Digital disruption impacts not only businesses, but also global tax systems
The business world, having reinvented itself multiple times, is in the midst of a fourth industrial revolution that features the economic and social fusion of the physical and digital worlds. Industry 4.0 is not a phenomenon limited to technology companies. Businesses in all sectors are, or soon will be, evaluating and adopting new models that take advantage of technological advancements in order to create additional value for their existing and potential customers.
In response, global tax systems have and will continue to transform and adapt to new business concepts and models. Even though the need to evolve is well understood, the prospect of change creates immense uncertainty for businesses and governments everywhere.
The blurring of physical and digital worlds poses some big questions for tax policy and lawmakers. After all, existing tax systems were designed in, and for businesses operating in, a traditional, physical world. For example, governments generally tax businesses that are in their jurisdictions - the businesses are located, do business, own assets, create value, and/or employ people there—all physical concepts. Many governments tax goods and services where they are purchased or on the basis of when and where value is added in the production or distribution chain —more physical constructs.
Also consider the challenge facing governments that impose employment taxes on employees. In the fast-growing gig economy, where nontraditional contributors and crowdsourcing are leveraged to create solutions, it’s fair to ask, “Exactly who is an employee?” As traditional employment partially yields to contractors and crowds, will government benefit systems—predicated on traditional employment paradigms—erode over time? In a world where all businesses create value through ecosystems, how will tax systems attribute and value member contributions? How should cryptocurrency trades be taxed? Some are even wondering aloud if and how robots should be taxed.
It is critical that global tax systems keep pace with economic and societal changes because tax revenue remains the funding mechanism for public and social infrastructure. Society simply cannot function without efficient, modern tax systems. It’s equally imperative that changes to the world’s tax systems occur in a universally coordinated manner to avoid damaging the global economy.
Historically, such coordination has proven difficult because individual countries’ governments have had different priorities driving their tax system policies. Many governments have used tax incentives as competitive levers to attract business investment and jobs. These unilateral approaches created odd incentives for global businesses, cross-border trade and investment. And because countries compete with one another for the world’s tax revenue, a shift in one country’s tax system(s) will often ripple throughout the world and cause other countries to adjust theirs. Several countries have already announced a re-evaluation of their tax systems in reaction to US tax reform.
With the support of the G20, in 2013, the OECD commenced a globally coordinated effort to create minimum standards that countries participating in the project (which now number more than 100) agreed to implement into their local tax laws. The OECD/G20 is continuing its focus on taxation issues in a digital economy. This synchronized approach is far superior to individual country’s unilateral actions and must continue.
The scope of recent and impending tax law changes is unprecedented and places immense pressure on businesses, especially those that are aggressively transforming for the digital age. Time and valuable resources are needed to comply with new requirements, and to assess the tax cost uncertainties of new business models.
Business leaders need to understand the magnitude of the changes afoot as they develop and implement their strategic growth plans. They should pay close attention to their tax positions and uncertainties given that recent and future changes may impact their financials in ways they did not expect. And, last but not least, they should appreciate and heed their tax professionals, because they need them now more than ever to comply.
