Tax Theory Applied to the Digital Economy: A Proposal for a Digital Data Tax and a Global Internet Tax Agency

  • Cristian Óliver Lucas-Mas and Raúl Félix Junquera-Varela
  • Jan 2021
  • The World Bank Group (WBG)
  • International

This book is about the scope of state sovereignty, which entails two exclusive faculties that are reserved for governments only: the power to tax and the power to punish. These powers go together, and each needs the other. Governments levy taxes under the threat of punishment, and the necessary institutional means to punish are funded through taxes. The power to tax encompasses the power of states to obtain resources for public purposes from their citizenry and their territory, which is the basis for residence taxation and source taxation, respectively. However, this power needs to be balanced to ensure fiscal sustainability. Unfortunately, high-income economies are facing an unprecedented fiscal deficit, which the post COVID-19 crisis will exacerbate. In this context, some countries are coming close to exhausting their fiscal space, especially as to raising residence-based taxes, which are unpopular and have a high political cost.
Hence, they are shifting their revenue strategy toward increasing their source taxing rights at the expense of claiming a portion of the residence taxing rights of other countries (mainly, the United States) over the digital economy. This approach, at first popular among constituents, might eventually backfire on them, since a significant share of the tentative direct tax to be paid by nonresident digital companies probably would be shifted to local customers, who already bear the burden of indirect taxes. On the one hand, remote sellers and digital platforms lacking a physical presence pose challenges for their role and responsibilities in the administration of consumption taxes on digital transactions (registration, collection, remittance, enforcement mechanisms). On the other hand, the digital economy has not altered indirect taxing rights, since the power to tax consumption clearly corresponds to market jurisdictions where customers are located. As a result, there is no additional tax revenue to gain for those countries.
Therefore, the digital debate focuses on direct taxation and the creation of new taxing rights arising from the tax claims of market jurisdictions on income obtained by foreign digital suppliers conducting business therein without any physical presence (digital services taxes, Amount A of the Unified Approach of the Organisation for Economic Co-operation and Development [OECD]); these tax claims are the focus of this book.