Marcelo Landeira

How to tax the digital economy

The growing access and use of the Internet, together with the creation of digital business services, has generated a stir to the traditional business models. Consequently, there is a challenge in legal and, above all, tax matters, since the old paradigms are not encompassing these new forms of transaction. We interviewed Marcelo Landeira, Partner of Englobally Argentina, to know what happens with the digital business model and the payment of taxes, globally and locally.

What is the current scenario regarding the taxability of digital services?

The reality is that in many countries, due to the international context, they are experiencing stagnation in economic growth. The China-United States trade war and the crisis in Europe and Latin America mean that these countries do not have all the resources they need to meet their local demands. The digital economy is a source of income, and many countries are not collecting these taxes. In 2013, the G20 Leaders endorsed the ambitious and comprehensive BEPS (Base Erosion and Profit Shifting) Action Plan. BEPS consists in a series of recommendations, which focus on preventing the erosion of tax bases between countries, which is the transfer of profits from one country to another. They are companies that have a physical presence in one country, but their income comes from others. This happens a lot in the digital economy. Working together within OECD/G20 Inclusive
Framework on BEPS, over 135 countries and jurisdictions are collaborating on the implementation of 15 measures to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment
In this context, in 2018, in the United States, the Supreme Court generated a significant ruling in the case of the State of South Dakota versus Wayfair. This is a huge company, online sales, but its physical presence was in another state, so the reality is that South Dakota did not collect taxes.

Finally, the Court issued a decision affirming it is not necessary to have a physical presence to be able to tax an income, but the most important thing is that there is a substantial link, an important trade in the jurisdiction. That is, if there are sales and there are revenues that come from that jurisdiction, you may be required to pay taxes in it. This is a ruling that sets a significant precedent for the United States, where the service of these companies begins to be taxed beyond having no physical presence.

What happens in Argentina?

Argentina is beginning to work in this direction. However, it is challenging to tax companies for these services because they are located in jurisdictions where they do not pay taxes, and even in some cases, they do not have offices in the country. However, last year, in the context of significant reform, the application of Value Added Tax (VAT) to digital services was regulated, and the payment of the tax is the responsibility of the consumer. I think all countries go along that line, try to tax this type of income with indirect taxes. The reality of our country is a reality that is also being approved throughout Latin America.

How do you think it is possible to increase the taxation of these companies?

For me, the easiest way is to tax services to end customers. This is being replicated in many countries on the planet, such as Argentina, the United States, with the ruling I mentioned, France, Italy, Spain. Sales taxes are created because it is complicated to tax with direct income taxes. The G20 group has met in Japan, Osaka, this year, and has ruled that, within the framework of these digital services, a commission will be created to analyze the application of taxes to these services globally. But it is recognized that there are many vested interests. Obviously, the United States has the largest companies such as Amazon, Facebook, Google, but it is understood that for now, the most direct and simple way is to tax where the end-user is located.

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