Taxation of digital corporations: options for reforms

摘要

Currently the new industrialization and digitalization of economies leads to the new tax challenges as a result of appearance of new business models, which do not need physical presence to carry out digital transactions. These challenges are generally related to the erosion of tax base and shifting profits by companies, operating in different jurisdictions due to different direct tax regimes. The OECD countries elaborated guidelines (BEPS Project), aimed to address tax avoidance strategies of corporations. Now EU Member States actively discuss the introduction of digital tax, aimed primarily to increase an effective income tax rate faced by digital corporations in order to reduce the gap in profitability between "brick-and-mortar" and digital companies. Recent research showed that there is no systematic difference in effective income tax rate faced by digital corporations compared to traditional ones, and therefore, the underlying proposition in the discussion about taxing digital firms in EU is misguided. We provide an empirical analysis of relationship between profitability of digital corporations and their effective tax liabilities. We exclude big Japanese digital corporations since features of Japanese digital taxation influence essentially on their performance indicators. The results demonstrate that tax expenses of digital corporations, as contrast to effective corporate tax rate, can have an impact of their profitability, measured as after tax profit margin ratio, and whether the digital tax has an impact, depends on its design, notably, availability of tax incentives and exemptions, and the progressivity of tax rate.