Tec(h)tonic Shifts: Taxing the “Digital Economy”

IMF Working Papers, May 29, 2020

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Digitalization of businesses has accelerated the need to address shortcomings and unresolved issues within the international corporate income tax system.
The customer or “user”—through their online activities—is increasingly considered a critical driving force behind the value of digital services.
Rapid growth of digital service providers over the last decade has made them popular targets for special taxes—similar to wealth and solidarity taxes—that can mobilize revenues in the wake of a crisis.
The paper argues a plausible conceptual case can be made to tax the value generated by users under the corporate income tax.

Agreement among countries is required on whether user value justifies a reallocation of taxing rights.
Establishing the legal right to tax income derived from user value is necessary before user-based measures can be implemented.
An appropriate metric for valuing user-generated data would be needed if user data is to be used as a tax base.
Attempting to tax only certain types of business is ill-advised because user data is now exploited widely enough to be recognized as an input for almost all businesses.

Modified permanent establishment definition combined with taxation by formulary apportionment.
User-based royalty-type taxes.
Each option has distinct merits and misdemeanors (trade-offs and implementation challenges).

International consensus-building is required to reallocate taxing rights based on user value.
Legal and administrative frameworks must be developed to establish taxing rights over user-generated value.
Develop and agree on valuation metrics for user-generated data before using data as a tax base.
Avoid narrowly targeted measures that single out specific business types, given the ubiquity of user data as an input.

Authors: Aqib Aslam, Alpa Shah
Date: May 29, 2020
Series: IMF Working Papers, Working Paper No. 2020/076
Pages: 81
DOI: https://doi.org/10.5089/9781513545974.001
Issue: 076
Volume: 2020
Stock No: WPIEA2020076
ISBN: 9781513545974
ISSN: 1018-5941
Subjects: Corporate income tax; Data collection; Economic and financial statistics; Income and capital gains taxes; Income tax systems; Revenue administration; Taxes
Keywords: company activity; computer database; Corporate income tax; Corporate Taxation; customer base; Data collection; digital economy; Digitalization; Global; gross income; Income and capital gains taxes; income tax; Income tax systems; market power; multinational enterprise; natural resource; profit margin; resident company; resource company; small business; social media; tax treatment; user data; withholding tax; WP

IMF Working Paper: "Tec(h)tonic Shifts: Taxing the “Digital Economy”", Aqib Aslam and Alpa Shah, May 29, 2020, Working Paper No. 2020/076.