Navigating the complexities of tax in the digital age
The Business of Tax Taxing where value is added is becoming more complicated, as digital supply chains stretch across the world.
There is no getting away from two fundamentals; all businesses are now digital, at least in part, and taxing digital businesses creates a new set of challenges.
Getting a better understanding of these new, complex issues is not only necessary for current tax liabilities and compliance today, but can also help organisations plan more effectively for their future.
As Melissa Geiger, Partner and Head of International Tax at KPMG explains, the added complexity derives from businesses moving away from simpler ways of operating to deploy supply chains that can stretch around the world.
“Traditionally, you would have a factory or an office where your product or service was made and that made tax pretty straightforward to work out,” she says.
“With digital businesses, however, it’s far more complicated. You may have teams collaborating all over the world, through different IT systems, and they might be adding value through intellectual property that is held on servers in various tax jurisdictions.”
Tax goes digital, principles remain
Geiger says this is a bigger issue than many companies might realise. It is far too easy to assume that digital taxation concerns only apply to the tech giants. However, simply being tech-enabled, as nearly every modern business is, adds extra layers of complexity.
“The main question has remained the same; enterprises have to establish where to attribute value,” she says.
“They need to know which activity added what proportion of profit and in which location. It’s essential because the tax authorities in each country will want to tax profit they see as coming from operations within their jurisdiction. If businesses get it wrong, it’s very easy to be taxed twice.
EU may take its own route
Tax in the digital age creates challenges for businesses and governments and ideally any solution should have international consensus. That has not gone unnoticed by the authorities. Both the Organisation for Economic Co-operation and Development (OECD) and the EU have pushed forward the debate on how they think tax should be handled in the digital economy. But obtaining international consensus will take time and there is a risk that individual governments will introduce interim measures in the meantime. It appears the OECD and the EU may already be pulling in slightly different directions.
“The OECD focused on explaining the issues of taxing digital business, making sure they are understood before action is taken. Importantly, the OECD also outlined safeguards that should be followed if interim measures are to be introduced. This approach made a lot of sense to me,” says Geiger.
“Both the OECD and the EU thinking suggests tax authorities around the world should apply tax to where the value is added because that’s the most straightforward way of dealing with new business models.”
First, know your business
For Kirsty Rockall, International Tax and Transfer Pricing Partner at KPMG, the entire board needs to have a clear vision on the implications of this evolving tax system and its impact on the company.
Leaders of every department need to know where value is driven in its business processes so they can make more informed decisions, both for today and the future, because every decision on business operations has a tax risk attached to it.
Rockall explains, “we’re starting off this technological journey with robotic process automation (RPA) which makes filing and handling returns a lot more streamlined,” she says.
“It takes the human element out of highly repeatable, high-volume work, but it can also be used to recognise anomalies. It can compare companies, and individuals, to their peers and thus know which returns should be challenged, and who are persons of interest. This technology could also see the tax function move more towards real-time reporting.”
A role for blockchain?
This is a major step towards a fairer tax system. It could become even more pronounced if authorities were ever to insist on blockchain technology being deployed. This is effectively a shared ledger where all parties have sight on income and outgoings and all entries are attributable to the person who made them.
“Blockchain is already being used on a small scale by tax authorities in a number of countries. With blockchain, there is a single source of truth, which provides you with ultimate transparency and the ability to reduce the number of systems, process steps and data interfaces used by companies. If fiscal authorities are provided with access to companies’ blockchains in order to fulfil compliance requirements, then both parties will have access to the data, immediately and in real time.”
Ultimately, then, the digital economy is fast becoming the economy in general, as companies increasingly use technology to conduct everyday business. While this adds complexity in determining where value is created, and therefore, where it should be taxed, it also has benefits.