Establishing the Taxable Event in the Digital Economy: Direct Tax Policy Challenge. Submitted By

Abstract

The fast expanding digital economy is shifting the business model of most corporate entities from the physical to the virtual. As the world, around us is choosing to interact, trade, buy, and entertain through the internet, the companies have no choice but to keep pace if they want to stay competitive. This has created new challenges for the drafters of the direct tax policy whose foremost agenda is to charge most of the income generated within the economy and generate maximum revenue for the government’s ever-increasing expenditure. On the other hand, the companies are constantly planning their tax affairs in a manner that the profits are declared within entities located in tax havens where no or nil taxation rates are applicable. This planning is deeply facilitated by the speed, anonymity and efficiency offered by the virtual world. In this scenario, the foremost task for the tax legislators is to identify the taxable event whose location in the virtual world can be scattered across boundaries and is blurred. In the physical world, this taxable event was identified with reference to the two connecting principles namely the source and the residence principle who form the bedrock of most domestic direct tax systems of countries across the globe. The digital environment on the other hand makes it extremely difficult to identify the physical location of the resident amenable to tax and also to locate with certainty the territory where the income has been generated. Thereby this paper seeks to analyse whether these principles when sought to be employed to identify the taxable event in the digital economy will serve the purpose of competently taxing this economy or new solutions and principles will have to be articulated to tackle this ecosystem. The paper will start with discussing the existing law for defining the taxable event employed to tax corporate profits in the physical environment. It will then endeavour to explore the growing jurisprudence both nationally and internationally around this subject and try to come up with suggestions for directly taxing this economy in it’s entirely with efficiency