The Digital Platform Economy and Its Challenges to Taxation

• Author: Thomas Fetzer and Bianka Dinger
• Pages: 30-56

2 ARTICLE_TAX.DOCX (DO NOT DELETE) 2019-12-20 11:48 AM

2019] THE DIGITAL PLATFORM ECONOMY AND ITS CHALLENGES TO TAXATION 30

THE DIGITAL PLATFORM ECONOMY AND ITS

CHALLENGES TO TAXATION

Thomas Fetzer

Bianka Dinger

Abstract

Digitalization is transforming many aspects of our everyday lives,

including the global business landscape. One of the most distinct

features of the digital economy is the rise of platforms. Digital

platforms not only change the supply chain in many industries but

also create fundamental challenges for established tax principles.

This paper will cover two of the most imminent challenges.

The first part of the paper is dedicated to the taxation of digital

platforms themselves. According to international tax law, income

taxation shall be linked to the source of the income. The current tax

system assumes that a company will only create taxable income in a

non-resident country, if there is some physical nexus with that

country (e. g. a permanent establishment). However, many platforms

in the digital economy offer their services to customers worldwide

without having any physical presence in countries where the

customers are located. This raises the question as to whether income

taxation of platforms should be linked to the country of residence of

the customers of a digital platform rather than the country of

residence of the platform operator. In this regard, the initiatives of

the European Commission on the digital services tax and the

significant digital presence will be evaluated.

The second part of the paper covers enforcement issues created by

the platform economy. As transactions between different user groups

of a platform, it is oftentimes difficult for tax authorities to

determine tax liabilities. The paper will, therefore, suggest

alternative mechanisms to ensure taxation. The focus will be on the

withholding tax system, which obliges platform operators to deduct

the tax on behalf of platform users. Whether and to what extent the

operator of sharing economy platforms can be held liable remains to

be discussed.

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I. TAXATION OF DIGITAL PLATFORMS

A. Introduction

Following the ‘business goes global, taxes stay local’ principle,

deficits of international corporate taxation are exploited through

clever tax planning.1 Large multinational enterprises like Airbnb,

Alphabet, Apple, Facebook or Amazon are being criticized for not

paying adequate taxes. Their innovative digital business models are

challenging the established tax system.2

International taxation is based on the “taxation at source”

principle. According to this doctrine, international income flows are

subject to taxation in the country where income is derived from –

regardless of the country of residence of the person achieving that

income.3 Profits should be taxed where the value is created. 4 In

principle, however, according to the current tax law system income is

only taxed in the source state if the taxpayer has a physical nexus to

that state. Traditionally, the most important nexus for this limited tax

liability is a permanent establishment or appointment of a permanent

representative in a country. 5 In the digital world, the number of

cross-border transactions has been increasing significantly. A special

feature of digital business models is their global activity across

1 See Norbert Herzig, Globalisierung und Besteuerung [Globalization and Taxation], 1998 DIE

WIRTSCHAFTSPRÜFUNG 280; Adrian Cloer & Cosima Gerlach, Die „virtuelle Betriebsstätte“: Ein

angemessenes Instrument zur Besteuerung der „digitalen Wirtschaft“? [The “Virtual Permanent

Establishment”: An Appropriate Instrument for Taxing the Digital Economy], 100 FINANZRUNDSCHAU

[FR] 105, 106 (2018).

2 See Stephan Eilers & Florian Oppel, Die Besteuerung der digitalen Wirtschaft: Trends und

Diskussionen. Überblick über die Arbeiten der OECD und EU mit kritischer Einordnung [Taxation of

the Digital Economy: Trends and Discussions. Overview of the Work of the OECD and EU with

Critical C lassification], 27 INTERNATIONALES STEUERRECHT [ISTR] 361, 362 (2018); Joachim

Englisch, Seminar G: VAT and Direct Taxation of the Digital Economy, 25 ISTR 717 (2016); Marcel

Olbert & Christoph Spengel, International Taxation in the Digital Economy: Challenge Accepted?

WORLD TAX J. 3, 4 (2017).

3 See DIETER BIRK & MARC DESENS & HENNING TAPPE, STEUERRECHT [TAX LAW] 402 et seq.

(21st. ed. 2018).

4 See European Commission: Co mmission Staff Working Document — Impact Assessment

Accompanying the Document Proposal for a Council Directive Laying Down Rules Relating to the

Corporate Taxation of a Significant Digital Presence a nd Proposal for a Council Directive on the

Common System of a Digital Services Tax on Revenues Resulting from the Provision of Certain Digital

Services, SWD (2018) 81 final/2, 8.

5 See EINKOMMENSTEUERGESETZ [ESTG] [GERMAN INCOME TAX LAW] § 49 (1) Nr. 2 a); Birk et

al., supra note 3, at 410-11; KOLJA VAN LÜCK, STEUERRECHT UND DIGITAL ECONOMY.

LÖSUNGSANSÄTZE SACHGERECHTER BESTEUERUNG MU LTINATIONALER UNTE RNEHMEN DER

DIGITALISIERTEN WIRTSCHAFT [TAX LAW AND DIGITAL ECONOMY. SOLUTIONS OF PROPERTY

TAXATION OF MULTINATIONAL ENTERPRISES OF THE DIGITALIZED ECONOMY] 82 et seq. (2018).