Great progress achieved in last few years ENFORCEMENT Not yet. Progress, but focus on revenue loss only is limiting further progress.

24 School of Law THANK YOU 7 th in the UK for Law The Times and Sunday Times Good University Guide 2017 University of the Year 2017 The Times and The Sunday Times Good University Guide