The Digital Economy and Tax Law: How Technology Affects Regulation

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Online and mobile technologies, faster internet access, and increased connectivity have changed the way people consume content and make purchases, contributing to the rise of the digital economy. The emergence of the global digital economy has broad ramifications for federal, state and local income taxes. In the US, companies embedded in the digital economy may struggle to keep pace with tax laws and regulations. Businesses often seek guidance from the Internal Revenue Service (IRS) on digital economy tax strategies. Still, the patchwork of evolving domestic and international rules makes it difficult to ensure tax compliance. Another challenge that businesses face, especially multinational corporations, is the imposition of varying digital tax regulations by individual countries around the world.

How can companies meet tax obligations in a digital economy that is in constant flux? Tax and legal professionals with a firm understanding of tax law concepts can help businesses align their tax processes with changing regulations and address the challenges. Through programs, such as a Master of Laws in Taxation or a Master of Taxation, accounting professionals and experienced attorneys can gain a deep understanding of tax laws in the digital economy to inform businesses’ tax practices.

What Is the Digital Economy?

The digital economy is the backbone of global e-commerce. The Bureau of Economic Analysis (BEA) breaks down the concept of the digital economy and describes it as the digital infrastructure that enables digital transactions and allows users to create and access digital content.

The digital economy provides new opportunities for businesses of every size and across every sector, regardless of location. It allows a retailer in a small town in a developing country to find customers thousands of miles away on another continent. Yet, as the digital economy creates opportunities, it also highlights the discrepancies between developed nations and emerging economies in the world. For example, Africa and Latin America house about 5% of the world’s colocation data centers, according to a United Nations Conference on Trade and Development (UNCTAD) report. In contrast, developed countries such as the US and China account for over 75% of the global public cloud computing market.

The digital economy landscape also has implications for a country’s gross domestic product (GDP). In the US, the digital economy is a juggernaut, accounting for nearly 7% of GDP in 2017, or $1.35 trillion, according to a 2019 BEA report. The size of the digital economy on a global scale is challenging to pin down; estimates range from 4.5% to 15.5% of world GDP, according to UNCTAD.

Growth indicators within the information and communications technology (ICT) sector are indicative of the expansion of the digital economy. Globally, digital ICT services exceeded the growth of overall services exports in the past decade, which, according to UNCTAD, reflects growing “digitalization of the world economy.” For lesser developed countries, the growth of digital ICT services more than tripled between 2005 to 2018.

As the digital economy continues to expand across borders, businesses face new challenges in the area of taxation. Since the new landscape is global, it creates tax implications for all countries participating in the digital economy.

Digital Economy Trends and Evolution

Two of the trends driving the digital economy are the rise of virtual currencies and digital connectivity. Virtual currency is a digital representative of actual money for investment purposes or for the payment of goods or services. For example, cryptocurrency is one type of digital currency that has been receiving more popular press attention lately. It uses cryptography to enable secure transactions; it records these transactions digitally on a distributed ledger, such as a blockchain. For federal tax purposes, virtual currency is treated as property. IRS Notice 2014-21, IRB 2014-16, offers businesses some initial guidance on how virtual currencies are taxed, and more recent guidance was released in 2019 to provide further guidance on emerging issues and taxpayer reporting obligations

Digital connectivity is made possible through a global infrastructure consisting of wires, cables and data. It simplifies digital business transactions and international commerce and makes it easy for companies to connect and engage with consumers. For example, manufacturing products in developing countries and getting them to customers remains a physical process. Digital connectivity, however, makes it possible for businesses, even in remote areas, to integrate themselves into established global value and supply chains. These businesses can benefit from efficient delivery systems, making the process of getting products to customers faster and more reliable.

Domestically and internationally, tax law concerns arise from these trends. How can regulating bodies ensure proper taxation in a fast-moving digital economy where users are spread out all over the world? Federal, state and local governments can explore solutions for determining the basis of taxation, which includes reaching consensus on where taxes ought to be paid. For example, should the taxes on goods and services sold be applied based on the location of the home office of the business, the location of the customers or both? Internationally, the Organisation for Economic Co-operation and Development (OECD) is leading efforts to build agreement on a long-term solution that will resolve tax challenges arising from the digital economy by the end of 2020.

Tax Professionals in the Digital Economy

For businesses participating in the digital economy, it is imperative to understand taxation rules in their home country and the countries where their customers reside. Within the US itself, the patchwork of tax rules can be difficult to follow. As the digital economy evolves, key challenges will include keeping up with tax changes domestically and internationally.

Villanova’s Master of Laws in Taxation and Master of Taxation programs prepare graduates with an understanding of tax law and the vital skills needed to thrive in a career in tax law. The programs are designed to give students clarity concerning tax law so that they can stay up to date on tax changes and help businesses incorporate these changes with a high level of efficiency. The faculty consists of distinguished scholars and leading practitioners from Big Four accounting firms, top law firms and Fortune 500 companies, the IRS, and the US Treasury. The curriculum provides experienced tax professionals and attorneys with knowledge of tax laws relevant to emerging economic trends. Core courses and electives include Taxation I & II, Wealth Tax, International Tax, Partnership Taxation, and Professional Responsibilities in Tax with Research and Writing, among other classes.

Start Your Journey Toward a Rewarding Tax Law Career

Want to expand your knowledge about evolving tax laws related to the digital economy to help businesses keep pace with the changes? Learn more about how Villanova University’s Master of Laws in Taxation and Master of Taxation programs can equip professionals to become trusted authorities in the digital economy.

Recommended Readings

How Lawyers Can Benefit From a Master of Laws in Taxation

In-Demand Careers for Tax Law Experts

The Tax Technology Gap: Future Issues to Watch

 

Sources

Bureau of Economic Analysis, Digital Economy

Bureau of Economic Analysis, Digital Economy Accounted for 6.9 Percent of GDP in 2017

CNBC, “Cryptocurrencies: Regulating the New Economy”

Internal Revenue Service, Virtual Currencies

Journal of Accountancy, Association Addresses Digital Economy Tax Issues

OECD, International Community Agrees on a Road Map for Resolving the Tax Challenges Arising From Digitalisation of the Economy

The Tax Adviser, “US MNCs Facing Implications of Economic (vs. Physical) Nexus”

United Nations Conference on Trade and Development, “Digital Economy Report 2019”

Villanova University, Master of Laws in Taxation

Villanova University, Master of Taxation

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