Digitalization and Taxes: Digital Economy

In the last part of our series on "Digitalization and Taxes," we've shown you which state services in the tax sector can already be handled electronically. Today, we discuss the challenges that digitalization of the economy poses to tax collection.

Business models are changing

‍Tax collection from companies has until now been fundamentally straightforward: A company interacts with customers in a country by having a physical presence, an operational site there. This is where revenue is generated and value created. The state where this operational site is located then taxes the revenue generated by this company. This principle of taxation is applied internationally.

The advent of the so-called digital economy, however, brings challenges. Because today, companies no longer necessarily need a physical presence in a country to do business there. Interactions with customers often occur only electronically. A physical presence would merely generate costs, which can easily be avoided. The respective countries where these companies do business see none of the corporate taxes, as these flow to the countries where the companies have their physical headquarters.

‍Netflix Tax

‍Some countries have therefore decided on temporary measures to prevent the complete outflow of this tax base. Australia, Japan, New Zealand, Russia, South Africa, and Taiwan, for example, have introduced a so-called "Netflix Tax," which can be classified as an expansion of the value-added tax. However, all these regulations are not meant to be permanent, but only short-term solutions. What is needed are uniform and internationally applicable principles. You can learn how they might be structured in our next article.

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