Extending Tax Sovereignty to the Internet Space
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Extending Tax Sovereignty to the Internet Space
Annotation
PII
S123456780015734-8-1
DOI
10.18254/S123456780015734-8
Publication type
Article
Status
Published
Authors
NIkolay Andreev
Affiliation: Law faculty, The State Academic University of Humanities
Edition
Pages
37-45
Abstract

The article analyzes the extension of tax sovereignty to the Internet space, and describes the legal instruments that regulate the taxation of digital companies and projects. The purpose of the study is to analyze trends in the spread of tax sovereignty to Internet projects and companies, and to find an answer to the question whether it is possible to extend the tax jurisdiction of the state to the Internet. Using historical and legal research methods, the author analyzed the works of researchers on theory of law and taxation and conducted a content analysis of the Organisation for Economic Co-operation and Development (OECD) acts and Russian tax legislation.The author concludes that many states have just begun the process of extending tax sovereignty to the Internet space. Effective tax instruments have not yet been developed, but work is underway in this direction. The author defines this trend as one of the global challenges of modern law.

Keywords
Tax, tax sovereignty, tax jurisdiction, taxation of Internet companies, corporate digital tax.
01.07.2021
Date of publication
02.07.2021
Number of purchasers
4
Views
357
8 The Russian Federation actively extends its sovereignty and its economic influence on the digital environment. The huge revenues generated by Internet companies force Russia to take into account the state's economic interests, the needs of the treasury and impose tax sovereignty in the digital environment. Concurrently, Russia, as well as a number of other states, face difficulties. For example, the usual structures of a permanent establishment, a place of income, a center of vital interests do not always correspond to the features of e-commerce. Thus, it is very difficult to determine the place of income if the office, that accepts payment in one country, places ads on sites in dozens of domain zones, and people who are not located in the corresponding domain zones make payments for this advertising. Another example is when giant aggregators or marketplaces, such as Alibaba, are located in one country, but a significant share of sales is carried out outside of it. As might be expected, the state where these sales are made will be interested in taxing the income from these sales (Khavanova 2017a). Currently, there is a problem of extending tax sovereignty, at least in the legal sense (OECD 2017). It is very difficult to extend the jurisdiction in which the legal aspect of sovereignty is implemented to something very unusual (for state bodies). Changing the binding to the space one can quickly change the server, the place of registration of the organization, and so on. At the same time, the objective need to fill the treasury requires The problem of taxation of electronic (digital) commerce is increasingly attracting attention. For example, in November 1997, the OECD held conferences on barriers to global e-commerce (OECD 1997), and in 2015 and 2018, joint papers of the OECD and the G-20 were published (OECD 2015, 2018). They addressed the issue of electronic representation (digital permanent representation) (Andreev 2018). The issue of tax sovereignty and the discussions around permanent and electronic representation are acute topics. At the moment, it is easier to extend the effect of tax sovereignty (in particular, tax jurisdiction) to a permanent establishment, since for ordinary commerce with the participation of foreign organizations and individuals, the practice of taxation of a permanent establishment is the most developed and understandable. Similarly, the domestic tax authorities, in general, have worked out the mechanisms of administration using the design of a permanent representative office. At present, there is a debate between supporters of the conventional design of permanent representation, on the one hand and supporters of electronic representation, on the other. Thus, Khusnetdinov (2011) proves the possibility of using the institution of permanent representation in direct taxation of participants in electronic business activities. Apparently, Frolova (2009), another supporter of the usual design of a permanent representation, points out that practical implementation takes time. Kastelskaya (2005), analyses international experience and problems of the classical concept of a permanent representation and does not support the idea of electronic representation. Ismayilov (2015) acknowledges the need to use different criteria in determining the country of location of the permanent representation, including addressing the issues of server placement. Danilkevich (2013) emphasizes the problems of the classical design of the permanent representation, but does not offer an alternative, except for restricting the import of goods purchased by individuals. Kadyleva (2012) suggests considering the provider and/or hosting provider as dependent on the subject of e-commerce agent and permanent representation. Konnov (2002) postulates an approach similar to the definition of a permanent establishment for international transport to the taxation of electronic commerce, and poses choosing the most preferred place of income generation. An intermediate position, in our opinion, belongs to Skachkov (2004). He justifiably points out that it is impossible to apply the classical criteria of a permanent establishment to e-commerce, but considers it imperative that a physical presence is necessary for the formation of a permanent establishment. The above-mentioned conference of 1997 opened up the possibility of establishing tax representation. The conference materials discussed the problems of e-commerce and taxation, and presented the idea of e-representation. Though over two decades has passed since the conference was held, e-representation still remains more a cause for reflection than a solved problem. Koren (2011) highlights the immateriality of e-commerce representation. The author defends the idea of the three criteria for determining the jurisdiction of a permanent establishment: registration criteria (registration in the corresponding domain zone), language criteria, and consumer criteria (the territory from where the main volume of payments is provided). We consider it appropriate to discuss the position of the OECD, which has become a "skirmisher" in the discussion of a digital permanent representation design. The OECD has formulated the position that a permanent establishment should be set up in the country with the localized website and specialized equipment designed to serve e-commerce activities. This criterion introduces an novelty by complementing the three main criteria for determining a company's residency. In addition, the 2018 OECD Interim Report outlined three factors to consider when determining digital representation: the factor of revenue generated, the factor of digital presence (for example, a local domain name or a specific payment method), and the factor of the number of users. In our opinion, at a minimum, fiscal interests require the recognition of the design of a digital permanent representation, taking into account the three criteria proposed by the OECD. Based on these criteria, we formulate the concept of digital permanent representation. For the basic concept for a permanent establishment, we draw on the OECD Model Convention on Taxes on Income and Capital framing (Rozdestvenskaya and Guznova 2017). In this Convention, the OECD defines a permanent establishment "as a fixed place of business through which an enterprise conducts its activities in whole or in part, including a place of management, a branch, an office, a factory, a plant, a mine, a drilling rig, a quarry or other place of extraction of natural resources, a construction site, a construction or assembly facility, and dependent agents" (Danilenko n.d.). This concept has long been inconsistent with the needs of e-commerce, except for the reference to the place of management, which is indicated at least by the factors proposed by the OECD itself. National regulators, in turn, are still only at the stage of comprehending the relevant problems. The addition of an already existing concept is seen as an unnecessary accumulation of factors (which is obvious from the definition provided above); furthermore, the features of e-commerce itself require a special approach. In this regard, a simple addition seems ineffective. It seems that the easiest way would be to create a special definition for an electronic digital representation, and to define it as "the place of activity through which the enterprise fully or partially conducts its activities, including the state or territory of the digital presence, in which it has the main source of users, the place of receipt of the main income" (Khavanova 2017b). The preservation of the term "place" is caused by the fact that, indeed, for the modern system of tax administration, a territorial reference is required. Otherwise, it will not be possible to apply the measures of influence that will be required to force the taxpayer to pay the tax. As a reverse example, we can use the "Google tax". According to the Federal Tax Service, as of February 2018, 143 major foreign organizations voluntarily registered as VAT (Value Added Tax) payers, and the proceeds for 2017 were estimated at 9.4 billion rubles (Regnum 2018). It is quite easy to determine the amount of trade transactions executed by these companies based on the amount of VAT. But these are only indirect taxes, whereas very significant amounts of direct taxes can be extracted if the digital permanent establishment design is properly implemented. On a global scale, the e-commerce market, for example, in the B2B sector (contracts of entrepreneurs with entrepreneurs) in 2017 was estimated at $7.66 trillion, and in the B2C sector (transactions between entrepreneurs and consumers) at$ 2.143 trillion. In Russia, the volume of e-commerce at the end of 2017 was estimated at about 1.1 trillion rubles, although estimates were made of the growth of these volumes to 5-7 trillion in the foreseeable future (Podguzov 2018). If you use old designs that are not optimized for the conditions of the digital economy, the treasury will lose very significant tax revenues: it will not be legally possible to tax the corresponding operations. The introduction of the concept of "digital permanent establishment" will also require the creation of legal instruments for tax administration. Many site servers whose main activity is connected with Russia can be registered, for example, in Ecuador, which, in accordance with the Order of the Federal Tax Service of 01.09.2017 No. MMV-7-17/709@, does not provide information exchange with the Federal Tax Service. There are over a hundred such states, in addition to two dozen territories. The process of tax information exchange is difficult, let alone effective tax enforcement (even the "Google tax" is paid by voluntarily registered organizations). Hence, even with the extension of legal sovereignty (through the consolidation of the concept of digital permanent representation), there will be economic and political issues. In future works, we plan to propose appropriate mechanisms that will ensure the full extension of tax sovereignty to e-commerce carried out in Russia or with the participation of Russian consumers. Since the end of the 2010s, the issue of digital sovereignty has become increasingly relevant for the Russian Federation. In addition to the introduction of the “Google tax”, in the spring of 2021, a reform to consolidate the corporate digital tax also began. The corporate digital tax was originally proposed by the OECD as one of the elements of the tax reform of electronic digital products (along with digital representation). Under the corporate digital tax model, a digital company that provides users from other countries (including sites registered in foreign domain zones) with digital services whose turnover exceeds a certain figure (for example, \$300 million per year) is required to pay taxes at the company's place of registration on all “digital” income (or global digital income), regardless of the territory on which they are received. A similar legal model of corporate digital tax is planned to be introduced in Russia. At the same time, foreign companies that provide electronic services or engage in e-commerce for users from the territory of the Russian Federation will be subject to it. The only key parameter for determining whether a company has received income related to Russia will be the question of personal data use. If a foreign company uses, stores, or at least collects personal data of Russian citizens, this will be a key basis for collecting corporate digital tax from a foreign company. Altogether, the mechanisms for collecting such a tax are still unclear. For example, the indirect tax on electronic services (Google tax) is currently subject to the voluntary declaration of income from transactions by a foreign company. In the event that a foreign company does not file tax reports as a payer of indirect tax on electronic services, the Russian tax authorities will not be able to forcibly recover the amount of indirect tax. In the case of indirect taxes, the mechanism for calculating the amount of tax becomes simpler through determining the percentage of the transaction amount and payment for electronic service, but in calculating corporate tax (income tax), the company's expenses should usually be taken into account as well. However, in a simple transfer of calculating tax from indirect tax to corporate tax, it will essentially be the same tax under different names. The Group of Seven (G7) countries offer a simpler, but no less burdensome way to impose a global single tax on companies, including IT giants: in all countries of the world (at least those who join the initiative) to set a single rate of 15 % on the company's income. Furthermore, a higher number of local offices will involve a higher tax burden. Nevertheless, it is not necessary for an IT company to have offices in the residing countries of digital services buyers and consumers. By and large, they can work without an office and without registering a legal entity.