7º Seminário Internacional de Impostos 7 th International Tax Seminar
Taxation of e-commerce and digital economy Page 2
Welcome Page 3
Disclaimer EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. This presentation is 2015 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are those of the speakers and do not necessarily represent the views of Ernst & Young LLP. This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer s facts and circumstances. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. Page 4
Presenters Artur Braga Ernst & Young Assessoria Empresarial Ltda Partner + 55 11 2573 3121 artur.f.braga@br.ey.com Gustavo Scravaglieri Pistrelli, Henry Martin y Asociados S.R.L. Partner +54 11 4510 2224 gustavo.scravaglieri@ar.ey.com Channing Flynn Ernst & Young LLP Partner +1 408 947 5435 channing.flynn@ey.com Osiel González Azocar Ernst & Young Ltda. Partner +56 26 76 1141 osiel.gonzalez@cl.ey.com Jess Martin Ernst & Young LLP Senior Manager +1 415 894 4450 jess.martin@ey.com Page 5
Action 1 Digital economy The BEPS Project addresses Organisation for Economic Co-operation and Development (OECD) and country concerns about the potential for multinational companies (MNCs) to reduce their tax liabilities by arbitrarily shifting income to no- or low-tax jurisdictions. The OECD focuses its work on 15 target areas or Action Items. Action 1 relates to tax challenges of the digital economy. Description Focus on new business models resulting from the evolution of information and communication technology (ICT) Direct tax concerns Value-added tax (VAT) concerns Identifies the need to adapt controlled foreign company (CFC) rules to the digital economy Permanent establishment (PE) concerns (addressed by Action 7) Status/next steps Complete evaluation after recommendations on all Action Items have been delivered Timing: December 2015 For the time being, no concrete solutions were agreed upon; OECD states that there is need for further work during 2015 to evaluate broader challenges and potential options Potential impacts on digital economy? Increased costs on digital goods products? Tax and operational compliance challenges? How it will impact competitiveness and margin considering the dynamic e-commerce environment? Page 6
Selected local country developments Brazil Open discussions: VAT treatment on transactions carried out by individuals over the internet, such as digital downloads and couch surfing Transaction tax treatment related to cloud computing and digital goods (e.g., bonus points, e-coin) Collecting agent structure not covered by existing rules, leading to incremental VAT exposure Distinction between general services and technical services are still somewhat unclear Treatment of shrink-wrapped software vs. tailor-made still based on case laws: Taxation of finished goods vs. services VAT treatment for downloads of shrink-wrapped software Tax authorities interpretation of withholding tax on cross-border service payment controversial in light of double tax treaties (ADI 5/14: Art. 12, 14 or 7) Page 7
Selected local country developments Brazil (cont.) Ongoing debate on the application or not of State VAT on streaming: communication services Recent tax authorities interpretation: Data centers are considered services and therefore subject to service taxation (Interp. Act 7/2014) Federal authorities issued several rulings stating that under the Presumed Profit Method, shrink-wrapped software is subject to an 8% rate for income tax-basis computation purposes, whereas a 32% rate applies for tailor-made software São Paulo Federal Court: Brazil Argentina treaty technical service fees should be remitted from Brazil to Argentina without withholding tax (Appeal 2015.03.00.001406-1/SP) Cloud computing: considered a service by the Municipality of São Paulo (Consultation 40/2013) Page 8
Selected local country developments Argentina Current lack of tax rules in Argentina for e-commerce businesses; discussions about redesigning tax rules in relation with digital economy Foreign suppliers Permanent establishment The pure exploitation of an app or internet platform in Argentina should not trigger a PE in the country under the rules in force. However, other issues should be considered in order to define its existence. Examples include a foreign app with an office in Argentina engaged in marketing services or a foreign app with an office in Argentina that also collects the revenues for the Argentine market. If a PE is configured, the entity will be subject to all the taxes applicable to Argentine taxpayers. The key factor is to define the appropriate profitability to be allocated to the PE. Page 9
Selected local country developments Argentina (cont.) Income tax WHT Definition of Argentine-source income Exploitation of intangible/platform/software/services? Practical issue with Argentine individuals (end consumers): in practice, payments through credit cards by Argentine consumers to foreign beneficiaries from a practical standpoint do not suffer withholdings; exception: 35% surcharge (withholding) aim at correcting foreign exchange deviations Withholding tax (WHT) rates (if applicable): domestic law 31.5% or potentially 28% // treaty rate: 10% 15%. Deduction of expenses Several challenges regarding income tax deduction in relation to expenses arising from payments to non-residents for digital services; formalities and requirements to be followed Foreign exchange rules Complexity Page 10
Selected local country developments Argentina (cont.) VAT Digital Business to consumer services by non-residents: There is no mechanism in force by virtue of which non-resident suppliers of digital services for Business to consumer transactions pay indirect taxes in the country. Digital Business to business services by non-residents: VAT (import of services) 21% self-assessed and paid by the resident service recipient to the extent it is a registered VAT taxpayer and the service is connected with taxable activities. The amount paid by the local company may be considered as technical tax credit in the tax period immediately subsequent to that in which the taxable event has occurred (reverse charge method). Turnover tax Currently no impact to the extent no PE is configured There are intentions to implement WHT collected by credit card administrators for foreign providers engaged in this type of business (digital products) (for instance, city of Buenos Aires) Page 11
Selected local country developments Argentina (cont.) Argentine companies providing digital services to the region Income tax: Argentine source vs. foreign source for the use or exploitation of intangibles abroad; different opinions by taxpayers and tax authorities Tax credits computation Transfer pricing rules: allocation of intangibles No issues with indirect taxes Foreign exchange rules applicable; exchange rate Page 12
Selected local country developments Chile Chile does not have special tax rules applicable to electronic commerce, internet or digital transactions. The territorial system for income taxation and VAT is not aligned with the development of the business environment. Permanent establishment In absence of a treaty, only the existence of an agent with power to conclude business on behalf of a foreign entity would give rise to a PE. Chile does not have an organic PE regulation on its Income Tax Law. The existence of a collecting agent would not trigger a PE by itself. In the case of treaty countries, a PE may exists if the fixed place of business provision is interpreted extensively. So far, no administrative or judicial precedent exists. Page 13
Selected local country developments Chile (cont.) Withholding tax Chilean source income exists for royalties exploited in the country and services paid from Chile, regardless if they are rendered in Chile or abroad. Royalties: The rates are 30% or 15% WHT, 10% for treaty countries and 0% for standard software (defined as the type of software that does not allow for commercial exploitation or sublicensing). 20% rate for payments related to materials to be broadcasted on TV or cinema, and a 15% rate for edition and author rights is also provided by local regulations. However, the Chilean IRS has considered that the 20% payments for broadcast TV only applies when tangible materials are sent to broadcast the show (not through satellite or digital), and in those other cases, the tax authorities have either applied the 30% WHT for royalties or 35% WHT as services. This interpretation is currently a topic of discussion in the Tax Courts. Services: The rates are 35% as a general rule, 15%-20% for technical assistance or technical services and 0% for treaty countries (Brazil 15%, Colombia 10%). Database access and other internet services that do not imply advice or technical work are subject to the 35% WHT, unless a tax treaty applies. Hosting and housing could also be subject to a 35% tax rate. There is a practical issue with Chilean individuals and absence of withholding. Page 14
Selected local country developments Chile (cont.) Sale of goods Profits from the sale of goods will be Chilean source income if the merchandise is located in Chile from the moment they are in Chilean territorial waters. Deduction of expenses Under general rules, proof of the existence of the service is the main issue. Value-added tax A 19% rate is only applicable to certain services (such as data processing and marketing) if they are used or rendered in Chile. Services rendered by foreign providers are only subject to VAT if they are: i) subject to VAT by nature; ii) not subject to WHT; and iii) rendered in the country. There is a problem with establishing the place where services are rendered and the need of physical (human) presence. In the case of the sale of goods, the same will only be subject to VAT once the goods are legally imported. Page 15
Worldwide cloud computing tax guide Global cloud survey maintaining existing countries and expanding to additional countries This guide was created in recognition that cloud computing is a technology megatrend that affects all industries, from technology companies as cloud service providers, to brick-and-mortar companies using the cloud to reduce information technology (IT) and infrastructure costs. Although there are a number of definitions for cloud computing, EY generally views cloud computing as borderless commercial transactions conducted over a virtual network (i.e., the internet) in which goods or services are provided to a user (related or unrelated) anywhere in the world with access to such network. Due to its borderless and commercially fluid nature, cloud computing can give rise to a number of tax complexities, especially in the cross-border arena. Page 16
OECD report Measuring the digital economy: A new perspective Read online here: http://www.oecd.org/sti/measuring-the-digital-economy- 9789264221796-en.htm The growing role of the digital economy in daily life has heightened demand for new data and measurement tools. This report presents indicators traditionally used to monitor the information society and complements them with experimental indicators that provide insight into areas of policy interest. The key objectives of this publication are to highlight measurement gaps and propose actions to advance the measurement agenda. Page 17
Questions Page 18
Thank you for attending! Page 19