In today’s world, due to advancement in the information and communications technology (ICT) the economy is seeing a transformation that has made technology more powerful, cheaper. It has brought about change in business processes and has bolstered innovation in most of the sectors of any economy which includes the traditional industries. Now, sectors as dissimilar as media, retail, agriculture and manufacturing are impacted in some way or the other by this fast digitalization. For instance, in the broadcasting and media industry, increasing the importance of data via user-generated social networking and content have allowed the internet advertising to beat the television as the largest medium of advertising.
With the global economy going digital, it was inevitably difficult for building taxation policy which can be followed globally having global consensus and translating it into practical taxation policy for every country.
Digitalization is inescapable that makes it difficult to ring-fence the entire digital world from the remaining economy, even for the tax purposes. It is one of the findings with respect to the taxation challenges faced in a digital economy which is agreed by all members of G20 and all the OECD nations, under the BEPS (Base Erosion and Profit Shifting) Project. Base Erosion and Profit Shifting are taxation strategies which allow ME (Multinational Enterprises) for shifting profits from locations where actual value creation and economic activity takes place, to a lower or non-tax locations.
This challenge has only deepened with today’s burden over the governments with respect to offering tax incentives for developing the national digital economies and for levying newer taxes for deriving much-required revenue. This challenge is aggravated across all the industries which are rapidly digitizing the business models in the hyper-competitive markets globally.
Targeting tax avoidance
Governments have joined hands collectively and individually for setting up a tone for digital taxation which would stress caution against tax evasion globally.
Companies whose value is progressively demarcated by their IP (intellectual property) are stressed for rethinking over their value chains globally, regarding the uncertainty with respect to treatment of the software and patents at the heart of their services and products which they commercialize globally. The subsequent struggle is such that if a country provides intellectual property tax incentives for onshore location, companies which try to reap advantage from such tax breaks can find themselves called into question publicly in the other country.
Such tone has triggered response across the business community. The probability must be understood that excessively strict regulation might force the economic activities out of nations.