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ALI-NAKYEA & ASSOCIATES

ALI-NAKYEA & ASSOCIATES. TAXING THE DIGITAL ECONOMY: THE WAY FORWARD BY ABDALLAH ALI-NAKYEA AT ICAG PUBLIC EDUCATION PROGRAMME KEMPINSKI HOTEL, ACCRA WEDNESDAY, JUNE 26, 2019. Agenda. Introduction and understanding Influence of the d igital economy

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ALI-NAKYEA & ASSOCIATES

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  1. ALI-NAKYEA & ASSOCIATES TAXING THE DIGITAL ECONOMY: THE WAY FORWARD BY ABDALLAH ALI-NAKYEA AT ICAG PUBLIC EDUCATION PROGRAMME KEMPINSKI HOTEL, ACCRA WEDNESDAY, JUNE 26, 2019 · Abdallah Ali-Nakyea (Managing Partner)

  2. Agenda • Introduction and understanding • Influence of the digital economy • Challenges facing the digital economy • Administrative challenges in the digital economy • Efforts to tax the digital economy • European Union Case Study • The Way Forward • Conclusions · Abdallah Ali-Nakyea (Managing Partner)

  3. INTRODUCTION AND UNDERSTANDING • Rouse (2017) regards the digital economy as the worldwide network of economic activities, commercial transactions and professional interactions that are enabled by information and communications technologies (ICT). • Don Tapscott is credited with having first coined the term “digital economy” in his 1995 best-selling book titled “The Digital Economy: Promise and Peril in the Age of Networked Intelligence.” · Abdallah Ali-Nakyea (Managing Partner)

  4. The digital economy, due to its reliance on internet connectivity, was sometimes called the internet economy, the new economy or the web economy. • The digital economy is more advanced and complex than the internet economy, hence the need for the distinction. · Abdallah Ali-Nakyea (Managing Partner)

  5. The digital economy uses multiple advanced technologies and new technology platform which include • hyperconnectivity, • the internet of things (IoT), • big data, • advanced analytics, • wireless networks (including e-commerce), • mobile devices, and • social media · Abdallah Ali-Nakyea (Managing Partner)

  6. OECD Working Party on Indicators for the Information Society define e-commerce as “the sale or purchase of goods or services, conducted over computer networks by methods specifically designed for the purpose of receiving or placing of orders.” • Section 16 of the Value Added Tax Act, 2013 (Act 870) defines electronic commerce to cover “business transactions that take place through the electronic transmission of data over communications networks like the internet”. · Abdallah Ali-Nakyea (Managing Partner)

  7. The digital economy has a huge impact on economic systems as it influences the structure, processing, products and general nature of the traditional economy. • The digital economy does not only affect economic systems, it also influences revenue mobilization hence the current trend of worldwide discussions and efforts on how to tax it. · Abdallah Ali-Nakyea (Managing Partner)

  8. MAIN CHARACTERISTICS OF THE DIGITAL ECONOMY i product structures processes platforms & services

  9. INFLUENCE OF THE DIGITAL ECONOMY • Owing to digitalisation the structure of businesses are changing. • The way companies interact with the market is changing as the individuality of customers is more recognized in the digitalized economy. • The platform for conducting business has equally changed. • Technical platforms have been introduced to facilitate the digitalised way of conducting business hence the ability to conduct business from multiple places of the world at a single time (Zimmermann, 2000). • This presents the difficulty of determining the specific location of a business. · Abdallah Ali-Nakyea (Managing Partner)

  10. Unlike conventional commerce, e-commerce as an aspect of the digital economy does not take place in a physical market and this renders the task of identifying the seller and buyer in those transactions for tax purposes very difficult. • The current tax rules which were designed to address “brick and mortar” economies appear inadequate in addressing the tax issues posed by the digital economy. · Abdallah Ali-Nakyea (Managing Partner)

  11. Challenges facing taxation of the Digital Economy(OECD, 2018) • There will be a drastic reduction in revenue mobilisation as most tax avenues are dissipated through digitalization. • Unfortunately international tax rules were not designed to cater for this evolution in business models, which appear to be fundamentally different from the nature of business when the rules were designed. • Advances in business practices, coupled with advances in ICT and liberalisation of trade policy, have allowed businesses to centrally manage many functions that previously required local presence, rendering the traditional model of doing business in market economies obsolete. · Abdallah Ali-Nakyea (Managing Partner)

  12. In the area of direct taxation, the report places the main policy challenges raised by the digital economy in three categories, namely; nexus, data and characterisation. • Nexus: The appropriateness of the current rules regarding nexus with a jurisdiction are brought into question when one considers the reduced need, owing to the digital economy, for extensive physical presence in order to carry on business. • The fact that it is possible to generate a large quantity of sales without a taxable presence makes one look at the current definition of permanent residence for treaty purposes, and the related profit attribution rules if they are appropriate in the face of digitalisation. · Abdallah Ali-Nakyea (Managing Partner)

  13. Data: The growth in sophistication of information technologies has permitted companies in the digital economy to gather and use information across borders to an unprecedented degree. • This raises the issues of how to attribute value created from the generation of data through digital products and services, and of how to characterise for tax purposes a person or entity’s supply of data in a transaction, for example, as a free supply of a good, as a barter transaction, or some other way. · Abdallah Ali-Nakyea (Managing Partner)

  14. Characterisation: The creation of new digital products or services owing to the advent of the digital economy makes it difficult to characterise payments made in the context of new business models. • The Digital economy has enabled new ways of monetization, which are not captured by the existing categorisations of income and therefore pose a challenge for consistency of treatment of similar types of transactions. · Abdallah Ali-Nakyea (Managing Partner)

  15. European Court of Justice ruled in Skatteverket v David Hedqvist (Case C-264/14) that bitcoin is currency therefore not subject to VAT. • The sellers who usually engage in e-commerce transactions avoid the payment of direct tax such as income tax and buyers who engage in e-commerce transactions also escape the payment of indirect taxes such as VAT. · Abdallah Ali-Nakyea (Managing Partner)

  16. Administrative challenges in the digital economy • Due to the nature of the digital economy tax authorities face the administrative issue of identifying businesses, determining the extent of their activities, collecting and verifying information, and identifying customers. • Identification: It is often difficult for tax authorities to know that activities are taking place, to identify remote sellers and to ensure compliance with domestic rules. Difficulties in identifying remote sellers may also make ultimate collection of tax difficult. · Abdallah Ali-Nakyea (Managing Partner)

  17. Determining the extent of activities: The borderless nature of the digital economy may make it difficult if not impossible to ascertain the extent of sales or other activities due to the absence of sales or accounting records held in the local jurisdiction. • Information collection and verification: Due to digitalisation, a tax administration, which needs information, may have to seek such information from a business that is not even in its jurisdiction and not subject to its regulations. • Although, the revenue authority may resort to exchange of information with another country, such efforts may be useful only if the tax authority knows where the offshore entity is resident in the first place. · Abdallah Ali-Nakyea (Managing Partner)

  18. Efforts to tax the Digital Economy • There is yet to be a consensus on how to tackle taxation of the digital economy. • Some countries, however have indicated they would implement interim measures to tax the digital economy. • According to chapter 6 of the OECD report in 2018, the most immediate concern for the countries that are calling for interim measures to tackle taxation of the digital economy relates to those “digitalised businesses that have a significant market presence, but have little physical presence, in the local jurisdiction and which have business models that rely heavily on intangible property, data, user-participation and network effects. · Abdallah Ali-Nakyea (Managing Partner)

  19. Countries that are in favour of the introduction of interim measures recognise the need to take the following considerations into account: • be compliant with a country’s international obligations; • be temporary; • be targeted; • minimise over-taxation; • minimise impact on start-ups, business creation and small businesses more generally, and • minimise cost and complexity. · Abdallah Ali-Nakyea (Managing Partner)

  20. BEPS INTERVENTIONS • Action Plan 1 of OECD/G20 Base Erosion and Profit Shifting Project requires that we “identify the main difficulties that the digital economy poses for the application of existing international tax rules and develop detailed options to address these difficulties, taking a holistic approach and considering both direct and indirect taxation.” · Abdallah Ali-Nakyea (Managing Partner)

  21. BEPS INTERVENTIONS • The Task Force on the Digital Economy (TFDE), a subsidiary body of the Committee on Fiscal Affairs (CFA) was established in September 2013 to develop a report identifying issues raised by the digital economy and detailed options to address them. • In the Final BEPS Report on the Digital Economy, the (TFDE), agreed to modify the list of exceptions to the definition of PE to ensure that each of the exceptions included therein is restricted to activities that are otherwise of a “preparatory or auxiliary” character, and to introduce a new anti-fragmentation rule to ensure that it is not possible to benefit from these exceptions through the fragmentation of business activities among closely related enterprises. · Abdallah Ali-Nakyea (Managing Partner)

  22. BEPS INTERVENTIONS • The (TFDE), also agreed to modify the definition of PE to address circumstances in which artificial arrangements relating to the sales of goods or services of one company in a multinational group effectively result in the conclusion of contracts, such that the sales should be treated as if they had been made by that company. · Abdallah Ali-Nakyea (Managing Partner)

  23. POST - BEPS INTERVENTIONS • In March 2018, the OECD released an interim report on the Tax Challenges Arising from Digitalisation. • The Committee of Experts on International Cooperation in Tax Matters Eighteenth Session, New York, 23-26 April 2019 also issued a report on the tax issues related to the digitalization of the economy. · Abdallah Ali-Nakyea (Managing Partner)

  24. POST - BEPS INTERVENTIONS • The Inclusive Framework and the TFDE are considering three proposals. • Two of the proposals relate to allocation of taxing rights which is aimed at modifying the rules on profit allocation and nexus based on the concept of user contribution or marketing intangibles. • The third proposal deals with the concept of Significant Economy Presence. · Abdallah Ali-Nakyea (Managing Partner)

  25. POST - BEPS INTERVENTIONS • First two of the proposals are anchored on the principle that business profits should be taxed in the countries where value is created irrespective of the state in which the business is located. • Thus, for social media platforms and online marketplaces, it is believed that the users of these products create value for the owner and thus, the value created should be quantified and taxed in the country where that value is created. · Abdallah Ali-Nakyea (Managing Partner)

  26. POST - BEPS INTERVENTIONS • Under the Significant Economic Presence proposal, a taxable presence in a country would be created when a non-resident enterprise has a significant economic presence based on certain factors, which include • revenue generated on a sustained basis from a jurisdiction, • the user base and the associated data input, • the volume of digital content collected through a digital platform from users etc. · Abdallah Ali-Nakyea (Managing Partner)

  27. European Union Case Study(Alan Rhode, 2018) • The EU Commission and Council in late 2017 officially identified long and short term avenues to make the taxation of digital activities fairer. • In the long term, they intend to embed taxation of the digital economy into the general international corporate tax framework, while in the short term they would introduce equalisation tax on turnover of digitalised companies, a withholding tax on digital transactions or a levy on revenues generated from the provision of digital services or advertising activities. · Abdallah Ali-Nakyea (Managing Partner)

  28. On March 21, 2018, the EU made two legislative proposals, which aimed to do as follows: • To reform corporate tax rules so that profits are registered and taxed where businesses have significant interaction with users through digital channels. • To have an interim tax which covers the main digital activities that currently escape tax altogether in the EU. · Abdallah Ali-Nakyea (Managing Partner)

  29. In addressing the taxation of the digital economy, the EU has made two long term proposals. • One lays down the rules to determine a taxable nexus for digital businesses operating across border in case of a non-physical commercial presence (“a significant digital presence”). • The other sets out the principles for attributing profits to a digital business, which should better capture the value creation of digital business models, which highly rely on intangible assets. · Abdallah Ali-Nakyea (Managing Partner)

  30. The Significant Digital Presence • A business holds a significant digital presence in an EU state during a specific tax period if and when: • Its activities consists, wholly or partly of digital services supplied through a digital interface; • At the group level, at least one of the following threshold is met during the tax year • threshold of more than €7million in annual revenues in that EU state; or • it has more than 100,000 users in that EU state; or • over 3,000 business contacts (B2B) for digital services are created in that tax year · Abdallah Ali-Nakyea (Managing Partner)

  31. Meaning of Digital Services • Digital Services are those services delivered over the internet or an electronic network, the nature of which renders their supply essentially automated and involving minimal human intervention and impossible to ensure without information technology. • According to the Directive proposal, they also include: • Supply of digitised products, including software and changes/upgrade of software; • Services providing/supporting a business/personal presence on an electronic network (e.g. website or webpage); • Services automatically generated from a computer via the internet or an electronic network, in response to specific data input by recipient; • Online marketplace intermediation services; • Internet Service Packages (ISP) going beyond mere internet access and including other elements such as content pages giving access to news, weather or travel reports, playgrounds, website hosting, access to online debates or any other similar elements. · Abdallah Ali-Nakyea (Managing Partner)

  32. Profits Distribution • The rules of profit distribution will be built on the current principles for profit attribution and be based on a functional analysis of the functions performed, assets used and risks assumed by a significant digital presence. • Transfer pricing rules. • In determining the attributable profits, due account shall be taken of the economically significant activities performed by the significant digital presence relevant to the development, management and exploitation of intangible assets. · Abdallah Ali-Nakyea (Managing Partner)

  33. The EU short-term proposal • In the short term, the EU Commission has proposed a Digital Service Tax (DST) for adoption by EU states. • The DST is a levy on gross revenues that would go alongside corporate income tax. · Abdallah Ali-Nakyea (Managing Partner)

  34. THE WAY FORWARD • The international community is yet to reach a consensus on the most appropriate way to tax the digital economy. • Until such a consensus is reached, states may adopt unilateral measures in their domestic law to address some of the challenges associated with the taxation of the digital economy. · Abdallah Ali-Nakyea (Managing Partner)

  35. Expand the definition of PE under the Income Tax Act, 2015 (Act 896) to include the provision of services in relation to e-commerce. • A working definition for e-commerce can be adopted from the Value Added Tax Act, 2013 (Act 870). • Enforce Regulation 7 of the Value Added Tax Regulations, 2016 (L.I. 2243) which requires agents of non-resident persons in Ghana to register and charge VAT if a non-resident who provides telecommunication services or e-commerce to persons in Ghana fails to register and charge VAT · Abdallah Ali-Nakyea (Managing Partner)

  36. Where a person provides a platform for the buyer and seller to interact such as tonaton.com, olx.com etc. it is difficult to trace the buyer and seller of the products. • However, items such as cars and landed property sold on such platforms will require a change of ownership to complete the transaction. • Thus, Part II of the First Schedule to the Revenue Administration Act, 2016 (Act 915) which requires the production of a tax clearance certificate to transact business with entities such as DVLA, Lands Commission etc. should be strictly enforced. · Abdallah Ali-Nakyea (Managing Partner)

  37. CONCLUSIONS • Digitalisation is a phenomenon that has come to stay and is only bound to grow deeper and deeper. • If we are going to tackle it, then we would need a well-thought and tailor-made policy to address it, while considering the likely international consensus to be adopted to deal with it. • In our quest to address the tax issues that the growth of the digital economy poses, we must not lose sight of tax neutrality. • An approach that places unnecessary impediments in the way of players in the digital economy will only lead to alternative innovative means of tax avoidance. • A balanced approach which addresses the competing needs of both the tax administrators and taxpayers is recommended · Abdallah Ali-Nakyea (Managing Partner)

  38. THANK YOU FOR YOUR TIME AND ATTENTION BEST REGARDS AND DO STAY BLESSED · Abdallah Ali-Nakyea (Managing Partner)

  39. Presenter Abdallah Ali-Nakyea FCIT, MIIA, MTP (SA), Professional Accountant (SA), CA (Gh), LLB (Hons), BL, MPhil (Econs) (Managing Partner) Placeholder for photo Ali-Nakyea & Associates(Tax Attorneys, Solicitors & Consultants) P.O. Box KD 66Kanda-Accra, Ghana Tel +233 (244) 23 5144 +233 (302) 23 6334Fax +233 (302) 23 6334E-mail: abdallah@alinakyea.com alinakyea@gmail.com Website: www.alinakyea.com · Abdallah Ali-Nakyea (Managing Partner)

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