The economy that you see before you today is vastly different from the one we had in the 20th Century. Advancements in technology have not only increased the pace of progress in modern societies but have also rendered entire job categories and industries entirely redundant. This is the new age we live in. Despite these advances, global taxation rules are still struggling to keep pace with the advent of new technologies.
A simple example of how taxation rules are still behind can be found in the social media space. We all have that one friend who has an Instagram account that has 100 thousand followers, earning amounts ranging from a couple of hundred dollars to perhaps even thousands per social media post. Or that friend who's freelancing his or her way to buying a new house that you still cannot afford. These are the "new jobs" in this new economy that have somehow fallen through the cracks within existing taxation structures. As you can observe, the economy of the 21st Century is fluid, with less structural boundaries given that the world itself has become increasingly borderless.
This means that persons operating their businesses through online platforms (like Instagram) would hardly have a business presence in any particular country. Just imagine this scenario. A person develops a large social media following (in excess of 100,000 followers) and thus has a sufficient enough scale to market a particular product around the world. That person then decides to sell products by advertising them through these social media channels and completes transacts via private messages which are totally hidden from the public view. Transactions are then completed by an online transfer of funds or cash on delivery of the particular product being sold. In cases where no products are sold, but merely services i.e. the social media account's owners "influence", tracking revenue generated becomes even more of a complex exercise.
These are the types of transactions that are increasingly difficult to track and have become the bane of tax administrators worldwide. Developed nations are scrambling to legislate ways in order to plug these potential leakages in revenue. In the case outlined above, imagine if the product being sold was priced at USD 10. If even as little as 5% of the social media followers were to purchase that product, that would mean a revenue of USD 50,000 through private transactions would potentially go untaxed.
The potential impact for leakage of government revenues could increase exponentially over the next few years. A recent study from GlobalWebIndex notes that social commerce (i.e. ecommerce through social media) is gaining momentum in 2018. Consumers are increasingly likely to search for products through platforms such as Instagram before making a purchase and are even more likely to purchase the product directly through Instagram if that option is available.
Hence, greater questions need to be asked on how administrators can start to tackle the untaxed economy. Australia is one country that's leading the charge with regard to taxing the social media space. The country is set to introduce a unique form of "Instagram Tax" in July 2019 where tax administrators are aiming to capture income made through advertising, sponsorships, free products, public appearances and promotions. This is aimed at reducing tax leakages and preventing individuals from under-declaring personal income taxes in the future.
In addition, Malaysia is also set to introduce a tax on internet platforms such as Netflix and Spotify by the year 2020, in order to protect local media industry players as well as to balance out the collection of tax revenue from the overall media industry. This is especially considering that traditional media businesses i.e. print media and satellite TV companies, are experiencing a sharp decline in demand for their product offerings leading to lesser collection of tax revenues from the government's perspective. Similar taxes have also been legislated in certain cities around the United States such as Chicago and Florida.
The above is merely a manifestation of the various global efforts that are being undertaken to ensure that businesses, which operate primarily in the online space are not indirectly exempted from paying their fair share of taxes just because they do not operate within physical boundaries. The initiatives by the OECD including the publication 2018 Interim Report on Tax Challenges Arising from Digitalization and the further commitment to monitor developments in this space up until 2020 showcases the vital importance of addressing these changes in the business environment from an international tax perspective.
The global business reaction to such tax legislation may not be entirely positive at first, but over time, adherence to new digitalization-driven tax legislation would lead to increased government revenues across the globe. This would only benefit societies as a whole and could potentially result in greater access to much needed funds to spur the next stage of development in the global economy.
Disclaimer: This above article was prepared or accomplished by the author in his personal capacity. The opinions expressed in this article are the author's own and do not reflect the views of any particular organization. This article first appeared on LinkedIn on 28 December 2018.Back to Articles Back to Kishenjeet Dhilon
The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.
Kishenjeet is a tax advisor based in Malaysia who specializes in tax matters relating to transfer pricing and international taxes. Professionally, Kishenjeet started off his career with one of the Big 4 consultancy practices where he was part of the pioneering team involved in the implementation of the Goods and Services Tax (GST) in Malaysia for various multinational clients. He has worked in the past with clients on multiple tax issues including transfer pricing, sales and services tax, indirect tax compliance, GST implementation and planning, Customs and trade matters and international VAT assignments. Kishenjeet has also participated in various discussion forums at institutes of higher learning and has also acted a business case judge. He holds a Bachelor’s degree from Lancaster University, UK and is currently pursuing a Masters in Business Administration with the University of Wales Trinity Saint David, UK. He is also a qualified Certified Practicing Accountant with CPA Australia and a Chartered Accountant with the Malaysian Institute of Accountants.
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