Date: April 21 (Wed.) 2021, 14:00-16:00
Location: IEAT International Conference Center Meeting Room 1 (No. 350, Songjiang Road, Zhongshan District, Taipei City)
Li-hsuan Liang, Deputy CEO, NIIEPA
- Andrew C. Hsu, Deloitte Taiwan
- Dr. Shih Chou Huang, Associate Professor, National Taipei University of Business
In this digital age, the internet community not only share opinions but also participate in global discussions about various topics. To fulfill its public responsibility, the Taiwan Network Information Center (TWNIC) established the Taiwan School on Internet Governance (TWSIG) in 2020. The idea is to develop a platform for the Taiwanese Internet community, where people can exchange thoughts and insights on critical issues regarding Internet technologies, economic, social and security, both globally and locally. The goal is to make TWSIG the go-to platform where open, inclusive, and diverse discussions take place.
In partnership with NIIEPA, TWNIC will be holding a series of events throughout the year to facilitate public dialogues on a range of topics. We will be looking at important global Internet Governance issues, and we will try to examine the significance and impact of those issues on Taiwanese society. We also hope that, by encouraging open and inclusive discussions, we will make the multistakeholder model a norm for public deliberation.
The global digital economy is growing steadily; transnational e-commerce has also become an integral part of modern day-to-day life. During the session, the speakers will elaborate on the current development of digital tax and provide an analysis of the potential impact Taiwan is facing.
The first speaker was Andrew Hsu, an accountant at Deloitte Taiwan. Titled ‘Modifying the Tax Regulations in the Digital Age’, his speech was divided to two parts: the taxing challenge of the digital economy and an overview of digital tax in countries and regions across the globe.
Hsu began by explaining the changes the digital economy brings to the global market. These changes can be summarized into four characteristics:
- The blurring of national borders due to the prevalence of transnational transactions.
- The advantage business used to enjoy thanks to the information asymmetry between consumers and vendors is quickly vanishing. The development and global reach of the Internet is the major reason of this change.
- Businesses are increasingly transpassing the existing categories. Corporations operating in several different business areas are becoming more and more common.
- As above, companies are increasingly operating multiple businesses. Especially the big tech companies who are offering various services and tools to their users are now enjoying an advantage almost equivalent to monopoly or oligopoly.
However, Hsu explained that the essence of business had not changed much. Companies want to maximize the profit and minimize the expanse.
After giving the audience an idea of the current market outlook in the digital economy, Hsu talked about digital tax. France introduced its digital tax regulations in late 2019, requiring big tech companies to pay a 3% digital service tax (DST) to the French government. The move enraged Trump and the latter threatened to slap tariffs on French cosmetics, handbags and other imports in retaliation. The DST has been suspended while negotiations on a broader overhaul of the global tax system played out at the Organization for Economic Cooperation and Development (OECD) and so did Trump’s retaliation.
This was an example of how one country trying to impose taxing requirements on companies from other countries can soon turn into a trade war situation between two nation-states. It also illustrated the difficulties of digital tax regulations as the parties who will be paying the tax are never limited within the national borders, meaning that they can bring their complaints to their own governments and lobby the latter to do something at the state level. Moreover, since the big tech almost always have to pay the most tax if the DST ever come into place, the United States has not been happy with this development, claiming this kind of DST arrangement is in fact unfairly targeting the country.
The idiosyncracies shared by the digital economy and digital tax are:
- Mobility. Businesses do not need a physical location to operate and they are able to sell to customers regardless of national borders. As a result, companies are able to arrange and assign different locations in charge of different business functions, which further expands the companies’ scale.
- Reliance on data. Businesses collect data on not only their existing customers but also potential ones. Using the algorithm to analyze the data they collected, companies are able to better target existing and potential customers by figuring out their preferences and purchasing patterns.
- The tendency of monopoly or oligopoly.
The digital economy will continue to accelerate the change of how global enterprises arrange and integrate their cross-national business and operation. In other words, the evolution of how people and businesses trade will not stop and neither does the governments’ search for solutions of collecting digital tax.
Hsu also shared the insights and suggestions from the Organization for Economic Cooperation and Development (OECD) regarding the tax challenges of the digital economy. According to OECD, ‘base erosion and profit shifting (BEPS) refers to tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax.’ In general, developing countries’ reliance on corporate income tax is higher. This means they suffer from BEPS disproportionately. This is why Working the OECD published the BEPS Action Plan. This plan—developed within the OECD/G20 Inclusive Framework on BEPS and by collaboration between over 135 countries and jurisdictions—includes 15 measures for countries to implement to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment.
The first chapter (Action 1) of OECD’s BEPS Action plan explains the tax challenges arising from digitalization. According to this chapter, the global digital transformation has sparked global debates in many legal and regulatory realms and most importantly, the international tax issue.
One of the major issues is whether international income tax rules, developed in a “brick-and-mortar” economic environment more than a century ago, remain fit for purpose in the modern global economy. The fundamental elements of the global tax system determined where taxes should be paid (“nexus” rules based on physical presence) and what portion of profits should be taxed (“profit allocation” rules based on the arm’s length principle) have served their purpose well.
Today, however, the existing global tax system is facing serious challenges. This is due to three significant phenomena facilitated by digitalization: scale without mass, reliance on intangible assets, and the centrality of data. On the one hand, the emerging new and usually intangible value drivers have revolutionized entire sectors and created new business models. As a result, most business does not have to maintain physical proximity to their target markets. This continuously challenges the effectiveness of existing profit allocation and nexus rules to distribute taxing rights on income generated from cross-border activities in a way that is acceptable to all countries. The so-called allocation of taxing right issue arises as a consequence.
On the other hand, multinational enterprises (MNEs) offering innovating technologies and services can better avoid tax through shifting profits to low or no-tax jurisdictions.
Hsu spent most parts of his speech comparing the differences between current digital tax regimes around the globe. He illustrated in detail of Taiwan’s digital tax regulation, including its origin and current implementation problems. It takes an accountant to understand fully what he was saying.
The second speaker was Dr. Shih Chou Huang. Passionate about educating the public, Dr. Huang said in advance of his speech that he has recorded himself with today’s lecture and will be posting the content on his YouTube channel right after today’s event. Hearing from the previous speaker, Huang realized several of his points have already been covered. Therefore, he would be focusing on using examples to illustrate the challenges of digital tax instead of explaining the definition and regulation details.
The first example Dr. Huang gave was Uber. Uber rolled out its services in Taiwan in 2015 without being legalized. To give more context, the San Francisco-based company was licensed to operate in Taiwan as an information service provider, and the fact that Uber was actually providing ride-hailing services via its platform was against Taiwanese law. In other words, Uber was in fact illegally operating a passenger transportation service, an economic sector closed to foreign businesses.
Tax has been the center of contention when it comes to this controversy. In 2015, the company earned an estimated US$620,000 in Taiwan but paid only US$30,000 in tax. That was because Uber’s passengers in Taiwan pay Uber drivers via an app bundled with credit cards that pay to Uber’s office in Amsterdam, bypassing Taiwan’s government. Some claimed that this was not fair to other transportation service providers in Taiwan.
Dr. Huang explained in detail Uber’s business model, basically how it manages to operate globally without having to pay the tax in those countries where it provides services. It was not until late 2020 the Uber finally incorporated in Taiwan and start paying value-added business tax.
Agoda operates in a similar fashion like Uber. The company set up an office in Taipei and hired local employees to sign contracts with Taiwanese hotels without registering as a business. In 2015, The National Taxation Bureau of Taipei (NTBT) fined the company by NT$20 million for violating the Business Tax Law and the Tax Collection Act and for failing to issue unified invoices.
Referencing the OECD’s findings, Huang explained the three characteristics of highly digitalized business models:
- Cross-jurisdictional scale without mass. Digitalization has allowed businesses in many sectors to locate different stages of their production processes across various countries, and at the same time access more customers around the globe. Some highly digitalized enterprises are therefore able to partivipate in the economic life of a jurisdiction without any, or any significant, physical presence. Namely, the companies achieve operational local scale without local mass.
- Reliance on intangible assets, including intellectual property (IP). One of the distinct characteristics of digitalized enterprise is the weigh they put on investing in intangibles, especially intellectual property assets. Many digitalized enterprises rely heavily on IP assets such as software and algorithms to support their platforms, websites and many other critical functions.
- Data, user participation and their synergies with IP. Most highly digitalized businesses are interdepent with data, user participation, network effects and user-generated content. The more information companies collect from users and customers, the more data they can analyze and gain advantage in competition. Social network is the perfect example of how user participation is vital for these highly digitalized businesses. Without data, network effects and user-generated content, the businesses would not exist as we know them today.
Both Uber and Agoda are we call today the ‘sharing and gig economy’. Again referencing the OECD’s report, Huang explained how the multi-sided online platforms play the critical role of facilitating digitalization. Thanks to these kind of platforms. Individual can sell and purchase goods and services without following the traditional business structure.
According to The Sharing and Gig Economy: Effective Taxation of Platform Sellers, the OECD’s report published in 2019, the sharing economy is usually linked with assets and the gig economy with services. Assets and services are often provided together (such as a driver and a car). Common examples are the temporary rental of a spare bedroom, idling apartment or parking space, or providing services such as goods delivery, cleaning services or ride-hailing services.
To be fair, the essence of sharing and gig economy is nothing new in human history. For a long time, people have been practicing the same thing in a smaller scale via word-of-mouth or community advertising and networking. It has traditionally been difficult to tax these kinds of practice due to the difficulty of monitoring and assessing the amount and value of such transactions, not to mention how to identify the individuals involved. And it did not bother the government as much. The fact that the scope and scale is so much larger now while crossing jurisdictions is what brings this to the state’s attention.
The concern is that platform sellers may be less likely than traditional businesses to understand their tax obligations, or that they even have tax obligations. If the government cannot assure effective taxation of such business practices, this kind of informal economy will most definitely grow substantially over time, which can have detrimental impacts on competition and public revenues.
This brings us back to the issue of digital tax. Several countries have introduced national digital taxes, many of which risked invoking tax wars with the US. The OECD started in 2015 to negotiate on a new global tax regime where taxes are not collected where a corporation is headquartered, but where it does business. The G20/OECD BEPS Group recently finalizes its proposal, the so-called “Two Pillar Approach.” Pillar One would establish new rules on where tax should be paid, ensuring highly digitalized global enterprises (such as Amazon, Google and Facebook) pay taxes where they conduct sustained and significant business. Pillar Two introduces a minimum tax to prevent enterprises looking for “tax heavens.”
Taiwan is not a member of the G20/OECD BEPS Group. Can Taiwan learn from OECD’s proposed approach anyways? No one has a definite answer. We do encourage any such discussions invite all relevant stakeholders and policy makers to consult with the public before nailing down the regulations.