The Transformation of International Tax Regime: Digital Economy

• Author: Tamer BUDAK
• Pages: 297-330

İnönü Üniversitesi Hukuk Fakültesi Dergisi –İnÜHFD- Cilt:8 Sayı:2 Yıl 2017 297

THE TRANSFORMATION OF INTERNATIONAL TAX

REGIME: DIGITAL ECONOMY

ULUSLARARASI VERGİ REJİMİNİN DÖNÜŞÜMÜ:

DİJİTAL EKONOMİ

Tamer BUDAK*

Abstract

The development of digital economy, which enables companies to avoid tax

through aggressive tax planning, is among th e main hardships to which the international

tax regime currently has to come up with new solutions. Many companies in the digital

economy engage in tax base erosion by exploiting the loopholes in international tax laws.

Globally, all tax authorities have faced difficult challenges. The growing of the digital

economy, increasing world trade, and raising mobility related to finance and resources has

challenged domestic and international tax laws.

The Organization for Economic Co-o peration and Development (OECD) has

focused on issues of Base Erosion and Profit Shifting (BEPS), and also developed BEPS

Action Plan s to manage the issues of international taxation. The BEPS Action 1

specifically addresses the challenges that arise in the taxation of the digital economy. This

paper primarily evaluates the new developments in the taxation of the digital economy,

investigates regional and national policies with respect to direct and indirect tax for

preventing eroding the tax base, and transformation of international tax law

Keywords: Digital economy, international tax law, BEPS Action Plan 1, taxation

Özet

   

       

        

         

      

       

        



*Tamer Budak is an Associate Professor at the Inonu University o f Faculty of Law,

Turkey. (tamer.budak@inonu.edu.tr) I would like to a special thank Dr. Joseph Zand for

his valuable editing and proofreading for this pap er. I also want to thank M ax Planck

Institute for Tax Law and Public Fin ance that provided me an opportunity to use their

library and a researcher position.

DOI: 10.21492/inuhfd.354397

Tamer BUDAK

298 Inonu University Law Review InULR Vol:8 No:2 Year: 2017

         

   

           

          

       

          rak vergi

         



Anahtar kelimeler:       



Introduction

Rapid developments in information and communication

technologies brought about the emergence of a new economy, namely; the

digital economy. The digital economy is not limited to traditional business

model. Especially after the 1990s, new advances in technology have also

led small businesses to enter the global market faster and at much lesser

cost. While digital economy offers many advantages to businesses, it also

brings significant problems especially in the field of taxation. Indeed, the

digital economy has a structure that is recognized as borderless trade. As a

matter of fact, the existing international tax regime requires a permanent

resident for direct taxes, but digital enterprises sell goods or services to a

large number of people without any physical presence. These enterprises

make concerted efforts to minimize their tax liabilities, by establishing

their legal or business centers where the tax rates are the lowest or where

there is zero tax rate or no tax rate. The result of this situation is known as

Base Erosion and Profit Shifting.

Due to digital transactions that take place in the digital economy, it

is difficult to determine the true identity of taxpayers and the tax status of

transactions by national tax authorities since digital processes have

confidentiality and virtualization features. The tax laws of various

countries and the international tax regime have not yet been synchronized

with the digital economy; therefore, the tax losses are substantial. The

process of dealing with the digital economy, establishing new regimes and

policy can be accomplished with a combined policies and practices being

considered in a zealous manner. In this context, the international

organizations and the national tax authorities have been working together

to find the problems and solutions for taxation of the digital economy.

The Transformation of International Tax Regime: Digital Economy

İnönü Üniversitesi Hukuk Fakültesi Dergisi –İnÜHFD- Cilt:8 Sayı:2 Yıl 2017 299

In this regard, starting from June 2012, the OECD has worked

together with governments and international organizations to figure out

what drives economic, social and environmental change in international

trade. In October 2015, OECD released 15 specified recommendations for

action. The Action 1 is only related to tax challenges of the digital

economy. It has been introduced the digital economy that is integrated

with all aspects of the economy by the OECD. Instead of proposing

specific measures, the organization encourages extensive efforts and

monitors to respond to specific tax challenges. The OECD`s plan will

continue up to 2020. As a result, many countries have initiated their

implementations in terms of the OECD's recommendations.

1. MAIN FEATURES OF DIGITAL ECONOMY AND

OECD

The development of Information and Communication Technology

(ICT) has led prices of ICT products and services down

1

. The drop in

prices caused by advances in technology and innovation has allowed the

growth of the digital economy

2

. As products easily reach a global market,

it is not possible for traditional sellers to compete with ITC seller

3

.

All sectors have rapidly adopted ICT to decrease operational costs, -

decline in price

4

, increase productivity, and reach broaden themarket.

5

ITC has also modified the ways in which businesses models can do

1

    

Brian, (ed.), Understanding th e Digital Economy  Data, Tools, and Research, MIT



2

          

Digital Economy, 24 March 2014     https://www.oecd.org/ctp/tax-

challenges-digital-economy-discussion-draft-march-2014.pdf (Accessed: 10.06.2017),

p.8. (OECD, 2014)

3

Significant changes in the provision of ICT services have been taking place in recent

years. India has become the leading exporter of ICT services, followed b y Ireland, the

United States, Germany, and the UK. China has also become one of the major exporters.

Together these six countries represent approximately 60% of total ICT services exports.

         

  www.oecd.org/sti/scoreboard.htm , UNCTAD, June 2013.

(Accessed: 10.06.2017). p.12. (OECD 2013a)

4

          

       

http://www.cbs.dk/files/cbs.dk/final_-_clean_version_-

_the_digital_economy_and_international_tax_law_-_pks_0.pdf (Accessed: 14.07.2017)

5

OECD, 2014, p.22.