THE ISSUE OF TAXATION IN THE DIGITAL ECONOMY

Abstract

The world has entered a period of deep transition with rapid and incredible development of innovations. The rise of the digital economy has dramatically changed the global business environment, creating new challenges for the tax system. Newspapers and magazines are being replaced by the Internet, and trade in material goods is being replaced by digital services. The digital economy destroys the barriers of time, space, and distance. The server where the transaction is processed, the location from which the goods or services are supplied, and the place of supply of such goods or services are in different jurisdictions, therefore, the question “where should the transaction be taxed?” is raised. Meanwhile, the digital economy opens unprecedented opportunities to avoid taxes for the international tax rules which still “stuck” in the 20th century business concepts because the companies operating in the digital space do not need factories, stores, or other permanent residences to develop their activities.

The purpose of this article is to evaluate the efforts of the European Union and international standard-setting entities to find a solution for fair taxation of the digital economy.

The first part of the study aims to delve into the concept of the digital economy and essential features with a special emphasis on the role of digital service user which is unique and more complex than the role usually assigned to the customer. This part also distinguishes the differences between digital and traditional business. The advantage of the digital business model compared to the traditional business model is shown based on statistical data. The second part emphasizes the reasons that will lead to the necessity of taxation of the digital economy, discusses the digital services tax applied in certain countries of the European Union and highlights the weakness of the concept of digital establishment in the double taxation agreements concluded by the countries. The final part of the final paper delves into the proposals submitted by the European Commission regarding the introduction of a common consolidated corporate tax base, the inclusion of the concept of virtual permanent establishment in the tax system, and the taxation of user-created value. This part also analyzes the digital economy taxation model proposed by international organizations. Given the absence of such legal regulation, this paper also provides recommendations for the taxation of the digital economy.