The current tax system is no longer adequate because it is not designed for digital business models like Airbnb, Uber, or Amazon. This gives rise to international tax debates, which sometimes raise the question whether we should fall back on ‘old-fashioned’ tax systems. Digital technology, the virtual presence, is new. However, the fundamental cornerstone of taxation - where profits are realized - is not. Even in the Dutch colonial era, a pertinent question was which part of the profits of multinationals could be attributed to the Dutch East Indies and taxed there. Fred van Horzen, partner at KPMG Meijburg & Co, explains.
The Dutch East Indies had a unique take on taxation. The multinational was regarded as a single organic entity, i.e. as a single taxpayer, and was assumed to earn a consolidated profit. This profit was allocated to all countries where the multinational was active. This profit allocation took account of ‘external’ factors from the source country that had an impact on the profit of the business. For example, the fact that the multinational benefited from the Dutch East Indies’ large sales market, natural resources and infrastructure, such as roads and ports.
No raw materials, but data as a profit generator g
The approach applied in the Dutch East Indies at the time could also apply to the taxation of profits made with digital business models. But we would have to abandon the principle that only profit tax can be levied on businesses established abroad if they have a physical presence in the territory of a source country. A principle that is supported globally. We would have to look at where a multinational is virtually located. And any profit allocation would not only take account of the supply of goods or services by the business to customers in that country, but also other factors. For example, the data that a company collects in that country. One thing is certain: data is not given away for free to businesses that then benefit from it. After all, tax is levied where value is generated. Without data, no value can be generated, so part of the generated profit is attributable to the data provider. Can’t we conceive of a system where people are indirectly paid to use data?
Back to humanitarian resources
That’s possible. The standard construction for the extraction of physical mineral resources is that the ‘operator’ pays a license fee to a government, the legal owner of the resources. The government consequently shares in the revenues from its mineral resources. Businesses thus pay an entrance fee. Why couldn’t such a construction apply to the data that today’s multinationals receive from market parties? If we consider the behavior and data generated by a population as a natural resource, then it would only be accessible and could be used in exchange for a fee. The government represents the citizens and receives the fee on their behalf. Makes sense, doesn’t it?
New allocation formula for the global pie
In the 19th century this was actually the case in Prussia. Merchants needed a permit when they wanted to sell goods in a certain municipality where they did not live. The price of such a permit depended on the number of citizens in that municipality. No tax, but the entrepreneur did pay a fee for access to the market. This approach requires a new vision of how the global pie should be divided. In short: how do we ensure that in a digital economy, where data is the key to profit, taxes are indeed levied? For this to work, an allocation formula is required. For example, by looking at the number of citizens of a country and an age range that serves as factor. This then forms the basis for estimating the profit attributable to data, after which a certain percentage of the revenue goes to the country in question.
Level of acceptance is crucial
Sounds pretty simple. Unfortunately, it stands or falls on its degree of acceptance. Analyses can identify how many of a country’s citizens are active online, but these analyses can also identify which businesses are targeting that part of the population. These businesses have access to data and, according to this approach, should pay for it.
The big question here is whether everyone can be persuaded to do so. Nowadays, this approach is very unusual and involves a certain degree of acceptance. If tax is going to be levied worldwide in a different manner, there are always going to be countries that object. And this is where the problem lies. The OECD has plans in this direction for a new distribution of the profit pie. Specific follow-up steps are currently expected to be taken during the course of 2020.
Would you like to know more about the consequences of the above developments for your business? Please feel free to contact Fred van Horzen or your designated contact at KPMG Meijburg & Co.