Deloitte TaxMax The 45 series Taxation of Digital Economy...The Policy Note set out three proposals...

Deloitte TaxMax – The 45th seriesTaxation of Digital EconomyLarry James Sta Maria and Thin Siew Chi

2Deloitte TaxMax – The 45th series© 2019 Deloitte Tax Services Sdn Bhd

Taxation of Digital Business Models

What is the Issue?

Deloitte TaxMax – The 45th series© 2019 Deloitte Tax Services Sdn Bhd 3

Digital Economy – What has Transformed?

Scale without

mass

Data and user

participationReliance on intangible

assets

Highly digitalised businesses often are highly

involved in the economy of a jurisdiction without

any significant physical presence

Digital business models tend to have a heavy

reliance on intellectual property assets, and are

therefore more mobile

Higher level of value than currently assessed

comes from users’ participation in the digital

activities that some platforms enable

The Action Plan 1 Report do not endorse ring fencing the digital economy and observe that –“Because the digital economy is increasingly becoming the economy itself, it would be difficult, if not impossible, to ring-fence the digital economy from the rest of the economy for tax purposes.”


Tax Challenges of the Digital Economy

Taxable nexus

• Remote supplies of goods and services

• PE / source

• Royalty vs. service

• Withholding taxes(WHT)

•Attribution of income issues

Intangibles

• Valuation / DEMPE

VAT/ GST Collectability

• In-bound B2C supplies

• Registration / Compliance for non-resident suppliers

Income characterisation

Value creation / Allocation of

income


OECD Initiatives

© 2018 Deloitte Tax Services Sdn Bhd Taxation of the Digital Economy 6Deloitte TaxMax – The 45th series© 2019 Deloitte Tax Services Sdn Bhd

2015 - 2018

BEPS Action 1: 2015 Final Report

‘Addressing the Tax Challenges of the Digital Economy’

− Final BEPS Report issued in October 2015

− Few specific direct tax recommendations: VAT/GST recommendations

2018 OECD Interim Report

‘Tax challenges Arising from Digitalisation’

− Released on March 2018

− Further work on ‘nexus’ and ‘profit allocation’

− OECD didn’t recommend specific interim measures

but set design principles

G20 Finance Ministers and Leaders

− In 2017, renewed mandated for the OECD, through the Inclusive Framework, to examine implications of digitalisation of taxation

− Timetable set for an interim report in 2018, and a final report in 2020

The Digitalisation Debate


2019

Policy Note

‘Addressing the Tax Challenges of the Digital Economy’

− Issued in January 2019

− Sets out two pillar approach

Programme of Work

‘Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalisation of the Economy’

− Approved by the 129 members of the Inclusive Framework, and released on 31 May 2019

− Endorsed by G20 Finance Ministers on 8-9 June 2019 in Fukuoka, Japan

Public Consultation Document

− Issued in February 2019

− Comments sought on policy issues and technical aspects

− Public consultation meeting in Paris in March 2019

OECD Progress


Programme of work published and endorsed

by G20

OECD working parties meet throughout

2019

OECD interim report on economic analysis

Final Report---

Consensus-based long term solution

Seeking political

agreement on ‘unified approach’

OECD progress report

Technical and policy details

Core design elements agreed by BEPS Inclusive

Framework

May/June2019

Throughout2019

Oct/Nov2019

Dec2019

end of2019

Jan2020

Throughout2020

End of2020

Timeline 2019-2020


Pillar 1

Revision of the existing profit allocation and

nexus rules

G20/OECD Inclusive Framework – Programme of Work

Two ‘pillars’

Pillar 2

A global anti-base erosion proposal

Work is being conducted on a ‘without prejudice’ basis in line with the Policy Note of January 2019

A number of the proposals would extend to the taxation of all multinational businesses - not just those that are highly digitalised


User participation

Marketing intangibles

Significant economic presence

The Policy Note set out three proposals to expand the taxing rights of user/market jurisdictions by revising profit allocation and nexus rules

• Social media platforms• Search engines

• Online marketplaces

Focuses on digitalisedbusinesses, where a significant source of value is derived from user participation and engagement

There is considered to bean intrinsic link betweenmarketing intangibles and the market jurisdiction

Where there is a purposeful and sustained interaction with the country through digital technology

Pillar 1 - Profit Allocation and Nexus Rules

Policy Note and Public Consultation Document Proposals

All businesses All businesses


GloBE proposal: Permit countries to tax profits where income is subject to no or very low taxation

Two inter-related rules:

Pillar 2 - Global Anti-base Erosion Proposal

Income inclusion rule

• Tax the income of foreign branch/ controlled entity

• If subject to effective tax rate less than a minimum rate

Tax on base eroding payments

• Denial of a deduction; or

• Imposition of source based taxation (including withholding tax)

• Including change in double taxation treaties


Recommendations:

Implement principles of the 2017 OECD International VAT/GST Guidelines, in particular:

Destination Principle

• For determining place of taxation of cross-border supplies• Tax levied only on the final consumption that occurs within the taxing jurisdiction

Addressing Indirect Tax Challenges of the Digital Economy

BEPS Action Plan: Action 1

Challenge:

Collection of tax on continuously growing volumes of goods and services that consumers purchase online from foreign suppliers.


Addressing the Indirect Tax Challenges of the Digital Economy


Simplified Collection Mechanisms

• For effective collection of tax on cross-border supplies of services and intangibles• Simplified processes:

Registration – minimum required information, online registration Input tax recovery and refunds Returns and Payments – electronic facilities Invoicing - Elimination of invoicing requirements, or issuing invoices in accordance with

rules of the supplier’s jurisdiction

Business-to-Business (B2B) - Reverse-charge mechanism recommended approach for collecting the tax at destination.

Business-to-Consumer (B2C) - Non-resident supplier to register and remit VAT in taxing jurisdiction

Recommendations


Addressing the Indirect Tax Challenges of the Digital Economy


Next area of focus:

The role of digital platforms in the collection of VAT/GST on online sales

“Digital Platforms/Marketplace/Intermediary” - platforms that enable, by electronic means, direct interactions between two or more customers or participant groups, typically buyers and sellers

• Options for taxing digital platforms:

Fully and solely liable for the tax due on the online sales it facilitates;

Facilitating the tax collection and payment in the name and on behalf of the underlying supplier that uses this platform to carry out its online sales;

Jointly liable for the VAT/GST due on online sales together with the underlying supplier.

Recommendations


Global Unilateral Measures to Respond to the Digital Economy

Measures Content Jurisdiction Status Features

Amendment of Permanent Establishment threshold

Incorporating digital or online factors into permanent establishment threshold

Israel Active from 2016 A comprehensive test of significant economic presence

Slovak Republic Active from 2018 Expanded definition of permanent establishment to include certain online platforms

India To be effective from 2019

Introduction of Significant Economic Presence test on non-resident enterprises to create direct India tax liability

European Union Uncertain Introduction of the concept of taxable “digital presence” or virtual permanent establishment in the EU.

Saudi Arabia Active from 2016 Incorporation of “furnishing of services” in the definition of permanent establishment

Broadening the scope of withholding tax

Expanding Royalties Greece, Philippines, Malaysia

Active from 2016, 2003 and 2017 respectively

Recognition of payments for the right to use software virtual images, or sound transmission as Royalties

Withholding tax on technical service fee

An increasing number of countries

Active from 2010 Specific provisions in tax treaties to tax technical service fee as passive incomes

Introducing sectoral turnover taxes

Equalisation levy India Active from 2016 6% charge on gross consideration paid for online advertisement services supplied by non-residents

Levy on digital transactions

Italy Effective from 2019 3% levy on the value of digital services

Interim digital services tax

European Union Uncertain Interim tax on certain revenue from digital activities


E-Commerce Tax Rates and Regulations in selected Asia Pacific Economies

EconomiesType of

Indirect TaxRate Regulations

Australia GST 10% • GST on sales of low value goods to Australian consumers by non-resident e-commerce companies

• This includes, digital products such as streaming or downloading of movies, music, apps, games and e-books. Services such as architectural or legal services

• Registration turnover threshold of AUD 75,000

China Uncertain NA • Chinese tax authority is working on reforming of its VAT system and continue investigating how to tax the digital economy

• For now, China postpones the full implementation of the new VAT regime for products purchased by consumers in the online marketplaces

Japan Consumption Tax

8% • Annual threshold for applicability of this tax is JPY 10 Million• To be charged on all B2C e-commerce transactions delivered by foreign businesses to

Japanese consumers • Foreign companies must register and designate a “tax agent” for themselves in Japan• B2B transactions apply a “reverse charge” mechanism

Indonesia VAT 10% • In 2017, the government stated its intention to add 10% VAT to the price of goods purchase online.

• The e-commerce tax, when implemented, will cover four types of platforms: online marketplaces, classified ads, daily deals, and online retail.

• The Indonesian E-Commerce Association is considering a 0.5% VAT for each marketplace seller. However, nothing has been implemented.

Singapore GST 7% • Currently, any online purchase under 400 Singapore dollars (S$) (US$290.17) is exempt from GST.

• Starting 1 January 2020, consumers will pay GST when buying online services from overseas.


E-Commerce Tax Rates and Regulations in selected Asia Pacific Economies

EconomiesType of

Indirect TaxRate Regulations

Malaysia SST 6%, reduced to 0%

effective 1 June 2018

• SST replaced the 6% GST in September 2018.• Extension of SST to B2B digital suppliers with introduction dates of 1 January 2019

(for certain B2B suppliers) and 1 January 2020 (for certain B2C suppliers).• Malaysia to introduce a digital tax to be applied to both local and international players,

for implementation by 1 January 2020.

Philippines VAT 12% • The Philippines is the only market in the region with an e-commerce taxation applied to local players.

• Since 2016, a 12% VAT is imposed on the total value of online transactions of more than $37,310.

• A 3% VAT is levied on online transactions lower than the threshold.

Thailand VAT 7% • Cabinet approved a proposal to collect 7% VAT from foreign e-commerce platforms with annual income exceeding THB 1.8 billion ($56,000)

• Companies with an overseas presence and earning income from advertising and/or website space rental from Thailand are subject to a 15% withholding tax.

• Currently, vendors outside of Thailand are liable for 7% VAT only if value exceeds THB 1,500 ($45.76)

Vietnam VAT 10% • Foreign e-commerce firms must have a local representative office registered in Vietnam and pay a VAT of 10%

• Individual residents without an establishment e-commerce company in Vietnam are subject to tax if they have annual sales revenue over $4,300.


Taxation of Digital Economy

What is happening in Malaysia?


17 Jan2017

6 Sep 2017

‹

‹

Amendments to the law- to redefine “royalty”- to expand withholding

tax net to coverpayments for servicesrendered outsideMalaysia

16 Mac2018

‹

28 Dec 2018

Withholding tax exemption on payments for services rendered outside Malaysia

‹

‹1 Mar 2019

IRB Practice Notes- to clarify withholding

tax treatment for digital advertising (whether royalty or service fee)

Amendment of Malaysian tax law- “place of business”- expand withholding tax

net to cover non-technical services

Revision of guidelineson taxation of electronic commerce transactions

13 May2019

Withholding tax exemption on royalty paid by individual residents for personal use of software

‹

Corporate Tax


Digital service

Consumer

• Any service that is delivered or subscribed over the Internet or other electronic network; and

• Which cannot be obtained without the use of information technology;• Where the delivery of the service is essentially automated.

Foreign Service Provider (FSP)

• Any person who is outside Malaysia providing any digital service to a consumer; and• Includes any person outside Malaysia operating an online platform for buying and selling

goods or providing services (whether or not such person provides any digital services); and• makes transactions for the provision of digital services on behalf of any person.

• Any person who fulfils any two of the following: Makes payment for digital services using credit or debit facility provided by any

financial institution or company in Malaysia; or Acquires digital services using an internet protocol address registered in Malaysia or

an international mobile phone country code assigned to Malaysia; or Resides in Malaysia

- Billing address- Home address- Recipient’s country selection

Scope of tax

Tax to be charged and levied on any digital service provided by a foreign registered digital service provider to consumers in Malaysia

Indirect Tax

Scope of Service Tax on Digital Services


Effective date

• 1 January 2020

Registration opens

• 1 October 2019 (3 months before the effective date)

Registration threshold

• RM500,000 of total turnover for digital services provided

Rate

• 6% on the value of digital service provided

Service Tax on Foreign Service Providers of Digital Services

Indirect Tax


What Falls under the Definition of Digital Service?

Indirect Tax

Examples of digital services (RMCD Guide on Digital Services)

• Software, applications and video games

– Online licensing of software

– Updates and add-ons website filters

– Firewalls

– Provision of mobile applications

• Database and hosting

– Website hosting

– Online data warehousing

– File-sharing and cloud storage services

• Music, e-book and film

– Provision of music

– Live streaming services

– Including subscription based media/ membership

• Internet based telecommunication

– Cloud-PABX

– VOIP Phone

• Advertisement and online platform

– Offering online advertising space on intangible media platform

– Offering platform to trade products or services

• Online training

– Provision of distance teaching

– E-Learning

– Online courses

– Webinar

• Search engines and social networks

– Customised search-engine services

• Others

– Subscription to online newspapers and journals

– Provision of other digital content like images

– Text

– Information and payment processing services


Key Features of Service Tax Rules on Digital Services

Indirect Tax

Unlike other jurisdictions, Malaysian service tax rules on digital service

covers not only B2C transactions but includes B2B transactions as well

Provision of digital services is not eligible for B2B exemption and intra-

group exemption/ relief

There is no input tax credit mechanism under service tax rules, therefore service tax is an added cost to the

business

Compliance Requirements:

- Simplified Online Registration

- Invoicing and Reporting requirements

- Online Payment

Key Features


• Individual, non-business consumers to pay for service tax as charged by a registered FSP on digital services acquired

• Business customers to pay for service tax as charged by a registered FSP on digital services acquired

• If FSP is not registered and does not charge service tax on digital services acquired, local business recipients to assess if need to self-account for service tax on imported services on a reverse charge basis

How would Service Tax on Digital Services impact Local Service Recipients?

Indirect Tax

B2B Transactions

B2C Transactions


What Lies Ahead?


Key Takeaways - Way Forward

Changes to domestic law and double tax treaties MLI 2.0?

Continued clarification of scope of taxable

digital services

Change in transfer pricing rules

Enforcement efforts by authorities

Income Tax Indirect Tax

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), its global network of member firms, and their related entities. DTTL(also referred to as “Deloitte Global”) and each of its member firms and their affiliated entities are legally separate and independent entities.DTTL does not provide services to clients. Please see www.deloitte.com/about to learn more.

Deloitte is a leading global provider of audit and assurance, consulting, financial advisory, risk advisory, tax & legal and related services. Our global network of member firms and related entities in more than 150 countries and territories (collectively, the “Deloitte organisation”) serves four out of five Fortune Global 500® companies. Learn how Deloitte’s approximately 312,000 people make an impact that matters at www.deloitte.com.

Deloitte Asia Pacific Limited is a company limited by guarantee and a member firm of DTTL. Members of Deloitte Asia Pacific Limited and theirrelated entities, each of which are separate and independent legal entities, provide services from more than 100 cities across the region, including Auckland, Bangkok, Beijing, Hanoi, Ho Chi Minh City, Hong Kong, Jakarta, Kuala Lumpur, Manila, Melbourne, Osaka, Shanghai, Singapore, Sydney, Taipei, Tokyo and Yangon.

About Deloitte Malaysia

In Malaysia, services are provided by Deloitte Tax Services Sdn Bhd and its affiliates.

This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities(collectively, the “Deloitte Network”) is, by means of this communication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this communication.

© 2019 Deloitte Tax Services Sdn Bhd

http://www.deloitte.com/

Date post:	17-Apr-2020
Category:	Documents
Upload:	others
View:	1 times
Download:	0 times

Deloitte TaxMax The 45 series Taxation of Digital Economy...The Policy Note set out three proposals...

Documents