Update Internet Tax

PUBLICATIONS / Newsletters / 2015 / Newsletter April

Update Internet Tax

Discussions about taxation of the Internet spread across the USA, Europe and Australia again. The world has divided itself between those who call for free communication, trade and distribution of knowledge, and those who claim that some form of taxation won’t harm the world wide web.
Taxation of “the internet”, the “digital economy” and “e-commerce” is a broad term that can refer to many types of taxation:
  • A direct taxation on Internet Service Providers (ISP’s).
  • An indirect tax on services provided by them (jointly this can be referred to as taxation of internet access).
  • A sales tax or VAT on products provided electronically.
The term can also refer to the fact that in the digital economy it is easier to move corporate functions to a advantageous environment and provide services from there, thus saving on global corporate taxation.
 

Individual Countries In Europe

In Europe, noises were made by France. The former French President Nicolas Sarkozy couldn’t stand the fact that web search engines became highly profitable and pushed for introducing a tax on the telecommunications sector which would include internet service providers. Economic issues opened similar discussions in Ireland and Hungary.
During the ‘Hungarian experience’ a hundred thousand people went to the streets and a quarter of a million successfully protested on Facebook. They finally achieved the withdrawal of the internet tax law draft.  This scared the EU law- and policy makers. No other EU country dares to present a similar plan. But of course there are ways to bypass the direct taxation of the internet and hide it under the header of sector tax, e.g. on telecommunications or on advertising.
 

The EU

After a transition period of several years, as of 2015 the general principle of sales of digital products to end consumers in the EU is that the VAT rate applicable in the country of residence of the consumer should be charged. The EU megalomania shows from the fact it expects every company in the world to be aware of this and implement procedures so that it can verify that the correct VAT rate has been charged.
What happened to modesty, and knowing your territorial limitations?
 

Australia

During a period of twelve months that ended in August 2014, Australians spent 15.7 billion Australian dollars in online stores. It is estimated that a quarter of this amount comes from foreign transactions. The vast majority of them fall below the rules of Low Value Threshold (LVT), so no sales tax applies here. The amount we are talking about, is one thousand Australian dollars, a limit established in (and unchanged since) 1985. This is something the brick-and-mortar shop owners in Australia do not like. But so far, there is not political impetus to change the situation. The local Office for Productivity recommended to retain the current limit since its abolition would increase the cost of collecting duties and taxes annually by about 500 million Australian dollars.
 

The USA

Last autumn, taxation of the Internet became a major issue in the USA. The discussion followed two strains: the imposition of taxes on internet access and the efficient collection of excise taxes on e-commerce.
But the discussion has been going on much longer.
In the late nineties several states saw the potential in levying tax on internet access but they were stopped in 1998 by the federal Internet Tax Freedom Act (ITFA). This law prohibited state and municipal taxes specifically related to the internet (e.g. internet access, bandwidth, bites, etc). It was meant to be temporary and enacted to encourage the growth of the internet. While still a temporary law, it has been amended four times since, most recently last December. With some smaller exceptions, so far it remains an efficient tool in reducing the attempts to tax internet access.
Taxation of internet access would stop this trend and would be counterproductive to the billions of USD pumped into digital economy by the state already. This coming October, the US Congress will decide whether the ITFA will be made permanent law..
 

The OECD

On the supranational level, the OECD is currently working on a grand project to make it more difficult for companies to shift profits to better tax climes. The reasoning here is that businesses are allowed to take all operating conditions into account, except the tax regime. They consider that unfair, because it restrains its member governments. Notwithstanding the fact that the current international tax rules were pretty much drawn up by the OECD. The BEPS projects naturally also touches on the digital economy, since it makes it easier to shift profits offshore. Why not put your order booking centre in Dubai, generate the related profits there tax free, and let the heavily taxed retail establishments in the taxed world, reap a commensurately low profits margin?
We discussed how to do this in the following article: Tax Aspects Of Running Your Online Business Offshore.
 

The Exception: Bhutan

So far the only country that currently imposes tax on all Internet access is Bhutan. Since last year, 5% tax is collected in order to build the state’s own telecommunications infrastructure that would reduce the country’s dependence on Indian operators. In Bhutan, until 1999 both television and internet were illegal. Recently the cultural influence of the media was reviewed and the country officially opened up towards the world wide web. According to BuddeCom, 4% of the population uses fixed internet connections while 30% uses mobile internet.
 

Internet Tax – Conclusion

Hopefully government greed taxes a step back, realising the enormous contribution that the growth of the internet has made to an improved standard of living in the past two decades.
 
 
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