To avoid some of the difficulties arising from creating new profit attribution rules for purposes of a nexus based on significant economic presence, an “equalisation levy” could be considered as an alternative way to address the broader direct tax challenges of the digital economy. This approach has been used by some countries in order to ensure equal treatment of foreign and domestic suppliers. For example, in the area of insurance, some countries have adopted equalisation levies in the form of excise taxes based on the amount of gross premiums paid to offshore suppliers. Such taxes are intended to address a disparity in tax treatment between domestic corporations engaged in insurance activities and wholly taxable on the related profits, and foreign corporations that are able to sell insurance without being subject to income tax on those profits, neither in the state from where the premiums are collected nor in state of residence. As discussed below, an equalisation levy could be structured in a variety of ways depending on its ultimate policy objective. In general, an equalisation levy would be intended to serve as a way to tax a non-resident enterprise’s significant economic presence in a country. In order to provide clarity, certainty and equity to all stakeholders, and to avoid undue burden on small and medium-sized businesses, therefore, the equalisation levy would be applied only in cases where it is determined that a non-resident enterprise has a significant economic presence.
1. Potential scope of the levy
If the policy priority is to tax remote sales transactions with customers in a market jurisdiction, one possibility is to apply the levy to all transactions concluded remotely with in-country customers. To target the scope of the levy more closely to the situation in which a business establishes and maintains a purposeful and sustained interaction with users or customers in a specific country via an online presence, the levy would be applied only where the business maintains a significant economic presence as described above.
An alternative would be to limit the scope to transactions involving the conclusion through automated systems of a contract for the sale (or exchange) of goods and services between two or more parties effectuated through a digital platform. Although this would create an incentive to choose non-digital means of conducting transactions, it would also focus more closely on the specific types of transactions that have generated concern. There is no rule, however, that prevents a broader scope of application. Indeed, focusing too narrowly on specific types of transactions may limit the flexibility of the levy to accommodate future developments, which would limit its ultimate effectiveness in addressing the tax disparity between foreign and domestic suppliers of products through an online presence. The levy would be imposed on the gross value of the goods or services provided to in-country customers and users, paid by in-country customers and users, and collected by the foreign enterprise via a simplified registration regime, or collected by a local intermediary.
Alternatively, if the policy priority is to tax the value considered to be directly contributed by customers and users, then a levy could be imposed on data and other contributions gathered from in-country customers and users. For that purpose, a number of options could be available. One option would be to impose a charge based on the average number of MAU in the country. As noted above, however, measuring MAU accurately may prove to be challenging. Moreover, the number of MAU of a foreign enterprise may not be directly related to in-country revenue generated by a foreign enterprise. Setting an appropriate rate for a levy measured by active users would also be challenging, as the average value of each user to a non-resident enterprise may vary widely. Another option would be to base the levy on the volume of data collected from in-country customers and users. Similar to MAU, however, data may also vary widely in value depending on its content and the purpose for which it was gathered, and it would be challenging to identify a reliable direct connection between the in-country revenue and the data collected from in-country customers and users.
2. Potential trade and other issues
As is the case with the imposition of a gross-basis final withholding tax, a levy that applied only to non-resident enterprises would be likely to raise substantial questions both with respect to trade agreements and with respect to EU law. In order to address these questions, potential solutions that would ensure equal treatment of domestic and non-resident enterprises would need to be explored. Depending on the structure of the levy, one option that could be considered would be to impose the tax on both domestic and foreign entities. If this approach were to be taken, however, presumably consideration would also need to be given to ways to mitigate the potential impact of applying both the corporate income tax and the levy to domestic entities and foreign entities taxable under existing corporate income tax rules.
3. Relationship with corporate income tax
Imposing an equalisation levy raises risks that the same income would be subject to both corporate income tax and the levy. This could arise either in the situation in which a foreign entity is subject to the levy at source and to corporate income tax in its country of residence or in the situation in which an entity is subject to both corporate income tax and the levy in the country of source. In the case of a foreign entity, for example, if the income is subject to corporate income tax in the country of residence of the enterprise, the levy would be unlikely to be creditable against that tax. To address these potential concerns, it would be necessary to structure the levy to apply only to situations in which the income would otherwise be untaxed or subject only to a very low rate of tax.
Another approach could be to allow a taxpayer subject to both CIT and the levy to credit the levy against its domestic corporate income tax. Such an approach would ensure that foreign entities with no nexus for corporate income tax purposes would be subject only to the levy in the source country, while the tax burden of entities subject to corporate tax would effectively be limited to the greater of the corporate income tax or the levy.