1. 1 September 2015 CIAT Rome 2015 The Inspection Role in Tax Administration Fiscal Control of Digital Economy

2. 2 Summary 1.Business models of digital economy 2.Tax connection and revenues assignment 3.Characterization of the services provided by the internet 4.Payments to non-residents 5.Challenges in controlling digital economy companies 6.Conclusion

3. 3 Business models of digital economy Key features of the digital economy:  How companies can add value?  How companies make profits?  How are the concepts of source and residence related to business models?  How are characterized the earnings for tax purposes?

4. 4 Business models of digital economy Taxes involved:  Direct taxes (on corporative income)  Indirect taxes (VAT on the commercialization of goods and services)  Customs duties on importing goods  Special taxes (excise tax)

5. 5 Business models of digital economy Digital economy coverage:  E-commerce of goods  App Stores  Advertising and marketing  Cloud computing  Payment services  Participative platforms

6. 6 Business models of digital economy Digital economy evolution:  Companies adapt their business and market it on the network  Expansion of information and communication technology  Companies digitally born and new business models  The mobility of intangibles and multinational companies functions is strongly enhanced  BEPS phenomenon exacerbation

7. 7 Business models of digital economy Businesses that benefited from technological innovation:  Retail  Transport and Logistics  Financial services  Manufacturing and Agriculture  Education  Healthcare  Communication (media and broadcasting)

8. 8 Business models of digital economy Data and business adding value:  Content generated by users  Personal data, browsing preferences, geolocation  Value added that is difficult to measure  Pricing of companies’ value is more visible when start-ups are acquired or the companies are negotiated (merger, acquisition, etc.)  Mass of data is expanded with the “Internet of things”

9. 9 Business models of digital economy Content:  Content produced by professionals with copyrights  Content produced by users without copyrights (videos, comments, products revision, etc)  Important asset to attract audience and advertisers  Platforms built entirely by users  Fundamentals to the network marketing  Content allocation: Paid by the user Paid by the brand owner

10. 10 Business models of digital economy Mobilities in digital economy:  of intangibles: intra-company transfers  of users and consumers: make business anywhere in the world (connection)  of functions performed by the business: technology allows a remote central management of functions spread around the world and the access to markets without physical store (scale gain without large teams)

11. 11 Tax connection and revenue assignment Permanent establishment (PE): Rules foreseen in Art. 5 of the UN and OECD Model Convention Companies profit: Art. 7 of the Model Convention Specials rules: interest, dividends, royalties and capital gains BEPS project (Action 1- Digital Economy)  Changing the concept of PE (Action 7 of BEPS Project)  Did not defined “digital economy presence” for purposes of characterizing a PE

12. 12 Tax connection and revenue assignment Revenue assignment and taxation: Need to initially characterize the connection, for instance, as a permanent establishment Taxation on the source of certain transactions Attribution of presumed profit to permanent establishment: Fractional apportionment: fractionate the total profit in the light of digital presence. This methodology apparently has low acceptance

13. 13 Characterization of services provided by the Internet Cloud computing  The activity is not mentioned in the comments of the OECD Model Convention  Many categories of cloud computing, such as the Infrastructure-as-a-Service (IaaS)  The IaaS can be characterized as services (Art. 7 of the OECD Model)  The IaaS can also be characterized as an equipment rental, equivalent to royalties (Art. 12 of the OECD Model) in some tax treaties

14. 14 Characterization of services provided by the Internet 3D printing, consultancy of architects, engineers and programmers:  Can be treated as services (Art. 7 of the OECD Model)  Can be treated as remuneration of technical services that, in some tax treaties, are equivalent to royalties (Art. 12 of the OECD Model)

15. 15 Characterization of services provided by the Internet Telecommunications network:  Internet Service Providers (ISP): operate the Internet infrastructure and are often geographically restricted  Over the Top – OTT: Companies that operate and offer services on broadband. It uses the existing infrastructure and have global action Taxation of OTTs:  May not be taxable in market countries  Compete in unequal conditions, which favor them in relation to market country companies

16. 16 Payments to non-residents Companies’ revenue in the digital economy  Revenues based on advertising  Rent or sale of digital content  Sale of goods, including virtual items  Revenues based on subscription  Sale of services  Content and technology licensing  Marketing of data from users and customized market research  Hidden fees or losses embedded in the operation

17. 17 Payments to non-residents Difficulties in the operation characterization:  In the seller identification: it cannot be expected the register or any type of identification in the market country  In the consumer identification: delivery addresses, credit card information, IP  In the determination of activities extension: amount traded by the non-resident company in the market country  In the exchange of information with foreign countries: due to the difficulty of identifying the country to request assistance

18. 18 Payments to non-residents Online payments services  Credit cards (especially in B2C)  Intermediaries: establish a trust relation in the transaction between the client and the supplier (especially B2C)  Intermediaries can be characterized as SaaS (Software-as- a-Service), service offered in the cloud  Others payments options: prepaid cards (cyber-wallets)

19. 19 Payments to non-residents Confusion in the identification of the client:  In B2C transactions, the client mobility on the planet can complicate his localization  In B2B transactions, there may be payments flows that do not correspond to the flow of services provision. Example: consultancy services provision to subsidiaries of a parent company in various countries. There may be a confusion in identifying the localization of clients when the payment is centralized in the parent and the service is delivered in many countries.

20. 20 Payments to non-residents Digital economy structure in levels  In digital economy, the information and communication technology (ICT) is structured in superimposed levels, being the ICT infrastructure the inferior level, while the superior is the final consumer.  Each level has its hardware, software and peopleware  One company that operates in a level is usually paid by a superior level entity, the one that makes payments to inferior levels entities.  Multiple localizations and difficulty in characterizing services

21. 21 Challenges in controlling digital economy companies BEPS phenomenon in the digital economy  Minimization of taxation in the market country, avoiding to characterize the taxable presence  Low or non-existent withholding tax  Low or null taxation of company in low-tax intermediary country (intra-group transactions) or with preferential arrangements.  Legal arrangements for non-taxation of a parent company results (residence country)

22. 22 Challenges in controlling digital economy companies Combating the BEPS phenomenon in direct taxation  CFC rules: combat intangibles mobility  New limits on the permanent establishment concept  Transfer of intangibles and transfer pricing adjustments  Exchange of information among tax administrations in relation to businesses and functions performed by subsidiaries and affiliates of multinational companies.  Rules more burdensome for transactions with preferential tax regimes without substance.  Neutralize hybrid instruments and interest payments effects

23. 23 Challenges in controlling digital economy companies VAT in cross-border transactions  The destination principle: tax due in the final consumer country  Need to identify the country of destination  B2B and B2C transactions: different strategies possibilities of tax collection in the trade of goods and services Collection timing in the trade of goods  VAT on the import of goods: usually charged during the payment of customs duties.

24. 24 Challenges in controlling digital economy companies International trade of small value goods:  Countries grant exemptions for small values  Cost-benefit to effectively charge low values Brazil:  General rule: only remittances between individuals up to US$ 50 are exempted. Remittances of goods sent by companies are taxed regardless of the value  One team of five people controls one hundred thousand objects per month  Tax collection effectiveness for small value goods (custom fees + VAT)

25. 25 Challenges in controlling digital economy companies B2B services trades:  Withholding income tax Relative ease to impose taxation in withholding income tax, requiring the service user to retain the tax Brazil: intermediary (financial institution) verifies the withholding income tax to carry out the payment transfer to the non-resident service provider  VAT The compliance of VAT legislation can be more complex if there are taxes to be charged in sub-national level (states or municipalities)

26. 26 Challenges in controlling digital economy companies B2C services trade:  Can drastically reduce the supply chains (wholesalers, distributors, retailers and intermediaries)  Difficulty on imposing the legislation to the consumer, in case of withholding income tax  Payments usually done by credit card, Paypal and others  Good practice: non-resident registration in the market country, so the VAT can be collected and delivered

27. 27 Conclusion The digital economy is still an opened theme:  Implementation of BEPS Project measures  Monitoring the effectiveness of BEPS Project measures in relation to the digital economy  Domestic legislation: registration of non-resident companies that provide services in the market country  Withholding income tax for digital or electronic services  Future reassessment of the permanent establishment concept (digital presence in the market country)

28. 28 Thank you!!!