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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.”
Deloitte TaxMax – The 45th series© 2019 Deloitte Tax Services Sdn Bhd 4
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
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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
Deloitte TaxMax – The 45th series© 2019 Deloitte Tax Services Sdn Bhd 7
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
Deloitte TaxMax – The 45th series© 2019 Deloitte Tax Services Sdn Bhd 8
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
Deloitte TaxMax – The 45th series© 2019 Deloitte Tax Services Sdn Bhd 9
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
Deloitte TaxMax – The 45th series© 2019 Deloitte Tax Services Sdn Bhd 10
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
Deloitte TaxMax – The 45th series© 2019 Deloitte Tax Services Sdn Bhd 11
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
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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.
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Addressing the Indirect Tax Challenges of the Digital Economy
BEPS Action Plan: Action 1
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
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Addressing the Indirect Tax Challenges of the Digital Economy
BEPS Action Plan: Action 1
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
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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
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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.
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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.
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Taxation of Digital Economy
What is happening in Malaysia?
© 2018 Deloitte Tax Services Sdn Bhd Taxation of the Digital Economy 19Deloitte TaxMax – The 45th series© 2019 Deloitte Tax Services Sdn Bhd
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
© 2018 Deloitte Tax Services Sdn Bhd Taxation of the Digital Economy 20Deloitte TaxMax – The 45th series© 2019 Deloitte Tax Services Sdn Bhd
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
© 2018 Deloitte Tax Services Sdn Bhd Taxation of the Digital Economy 21Deloitte TaxMax – The 45th series© 2019 Deloitte Tax Services Sdn Bhd
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
© 2018 Deloitte Tax Services Sdn Bhd Taxation of the Digital Economy 22Deloitte TaxMax – The 45th series© 2019 Deloitte Tax Services Sdn Bhd
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
© 2018 Deloitte Tax Services Sdn Bhd Taxation of the Digital Economy 23Deloitte TaxMax – The 45th series© 2019 Deloitte Tax Services Sdn Bhd
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
© 2018 Deloitte Tax Services Sdn Bhd Taxation of the Digital Economy 24Deloitte TaxMax – The 45th series© 2019 Deloitte Tax Services Sdn Bhd
• 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
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What Lies Ahead?
© 2018 Deloitte Tax Services Sdn Bhd Taxation of the Digital Economy 26Deloitte TaxMax – The 45th series© 2019 Deloitte Tax Services Sdn Bhd
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
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