Digital Era and Taxation

To Choose an Accounting Topic That Would Be Excellent for A Dissertation.
Research Topic
Taxation in the digital era is an excellent topic for a dissertation because there is an ongoing debate on whether digital companies are paying their fair share of taxes. Some tax experts believe that digital companies enjoy tax levels close to zero compared to traditional companies, yet they earn huge profits. The underlying principle of corporate taxation is that "profit should be taxed where value is created" (Sestakova, 2018). However, digitalization challenges this principle because of it difficult to pin down how and where digital companies create value. Also, digital companies rely heavily on intangible assets, big data, and which is hard to value (Sand- Zantman, 2018). Given this fact, there is a need to research problems that tax accountants face when taxing digital profits.
The above topic is relevant when examined from the technological perspective because of two main reasons. First, taxation policy should promote fairness. Both traditional and digital businesses should bear the same tax burden. It will be unfair for citizens and traditional businesses to bear a heavier tax burden simply because large volumes of digital profits are not taxed. Second, there is a need for sustainable revenues in this digital era. The digital economy is overtaking the traditional economy in terms of market presence. So, if digital taxes are not taxed effectively, revenue gaps will start to emerge, and revenue bases will shrink.
Research Problem
Taxation Issues in the Digital Era
Sand- Zantman (2018) highlighted four features of digital businesses that makes taxation of digital profits difficult. First, it is not easy to track digital activities that generate profits. Digital companies sell their products to customers worldwide from a limited number of sources. Furthermore, a higher percentage of digital goods are intangible. Taxation rules are based on physical location and tangible assets. Also, the concepts of intangible property are not well defined in accounting and cannot be considered in taxation.
Secondly, digital companies facilitate transactions between sellers and buyers of traditional goods and services. That is, they act as intermediaries. Given their unique position, they can collect information on consumer behavior and sell it to advertisers. Taxation issues arise because it not clear what can be counted as a new value. Is it e-Commerce services or data collection?
Third, digital companies rely on big data because it is a source of competitive advantage. Big tech companies such as Amazon, Facebook, and Apple collect data and use without the consent of economic agents from whom data is being extracted. Raw data does not add new value unless it is processed, analyzed, and used. So, digital companies create value by managing and using big data.
Fourth and lastly, digital companies rely on network effects concerning synergies, integration, and user participation. In other words, the value of a digital platform increases as the number of users increases. So, big digital companies have a higher return to scale compared to small tech companies. Additionally, network effects adversely affect new digital firms. They earn less premium compared to established firms
Recommended Solutions
The tax system has not kept up with technology. Corporate taxes were designed in an era where most businesses sold physical goods in brick-and-mortar shops. It was easy to track the number of goods sold over a given period and the tax generated from sales. Today, sales and services have shifted online. There is a need to modernize the current tax framework because it is outdated (Katz, 2015).
Corporate tax rates have decreased over the years. Partly due to the digitalization of the economy. In 2018, Amazon's profit was more than $10 billion, yet they did not pay federal income tax. So, there is a need to modernize the tax system for the digital era. Organizations such as the International Monetary fund (IMF) and the Organization for Economic Cooperation and Development have all called for new tax laws that reflect the fact that many companies are doing most of their business online. This is where the idea of a digital tax comes in (Committee of Experts on International Cooperation in Tax Matters, 2019),
In 2015, the U.K introduced diverted profit tax (DPT) to address tax avoidance by big tech companies. DBT is charged 25 percent on profits that are artificially diverted from the U.K. This tax policy is not aimed at any specific sector or type of activity, and it is effective. The amount of corporate taxes increased to 281 million in the financial 2016/2017 from 31 million in the financial year 2015/2016. Most countries do not support this tax policy.
Withholding taxes on digital transactions is imposed on the buyer or recipient of digital service. So, it is a form of direct income tax. Under this tax policy, it is important to define what is digital and non-digital transactions. In reality, this tax measure creates more tax challenges for banks because they handle both digital and non-digital transactions. Also, it worsens the business environment of a country that imposes this tax policy because it results in double taxation. Double taxation will force digital companies to shift to other jurisdictions. Overall, administering this form of taxation is very complicated.
In 2016, the government of India introduced equalization levy on digital transactions. Providing space or facility for digital advertising and online advertising are examples of digital transactions. The equalization levy can only be effected if the digital company has more than Rs 100,000 that is supplied by non-residents who do not have a permanent establishment in India. Furthermore, the levy has to be deducted by a person who is a resident in India. The purpose of this tax policy was to solve the problem of non-taxation by digital companies. This levy is to be paid from gross income. So, it is exempted from income tax. It has been successful because Japan and Argentina introduced a similar tax. In Japan, the levy is 8 percent on cross-border digital services to customers, whereas, in Argentina, it is 3 percent.
Tax experts have criticized this tax measure because of its limitations. First, there is no consensus among tax experts if equalization levy is a direct or indirect tax. Indian government argues that it is an indirect tax because it is not covered by tax treaties. Second, the levy results in equity versus efficiency dilemma. This tax was meant to solve the unequal treatment of domestic and foreign companies. However, domestic recipients are negatively affected by the levy if analyzed from the efficiency point of view. Third, it is not clear who bears the actual burden of the tax. Initially, it was expected that sellers would bear all the burden, but part of the levy may be paid by domestic customers.
Overall, the research literature on taxation in the digital era describes features of digital business that makes taxing of digital profits difficult as well as possible solutions. However, we do not know the problems that tax accountants face when taxing digital profits.
References
Committee of Experts on International Cooperation in Tax Matters. (2019). Tax Issues related to the Digitalization of the Economy: Report (E/C.18/2019/CRP.12). https://www.un.org/esa/ffd/wp-content/uploads/2019/04/18STM_CRP12-Work-on-taxation-issues-digitalization.pdf
Katz, R. (2015). THE IMPACT OF TAXATION ON THE DIGITAL ECONOMY. https://www.itu.int/en/ITU-D/Conferences/GSR/Documents/GSR2015/Discussion_papers_and_Presentations/GSR16_Discussion-Paper_Taxation_Latest_web.pdf
Pemerathna, A. (2016). Economic impact of digital taxation: A case on information communication technology industry Sri Lanka. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2910328
Sand-Zantman, W. (2018). Taxation in the Digital Economy. https://www.orange.com/fr/content/download/47110/1371114/version/1/file/Rapport TAXATION-VF-Mai2018.pdf
Sestakova, M. (2018, February). Tax Challenges of the Digital Economy [Paper presentation]. Management Challenges in the 21st Century, Bratislava, Slovakia.