Digitalisation challenges taxation

The digitalisation of traffic changes existing structures and the way we move from one place to another. Mobility increasingly transforms into a service (Mobility as a Service/MaaS) that allows us to purchase mobility services according to our needs. A MaaS concept may consist of, for example, public transport, car, bicycle and haulage services. In the future, we will be able to buy a monthly mobility package similarly to purchasing phone or data communication services from a telecommunications company.

The digitalisation of traffic will influence the structure and efficient use of vehicle stock. The importance of owning a car will be reduced and mobility will become safer, more environmentally friendly and more fluent. At the same time, new business models will create new businesses and challenge established operators. The global value of the digital traffic services market is estimated at more than EUR 10,000 billion. The functional infrastructure and high level of education in Finland gives us an exceptional opportunity to spearhead this development.

Digitalisation, platform economy and sharing economy also pose a challenge to the tax authorities. Some of the challenges are purely national; however, digital business and its parties are often connected to several countries.   MaaS services, too, can be offered without the company being physically located in the country where the services are consumed. In that case, however, the tax authorities must settle which country should tax the operations, whether the operations are taxable, who is liable to pay taxes for the operations and whether the tax is paid on income or consumption.

Digitalisation is becoming a hot topic in the taxation discourse all around the world. Digitalisation has been viewed as a threat that disintegrates the tax base of countries and strongly increases tax disputes. It has been argued that digitalisation is everywhere and that the current international tax system that was developed in the beginning of the previous century is outdated and requires a significant reform.

Large-scale policies on tax legislation are drafted on an international level, which makes the role of national tax legislation and legislator more of an executive one. Key taxation rules for digitalisation must be agreed upon on a scale that is as global as possible at the OECD. National, regional and temporary solutions must be avoided.  The European Commission’s proposal for a temporary digital tax has faced justified critique, and passing the proposal as such is unsure.

More than 110 member states of the OECD are committed to strive towards shared taxation policies for the challenges of digitalisation by 2020. To put it plainly, the question is how tax revenue will be distributed between different countries. Will corporation tax be directed to the state where the services are used or to the state where the product development of the services takes place and where the value is created?  If a global consensus cannot be reached on common policies, companies are at risk of double taxation. There is a lot at stake.

When developing the tax system, it is advisable to acknowledge that separating digital business from other operations is problematic, which is why the taxation principles concerning digitalisation should be as in line as possible with the taxation principles used in traditional business. On the other hand, necessary tax solutions implemented as a result of digitalisation will have an effect on the current rules of the taxation of traditional business.

The principle of destination or consumption countries is applicable to indirect tax, such as value-added tax, traffic-related taxes and excise tax as the precise purpose of these forms of consumption tax is to tax the use of goods and services. However, digitalisation, artificial intelligence and automated traffic will also change the compensation paid for goods or services. Does the platform operator act e.g. as a seller or only as an intermediary.  Digitalisation blurs the concept of a service or goods, which may make the application of indirect tax legislation challenging. As a result, legislative decisions may also vary.

The tax authorities are very interested in gaining access to the data accumulated in digital platforms for the delivery of taxation. However, the need to simplify taxation so that every operator has the chance to be correctly taxed with minimal administrative costs has received less attention.

The tax system must adapt to the quick reformation by not hindering development but, instead, enabling the quick and flexible implementation of new business models. This requires changes in the legislation, but some of the issues can be settled by updating the instructions and statements of the tax authorities.

The EU is expanding its special scheme for electronic services and simplifying the value-added taxation of e-commerce. The purpose of the changes is to simplify the declaration and payment of value-added tax when the consumer buys goods and services online. This development has positive implications, and the new regulations should enter into force gradually as of 2019.

For long, it has been argued that states competing with the lowest corporation tax will soon lower it to zero. Digitalisation challenges corporation tax in a new way. The focus of legislative work regarding taxation will be on corporation tax in the coming years. However, simultaneously, the significance of consumption taxes to states’ tax revenue will increase. As a result, digitalisation will challenge corporation tax more than indirect taxation.


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