In the second of his articles on the digitalisation of tax, KPMG’s Darren Anton looks at the move from analogue to digital tax in an international context and how this may lead to double (or even triple) taxation issues.
Looking back over the past couple of decades, one of the most striking developments in the world of commerce has been the shift to digital. While businesses on the whole have risen to the challenge, and the opportunity, of online, it has left some areas, such as taxation, struggling to keep up.
Take the taxation of international business, for example. Traditionally this has required businesses to attribute value creation across the global supply chain and allocate that ‘value’ to specific jurisdictions so that it can be taxed. That system has worked reasonably well to date, largely because businesses have had physical presence in those jurisdictions. However, with the increase in digital business, which does not require bricks and mortar to contain it, things have become a lot more complicated, and are likely to become yet more complicated as time – and technology - goes on.
Whilst there is widespread agreement that the international tax system needs to evolve, there is no consensus as yet as to how this could happen, especially on a global level when tax revenues and tax policies can be such political issues.
This has led some jurisdictions to act unilaterally in an effort to move forwards and protect their own tax base. Although this is understandable, it is definitely not helpful in building a cohesive international tax system. We are already seeing issues emerge around double (or higher!) taxation, as well as increasing compliance costs and risks, as businesses struggle to contend with different, possibly competing, requirements.
At present, when international tax treaties are available they provide a mechanism for alleviating the risk of double taxation and, where there are gaps, there is often a way of finding a solution through a dispute resolution process. The problem is that now we are seeing governments beginning to introduce taxes that fall outside these recognised frameworks.
Such an approach might work for well for governments who have a keen eye on revenues but it could lead to disaster for businesses who may find they have to negotiate expensive and time-consuming international dispute resolution appeals to relieve the taxation burden.
This is a real problem as witnessed recently in the US following tax reforms where unrelieved double taxation is leading to effective tax rates of over 100% in some cases. Some businesses fear that new and future digital taxes could even equate to triple taxation or even more.
Clearly a better solution for today’s borderless businesses needs to be found.
Next month Darren Anton looks at the progress being made in bringing forward solutions for the successful digitalisation of the international tax system.
Read the last article below:
© 2020 KPMG Limited, a Gibraltar Limited Liability Company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
KPMG International Cooperative (“KPMG International”) is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.