Digital challenges and tax equity

Historically, tax reforms have always been a response to societal transformations, which aim to modernize relations between states, businesses and citizens. The contemporary digital transformations of social relations intensified by globalization have become another challenge. The tax system has been at the centre of ongoing changes. Consequently, there arises a need for reforms of tax systems. Likewise, it is necessary to reassess and review the principles ensuring the efficiency of such systems.

The research aim is to investigate the impact of the digital society and economy on tax equity. This purpose also includes a critical analysis and a summary of the ways in which tax systems in different countries and corporations respond to digital challenges. The challenges in question are associated with tax burden on the activity of the abovementioned entities when they implement business models in virtual reality.

The research methodology is based on the fundamental principles of the Russian tax law with particular regard to the mandatory elements of taxation. Additionally, the research method involves the classical principles of taxation such as equity, certainty, convenience and economy. The authors have also developed an original approach to consider the formation of excess profits by digital companies and digital rentiers.

The analysis of the terms ‘digital presence’, ‘market jurisdiction’ was conducted with due consideration of jurisdiction in digital markets directly related to the activity of digital platforms. The paper also examined the potential opportunities and dangers that arise in the process of automated payment of taxes in each deal. Furthermore, specific problems regarding the determination of border crossing by an intangible asset or a provided service which can consist of both a tangible asset and a digital service were addressed. The research on the impact of digital solutions in business was performed in conjunction with the analysis of the European approach to similar issues. In accordance with the European framework, attribution of profits to the jurisdictions of those countries where consumers reside establishes the principles of equity. Based on this evidence, therefore, it was demonstrated that it is becoming a fundamental necessity in modern society to increase tax certainty of virtual businesses despite the opportunist attitude of some companies (with respect to national governments) as well as governments (with respect to the global economy). As taxpayers’ physical presence in a particular jurisdiction to generate profits which form the tax base is no longer required, a balance between national tax systems and the appearance of supranational taxation should be found. This objective poses a risk of failing to provide conditions necessary to ensure tax equity.

The thesis that tax competition exists in countries and various territories was supported, which enabled the authors to demonstrate potential of concerted effort to develop supranational taxation aimed at tax equity restoring. Furthermore, such mandatory elements of taxation as ‘object of taxation’, ‘tax base’, ‘tax rate’ are still valid in the digital world. At the same time the evolution of business models used by digital and supranational companies, servicization of the economy, digital service development and smart products creation require revising the definitions of these terms.

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