Taxation in the digital economy
New digital business models pose challenges for legislators on how to tax these services globally. Companies also need to pay attention to new tax obligations arising from the growing convergence environment between the physical and digital worlds.September-November | 2018
Paying taxes has never been a simple task, but it has become increasingly complex as the global economy develops and convergence intensifies across sectors, integrating operations that formerly occurred only in the physical environment and are now more and more connected to digital platforms. It is not a novelty that companies install themselves on foreign countries and, therefore, must have a global tax collection system. Nevertheless progress in digitization has made the environment more uncertain: how to collect taxes from a company that are based in a particular country but sells services or products online abroad without having a physical presence in other countries? What taxes should be collected? And who should collect these products? The authorities from the company’s headquarters or from the customers? What’s more, what should be the tax structure for companies that offer services that mix across industries such as Netflix or Apple Store?
In Brazil, where there are dozens of municipal, state and federal taxes and contributions, authorities from the three spheres are discussing the subject. In 2017, the Federal Government approved a supplementary bill that extends the Service Tax (ISS), collected by municipalities, to companies that sell streaming (music and video) content. The decision reached Netflix, Google and Spotify, among others. Application and software development stores, such as Google Play and Apple Store, also pay this tax. The law establishes a minimum tax rate of 2%, which avoids a “fiscal war” among municipalities by preventing tax exemptions.
In March 2018, the European Commission issued two directives on taxation of companies linked to the digital economy to solve the following problem: how can the country of the population that consumes digital services receive taxes? According to one of the directives, the idea is that each member of the EU can collect taxes from companies with “significant presence” in the country. This is determined from criteria such as reaching an annual local revenue of €7 million or having at least 100,000 users. The goal is to start this model in 2020. The second directive stipulates that before that, companies that sell user data or offer services related to digital advertising should pay a fee corresponding to 3% of their gross revenue. In this stage, the production of digital content and online payment service companies are excluded from the taxation.
“Taxation for online content companies is incipient and there will still be a lot of discussion around this topic”, says Gustavo Rotta, Deloitte’s Tax Consulting partner in Brazil. According to the expert, the next discussion will be around the levy of Tax on Circulation of Goods and Services (ICMS), a state tax on these same products and services. “As the ISS is municipal, the states want to tax this market”, says Rotta.
Several companies in one
The new digital economy is leading to a growing convergence between sectors of the same company. This trend forces them to change the way they structure themselves. An example is the automotive sector. Until recently, the automaker business was, in simple terms, buying parts from multiple suppliers and putting them together on one production line – that is, assembling cars. New business models are putting this model in check. To survive, automakers are developing shared car services (something like Uber). And the development of self-driving vehicles will create an industry of embedded technologies and applications.
There are examples in other sectors. One of them is agribusiness, where input producers and service companies come together around the concept of “precision farming”, which uses digital technologies like Internet of Things, big data, drones and satellites to increase productivity in the field. In this convergence, a new business structuring corporate model can make sense, says Rotta. It would be something like joint ventures or consortia, now common in public service concessions (such as airports) and infrastructure works. “In a scenario of convergence of services and products within the same company, this model can be adopted.”
These advances lead to changes in tax compliance. For example, if a company that works on B2B starts acting on B2C, the tax model changes. This happens when a manufacturer of a particular product that sells to retailers opens an online channel to serve the end consumer. “Whenever companies change the way they act, they need to adapt tax compliance, since the system was set up for a reality, which will be different after the change” says Rotta.
Last year, the manufacturer of computers and notebooks Acer went on to sell to institutions in the area of education – something that, for a layman, may not represent any relevant change. “By coming out of the retail sales, the tax classification may change”, explains Roberto Cabrera, head of Finances at Acer. Cabrera explains that the tax treatment can vary if it is a public or private school and if it serves students with some special needs. “Not paying attention to this can cause us to lose tax incentives, which is something relevant to the business.”
Whenever companies change the way they act, they need to adapt tax compliance, for the system was set up for a reality, which will be different after the change., Gustavo Rotta, Deloitte’s Tax Consulting partner.
As in disruption scenarios, fears arise. When changes occur in the tax law field, the sense of legal uncertainty is big. “There is discomfort among taxpayers, who do not know who they should collect taxes for, or whether they should collect taxes at all”, says Rotta. The fear increases because many decisions are retroactive, that is, they do not come into effect from the date of the decision, but from an earlier period. Depending on the amount to be paid, it can compromise the companies’ results. “As there are 27 states and more and 5,000 municipalities, we must be aware of the changes.”
Taxes and innovation
In the current economic scenario, innovation is one of the most relevant attributes for competitiveness among countries. Tax incentives play a key role in consolidating an innovative country. In 2017, Brazil ranked 69th in an innovation ranking with 130 countries by Cornell University, United States, Insead and the World Intellectual Property Organization (WIPO).
For the Deloitte specialist, incentives to innovation in Brazil are very focused on industrial products. An example is the IT Law, which removes the collection of IPI (Tax on Industrialized Products) on computers, but offers no incentive for software or applications. “Brazilian laws are focused on encouraging manufacturing”, explains Rotta. “In the 21st century, we need to encourage the production of digital software, applications and services.” That is, the tax system must act in favor of the production of wealth – and be aware of the changes that the world has been going through.
“Convergence has made the tax area work together with other sectors of the companies”
Interview with Roberto Cabrera, head of Finances at Acer
What has changed for tax professionals with the greatest convergence brought about by the new technologies?
Today, professionals are more specialized in technology and are more attentive and up-to-date. Moreover, they have the perception that, without this knowledge, it is difficult to perform in the area. They also have greater information sharing culture and ease of working in conjunction with other areas.
What about the work itself?
In the past, the role of (the tax area) professional was more reactive – we worked to avoid problems and mitigate risks. Risks are an inherent part of the business and working in managing them is still important. But today, the work is more focused on the ‘core business’. The professional can work in a more consultative manner; is more focused on serving the company, helping with business and generating value. They work with teams from other areas. In our case, with the product, engineering or sales teams. We need to understand new products, how they work, who they are directed to and how best to fit them into the Brazilian tax structure. As the tax issue poses a great challenge for companies, positioning and classifying the product in the best way is an important contribution.
Can you mention an example?
Until last year, tablets and notebooks were two different products for the Tax Authorities and received different tax treatment. But, in essence, they have similar functionality. As a result, the Tax Authorities began to classify the two products in the same way.