Development of Sharing and Gig Economies and Challenges for Taxation

In association with the development of digital economy, the sharing economy and the gig economy have developed, creating new growth and employment opportunities, and as a result, the number of gig workers providing labor service through platforms under one-off contracts is increasing. On the other hand, existing laws and institutional systems, particularly tax and social security systems, are not well adapted to this new situation. Consequently, there have occurred such problems as a tax gap, which refers to a tax revenue shortfall due to non-declaration or under-declaration of taxable income, a tax burden inequality between self-employed and salaried workers, and convenience problems related to tax declaration.

With respect to the tax burden inequality between gig workers and salaried workers, Japan should consider granting to gig workers a standard expense deduction comparable to the one granted to salaried workers, and with respect to the growing tax gap, it should consider enhancing reporting requirements and introducing a taxation-at-source system under which IT platform operators act as agents for collecting withholding tax. Regarding convenience problems related to tax declaration, following the example of the pre-filled tax return system adopted in European countries, Japan should introduce a similar system using the portal for personal identification numbers. The digitalization of taxation will also be very useful for responding to the novel coronavirus pandemic.

Keywords: gig economy, sharing economy, IT platform companies, pre-filled tax return, taxation at source, reporting requirements, response to the novel coronavirus pandemic

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Proposal for VAT-type Transaction Taxation

Economic digitalization is likely to become a major turning point for taxation as well. This paper proposes introducing by around 2040 a flat-rate VAT (value-added tax)-type transaction tax integrating the consumption tax and the personal and corporate income taxes as a taxation adapted to the new economic environment, including economic digitalization and the diversification of working styles. In terms of tax enforcement, the collection of income tax at source and the reverse charging of the consumption tax would be integrated under the proposal. Specifically, individuals and companies would be divided into registered and unregistered business operators, while accounts (assets) would be divided into registered accounts and unregistered assets. Based on this categorization, tax collection would be enforced under the following principles: (i) unregistered business operators, including households, would be added to the scope of entities subject to taxation at source (reverse charge); (ii) transactions with unregistered business operators would be taxed in real time; (iii) registered business operators would be allowed to include wages in losses, with the taxation base converted into an R-based cash flow; (iii) purchases of goods and services and wages would be subject to a uniform rate of transaction tax; and (iv) transfer from registered accounts to unregistered assets (conversion into crypto assets and cash) would be subject to transaction tax as a way to restrain tax avoidance.

Keywords: digitalization, taxation at source (reverse charge), real time, registered business operators, registered accounts, unregistered business operators, unregistered accounts

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Challenges for Rules on Taxation on Digital Economy from the Viewpoint of Global Businesses

(Abstract)

With respect to the process of the OECD's deliberation on the design of corporate taxation adapted to digitalization, this paper examines what kind of lobbying efforts businesses have been making and how they have been contributing to the process as important stakeholders.

Regarding the OECD-led designing of taxation, the deliberations focused on how to allocate taxation rights between global companies' resident countries and market countries. Meanwhile, global digital businesses have argued for the legitimacy of their practice of booking excess profits in countries of development under existing taxation rules by emphasizing the importance for their businesses of research and development and use of intangible assets. They have repeatedly argued for the seven taxation principles, including fairness, that were agreed to at an OECD ministerial meeting in Ottawa in 1998 . Therefore, they insist that if new rules are to be agreed to, they should be ones which respect corporate accounting as much as possible and which are based on the principle of proportional allocation and therefore do not entail an allocation of taxation rights deviating far from the existing allocation. They also insist that in particular, requiring businesses to bear excessive compliance cost should be avoided. The inputs from global digital businesses are expected to play an important role in the formulation of a final agreement.

Keywords: taxation on digital economy, allocation of taxation rights, response by businesses

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Analysis of a New Framework of Cooperation in International Taxation<br/ > —Discussion on Global Tax Governance—

(Abstract)

The framework of international tax governance has changed dramatically since the global financial crisis. For example, the following changes have been pointed out by scholars of international politics. First, as government intervention has been re-evaluated, citizen's attitude to tax competition has changed. Next, the legitimacy of proposals by the OECD has been politically strengthened because the G20 played a role as an agenda setter.

The study on changes in global tax governance can provide interesting insights for the future of the ongoing project addressing challenges of digitalized economy. The first point is that the countermeasures of tax avoidance by multinational enterprises has become interconnected with domestic politics and must be supported by voters in each country. The second point is the re-assessment of the impact of the United States' stance on the latest project. These implications will provide the basis for predicting the success or failure of the project, which is surrounded by growing uncertainty.

Keywords: international taxation, OECD, global governance

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New Trends in and Prospects for International Allocation of Taxation Rights<br/ > ――Taking Account of the Tradition since the League of Nations

(Abstract)

The most important choice made during the era of the League of Nations was the adoption of separate accounting, which regards the domestic physical presence (which corresponds to the present concept of a "permanent establishment" (PE)) of a foreign enterprise as an independent enterprise. The concept of separate accounting leads to the labor theory of value idea that persons (natural and legal persons) and business divisions (e.g., PEs) that contribute to business income earn income in accordance with their contributions. In the real world, there is income earned without contributions being made, such as a compensation for a covenant not to compete. When we allocate income among affiliated enterprises in accordance with the contributions made, there are reliable arm’s length transactions and unreliable arm’s length transactions as comparable transactions.

Amount B, which is the amount of profits allocated to a place of activity based on an assumed profitability rate, may be understood to represent a minor deviation from the arm's length principle (denial of a transaction similar to a unreliable arm's length transaction). Amount A, which is the amount of profits allocated to a place of demand (not explained away as a minor deviation), may be understood to represent a serious deviation from the arm’s length principle.

Keywords: international tax law, League of Nations, source rule, permanent establishment, threshold, separate accounting, arm’s length principle

JEL Classification: H25,H26

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Developing Countries’ Perspectives on the Digitalisation of the Economy
―Focusing on the U.N. Initiatives―

(Abstract)

Developing countries have a strong interest in the international taxation, particularly how to address taxation issues related to the digitalisation of the economy, to satisfy the fiscal needs under the Sustainable Development Goals (SDGs), which are targeted for achievement in 2030. In exploring a new taxation approach to address taxation issues raised by the digitalisation of the economy, developing countries emphasise that the due consideration should be given to a fair allocation of tax revenue, a simple design of taxation system, and administration capacity of developing countries. In order to achieve a worldwide consensus on how to address those taxation issues, it is essential to develop the solutions that reflect developing countries' perspectives and conditions. This article examines the background of developing countries' position on this matter and how the U.N. Model Tax Convention which reflects the developing countries' international taxation policy, has addressed this matter thus far. This article also examines the relationship between taxation and trade/investment rules, since the new taxation approach needs to be consistent with the existing trade/investment rules, with focusing the relationship between taxation and international investment agreements, which is a specific matter to developing countries, to explore the new desirable taxation approach for developing countries.

Keywords: Sustainable Development Goals (SDGs), U.N. Tax Committee, U.N. Model Tax Convention, Significant Economic Presence (SEP), Taxation and Trade/Investment Rules

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Fight against Tax Havens and International Tax Law
―New Taxation Rights and a Global Minimum Tax―

(Abstract)

Under the current principles of international taxation, taxable income of each member of multinational enterprises (MNEs) is calculated on the assumption that individual companies are engaged in business transactions as a separate company dealing at an arm’s length (principle of separate accounting). However, MNEs can easily reduce their group tax burden by booking intangible assets that generate a significant amount of profits (assumed to be excess profits) on the books of group companies in tax haven countries granting low tax rates.

This paper pays attention to the fact that a package of solutions worked out by the international community in January 2020 has boldly adopted the taxation of consolidated group income and a global minimum tax for income taxation of MNEs ,and explores the meaning of the package under international taxation law. Will the package be effective in restraining “ a race to the bottom” (tax rates reduction competition)?

Keywords: international taxation, BEPS, tax avoidance, tax haven, multinational enterprise, intangible assets, OECD

JEL Classification: H25, H26, F23

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Taxation on the Digital Economy
―Issues on Implementation and Enforcement―

(Abstract)

The consideration of tax system on the digital economy involves challenges related to implementation, such as how to calculate and allocate profits attributable to market countries, and challenges related to enforcement, such as ensuring appropriate tax declaration and payment, avoiding excessive compliance cost, and preventing and eliminating double taxation. New rules should adequately take into consideration the following issues concerning implementation and enforcement. The first issue is the clarity of the requirements regarding the methods of calculating and allocating attributable profits. The second issue is the need to effective systems for requiring registration in market countries and for information sharing among the tax authorities in order to ensure appropriate tax declaration and payment, and avoid excessive compliance cost. The third issue is the need to foster an international consensus to allocate profits and develop an effective multilateral framework of dispute settlement. It is required to hold sufficient discussions on how to tax the ever-growing digital economy, which are the issue that significantly affects the future direction of international tax system.

Keywords: digital economy, BEPS, compliance cost, tax enforcement, dispute settlement mechanism

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Economic and Social Digitalization, and India's Taxation
―Focusing on International Taxation Issues―

(Abstract)

In the field of IT-related services, India is a major provider of outsourcing services with a share of more than 50% in the global market for outsourcing services. On the other hand, foreign IT businesses, such as Google, have penetrated deep into the Indian market, where cross-border flows of information are basically free. India's position on international taxation is representative of countries that attach importance to source-country taxation. India is expected to firmly maintain this position for the moment in the field of IT-related businesses as well. Specifically, India was early in introducing an equalization levy regarding digital businesses operated by foreign companies without physical presence. In addition, it has incorporated the concept of "significant economic presence" into law as a new nexus for taxation and is considering revising rules on the calculation of attributable profits. If Japan is to play the leading role in the ongoing international discussions on taxation on digital economy, it is important to understand the approach of India, whose position takes the lead among developing countries. This paper's primary purpose is to contribute to the understanding of India's approach. The paper also discusses how India is dealing with the shift to digital economy in terms of consumption taxation and tax administration, and finally considers what implications India's approach may have for Japan.

Keywords: digital business, permanent establishment, significant economic presence, equalization levy , reverse charge, personal identification number (Aadhaar)

JEL Classification: H25, H83, K34

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Theoretical Basis of Digital Services Tax and Challenges
―Focusing on Location-Specific Rent―

(Abstract)

Debate on taxation adapted to economic digitalization is now ongoing, mainly at the OECD. On the other hand, despite the OECD's efforts, countries are individually moving to introduce digital services tax (DST) as an interim solution (unilateral measure). DST is coming under criticism for its perceived flaws, such as being devised unilaterally without treaty coordination and targeting particular companies.

On the other hand, Professor Wei Cui conducted a study on DST from the viewpoint that digital platforms are earning location-specific rent (LSR), just as energy companies are earning profits by extracting natural resources in particular countries, and rationalized the taxation rights of user countries.

This paper examines the theoretical basis of DST in light of Professor Cui's argument and through analysis of the argument by experts. Among the key points for the examination are that as businesses operated by market-dominant digital platforms are two-sided, they generate indirect network effects, that those companies' profits are close in size to their sales because their marginal cost is negligible, and that there is room for assuming that treaty coordination is unnecessary.

Keywords: digital platforms, allocation of taxation rights, sales tax, rent, location neutrality, two-sided business, indirect network, elimination of international double taxation

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