The taxing question of digital business

Digital technology has changed – and continues to change – our lives. It’s also changed how businesses operate in fundamental ways. But is there really such as thing as a separate, and distinct, ‘digital business’?

We now talk about not just ‘the economy’ but ‘the digital economy’ too, as if they’re two separate things. I don’t think they are. Digital technology hasn’t created a different business; it’s just changed the way in which business is delivered. Consumers use digital technology to communicate with businesses, and vice versa, and businesses have digitised many of their processes, but they’re still essentially the same processes underneath.

The perception that business and digital business are two different things has even pervaded the world of tax.  The OECD set up a task force to look at ‘tax and the digital economy’, in response to arguments that ‘digital business’ is behind the reason why multinational companies aren’t paying as much tax as they might.

In fact, the OECD task force quickly came up with a similar conclusion. There aren’t distinct ‘digital businesses’ that need separate tax rules, it said, because the digital economy is fast becoming the economy itself. ‘Digital’ means using modern forms of communication, something every business in every sector does – although some, clearly, are doing it rather more efficiently, in both business and tax terms, than others.

The essential problem is that taxes, by and large, were designed for the 1920s world of business, when people made things that you could see and touch, and other people bought them with real money. And if the buyer and seller needed to exchange things, or talk to each other, they used pen and paper, boats and trains.

The problem for the tax authorities is that business in the digital world is rather different. The newest companies deal almost entirely in intangibles. And as an added complication, digital technology has made it possible to locate parts of the business in different territories from those in which customers are based. In the digital economy, it’s much harder to work out who is doing what, where, and with whom.

So it’s not that we need an entirely new tax system – what we need is a tax system that’s better adapted to global business in the digital age. In future blogs I’m going to talk more about the problems that the OECD will have to tackle, and what might be done about it – thoughts and bright ideas are most welcome!


John Steveni | Communications Tax Leader
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