Responding to tax challenges of the digitalised economy

Whereas digitization can support economic growth and growth of the small and medium sized enterprises by providing them with the opportunity to participate in the global marketplace and reach more customers, the rapid expansion of the digital economy has undoubtedly created challenges for the global tax system. The growth of the digital economy has created business models that are beyond the scope of reins of tax legislation. Recent commitments relating to the digital economy at the G20 leaders meeting on 29 June 2019 in Osaka, Japan signal the growing importance of these issues. The Osaka Declaration on the Digital Economy, signed by 24 world leaders, was in support of international rule-making in this area and further progress at the WTO. The G20 leaders pledged their strong commitment to promoting international policy discussions; inter alia, international rule-making on trade-related aspects of electronic commerce at the WTO. They re-affirmed their support of the Joint Statement on Electronic Commerce issued in Davos on 25 January 2019, in which 78 WTO Members confirmed their intention to commence WTO negotiations on trade-related aspects of electronic commerce. 1 Clearly, digital economy and trade reinforce each other, but more importantly, the G-20 leaders agreed to intensify their efforts for a consensus-based solution on tax challenges arising from digitalisation with a report by 2020. Features of the digital economy that differentiate it from the ‘traditional’ economy for taxation purposes are where the goods or services and the payments thereof are delivered digitally instead of physically—such as online advertising by Google, retail distribution by Amazon and ebay, movies distribution by Netflix, and travel-related services by Priceline, Expedia & Booking.com—reducing the need for a presence in a country to deliver products or the reliance on third party distributors. E-
commerce platforms have already made it easier to connect buyers and sellers worldwide, opening new
opportunities for companies to tap into global markets. According to a McKinsey report, the e-commerce market in Indonesia, for example, is estimated to grow by eightfold in the next five years, from $8 billion in 2017 to $65 billion in 2022. Consumers can buy a vast array of products and services online, from books and computer equipment, to air ticket, financial services, education services and supplies, and entertainment services, including images, movies, videos, music, games, and other digital entertainment provided through download, streaming, or other technology. There is no doubt about the opportunity and economic benefits that these new technologies can bring, especially for small and medium enterprises in developing and least developed countries, when accompanied by appropriate complementary policies and capacities in tax administration.
Emerging concern is that substantial supplies (consumption) made through these new technologies
channels and associated profits thereof are not taxed in any jurisdiction. Consequently, the expanding
digital economy could erode the existing tax bases and the distribution of taxing rights between1 During the Second Ministerial Conference of the WTO in May 1998, Ministers adopted the Declaration on Global Electronic Commerce, recognizing that global electronic commerce was growing and creating new trade opportunities. This called for the establishment of a work programme on e-commerce, which was finally adopted in September 1998.