Fair Taxation in the Digital Economy | Asian Development Bank

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Fair Taxation in the Digital Economy

Publication | December 2017
Fair Taxation in the Digital Economy

The spread of the digital economy creates challenges for international taxation as well as domestic tax revenue mobilization.

We are living in a technology-driven era in which new developments and innovations are happening at a rate we have never seen before. As technology merges with the economy, we witness the digital economy grow day by day. The international community—and developing economies particularly—can greatly benefit from these innovations. Policy makers, however, must ensure they are harnessed in a way that ensures the benefits are shared as equitably as possible.

In particular, the spread of the digital economy creates challenges for international taxation as well as domestic tax revenue mobilization. As taxes are the main sources of revenue for the government to fund its various public services and projects, tax authorities must learn to adjust their capability to catch up with the fast change of digital economy activities. However, capacity in governance remains weak in many developing countries in Asia and the Pacific.

Key points

  • Globally, mobile phone subscriptions and internet usage have increased dramatically. This reflects the rapid growth of many developing economies to levels close to that of advanced economies.
  • As technology merges with the economy, the rise of the digital economy will create challenges for international taxation as well as domestic tax revenue mobilization, including determining where tax must be paid, collecting value-added-tax (VAT), and clarifying the treatment of workers in the new economy.
  • The first major attempt to align tax policy with today’s contemporary economy was the Action Plan on Base Erosion and Profit Shifting. It stresses the need for change to the traditional jurisdictional approach and identifies 4 vital focus areas: treaty shopping, country-by-country reporting, dispute resolution, and harmful tax practices.
  • Drawing support for international tax issues is difficult due to their highly technical nature. With only a few large players dominating the digital economy, however, simplifying compliance for them could capture a majority of the market.
  • Asia and the Pacific region needs to pull together and push forward the necessary reforms, innovate tax structures and administration, and continue to learn from each other’s experiences.
Policy Brief No: 2017-5