Revamping tax regimes in the digital economy

A consensus seems to be developing that tax regimes need to adopt a global approach to confront challenges posed by technological advances

As technology transforms the methodology of conducting business transactions, the change in technology itself has significantly accelerated in the past few years. Continuous innovation in the digital economy space has been remarkable as well as disruptive to the traditional ways of doing business. This has led many countries to consider the adequacy of their systems in regulating digital economies.

However, tax regimes need to adopt a global approach to confront these challenges. Therefore, many countries are looking in the direction of the Organisation for Economic Co-operation and Development (OECD) for coordinating a response.

The OECD is, therefore, developing proposals to overhaul global tax rules that determine where and how much tax multinationals pay, with a plan to give more taxing rights to countries where multinationals conduct business.

Under its Base Erosion and Profits Shifting (BEPS) project, Action 1, the OECD is addressing tax challenges arising from digitalisation. Simultaneously, countries worldwide are introducing new taxes and/ or expanding their current tax regimes in order to tax their digital economies.

Regionally, here’s how GCC countries are taxing the digital economy and the practical challenges that companies operating in this space face.

INCOME TAXES

Generally, countries impose income tax on businesses that either have a taxable presence in the country or carry out activities there. Certain passive income received by companies from those countries may also be subject to tax at source through withholdings. Saudi Arabia, Kuwait, Qatar and Oman impose income tax on companies, based on some of these criteria. Bahrain and the UAE do not generally impose income tax.

COUNTRIES WORLDWIDE ARE LOOKING TO TAX THEIR DIGITAL ECONOMIES

With respect to digital economies, the challenge remains on ways to levy tax on income gleaned from transactions that are conducted online by suppliers that neither have any business presence in the country nor are registered for income tax there.

The income tax systems in Saudi Arabia, Kuwait, Qatar and Oman – that impose income taxes on companies – are generally effective in handling traditional business models, with key principles adapted to cope with cross-border provision of online transactions.

Nonetheless, these tax regimes may need to be refined at various levels, some more than others, to accommodate the rapidly evolving ways of conducting business in the digital space. In doing so, these may require a balancing act of enhancing an equitable tax system that ensures neutrality in taxation of various business models (including traditional and digital) whilst facilitating ease of compliance for businesses.

VALUE-ADDED TAX

The GCC member nations agreed to a framework for the implementation of value-added tax (VAT) in 2017. The UAE and Saudi Arabia introduced it on January 1, 2018, based on that framework, while

Bahrain joined a year later on January 1, 2019. The other Gulf countries are expected to introduce it in the near term, with Oman most likely to follow suit. In accordance with the agreement, the VAT regimes of the UAE, Saudi Arabia and Bahrain tax electronically supplied services (ESS) based on where the customer utilises or consumes the service.

The countries that have so far introduced VAT do not have a harmonised definition of ESS. Therefore, businesses need to assess whether their services qualify as ESS under each domestic VAT legislation.

Also, as per VAT rules, if anyone consumes an ESS in a country, it will be treated as supplied in that space, irrespective of the location of the supplier, ensuring that the electronically supplied services operate within the VAT umbrella.

VAT REGISTRATION

While there are mandatory VAT registration thresholds in the UAE, Saudi Arabia and Bahrain, there is no such directive for non-resident service providers offering services to unregistered customers. A foreign firm serving unregistered consumers is required to register within 30 days of providing the service. In addition, following the recent legislative changes in Saudi Arabia, foreign companies can now register directly with the local tax authority similar to the UAE and Bahrain.

Adding up

The UAE’s tax revenue, including VAT, made up 5.5% of the total public revenue in 2018

OUTBOUND SERVICES

The Gulf countries, and especially the UAE, have developed a good environment for start-ups in the digital space. For example, UAE based online service companies are able to service customers across the entire globe. It is important that these companies also consider the tax implications of the services they provide to overseas customers.