Digital Economy: Challenges from a Tax Perspective?
"The digital economy brings its share of challenges and one field where this is also being felt is taxation. Mauritius as a financial hub is no exception to this trend."
Article published in the Global Finance Mauritius - Issue 7: Mauritius International Financial Centre
April 2018
The digital economy is ushering in a new set of challenges to tax regimes around the world, including in Mauritius, not least from the use of cryptocurrencies where a lack of international consensus may lead to cross-border tax disputes. Will this lead to disruption of the tax environment or can solutions be found?
In recent years, technology has been instrumental to major developments in the world. It has brought in many benefits including new market opportunities and sophisticated business models. With the increasing pace in technological advancement, we are witnessing an evolution and an increasing growth in digital activities. Today, digital transactions not only encompass online buying and selling of goods with online credit card settlement, but also payments through virtual currencies.
The digital economy brings its share of challenges and one field where this is also being felt is taxation. Mauritius as a financial hub is no exception to this trend.
Contribution of BEPS
The Organization for Economic Co-operation and Development (OECD) has extensively addressed tax issues in the context of a digital economy in Action 1 of the Base Erosion and Profit Shifting Project (BEPS). While traditionally an enterprise pays tax in the country where it carries on business, a number of questions arise when it comes to taxation of digital transactions - for example should tax arise where the payments are effected, or where the order is placed or where the delivery of the goods is made, etc. Suppliers can now remotely interact with clients.
Many tax jurisdictions impose taxation on enterprises on the basis that these have a certain degree of permanency in the country. But with technology, a taxable presence, under the current tax regime, could be reduced to a minimum despite significant trading activities taking place in a country. To address these concerns, the OECD has proposed a number of ways to establish the tax link of an enterprise in a country.
Examples are in-country customer transactions, the use of a local domain name or a local digital platform. However, the consultations are ongoing and no position has yet been taken globally although countries have been issuing their own local guidelines.
Approach in Mauritius
Unlike some countries, Mauritius has so far not introduced any unilateral tax measures to tackle digital transactions. It has relied on its traditional tax code and established international tax principles to deal with digitalization. The Mauritius Revenue Authority (MRA) has also, in a couple of cases, issued tax rulings which are in conformity with the domestic tax legislation and international tax practices. For example, an enterprise shall not be taxable in Mauritius if it does not carry out business through a physical presence in the country.
The taxing issue of cryptocurrencies
Another area which has in the recent past made headlines is the use of virtual currencies, also known as cryptocurrencies, and the most common cryptocurrency that is presently used is Bitcoin. Virtual currencies are a medium of payment and are also tradable.
They are, however, not backed by any central bank or corporate entity. While some jurisdictions have taken a position on the tax treatment of virtual currencies, so far there is no international consensus on their taxation. And this lack of harmonization may give rise to cross-border tax disputes.
Read more on bitcoin, cryptocurrency and blockchain
Mauritius has so far responded well in dealing with emerging issues based on its existing tax laws
In the UK, the tax treatment of any transaction involving a virtual currency needs to be looked at on a case-by-case basis taking into account the facts and circumstances around the transaction. For example, a company that makes sales in exchange for virtual currency in the course of a trade is required to compute the profits of its trade under normal accounting principles and pay income tax accordingly. Cryptocurrencies used for investment purposes or capital asset are subject to Capital Gains Tax (CGT). In the US, virtual currencies are treated as a property and the general tax principles in respect of property transactions apply to transactions in virtual currencies. Virtual currencies are not treated as a currency that could not generate foreign currency gain or loss for US Federal Taxes.
The MRA has so far not issued any guidance on the taxation of virtual currencies. But, broadly, the tax rules in Mauritius may already be equipped to tackle new financial instruments, including cryptocurrencies. In my view, if cryptocurrencies are regarded as a medium of exchange and used as part of trading transactions, any profits arising on the exchange of the virtual currencies may be taxable as they relate to the underlying trading activities. Gains on virtual currencies held as capital asset should be out of the scope of income tax and non-taxable in Mauritius, while any short term gains on virtual currencies held as inventory may be subject to income tax. However, there may also be scope for these gains to be exempted on the same footing as gold, silver and platinum in Mauritius (as currently provided in the tax legislation). As the use of cryptocurrencies becomes more prominent, the MRA may need to consider adopting specific rules on the matter
Disruption of the tax environment?
The digital economy will continue to disrupt the economic environment, bringing with it opportunities and challenges that may be relevant from a tax perspective. There are suggestions of having a separate taxing system for digital transactions, but this may create negative consequences for cross-border trade and investment. The concern with digitalization is that it may erode the tax base of countries. There are continued international discussions and, hopefully through the BEPS initiatives, we will move towards a global consensus on this issue.
Mauritius has so far responded well in dealing with emerging issues based on its existing tax laws. It has amended certain aspects of its tax legislation in the past, but fundamentally the changes were in line with international tax norms. It has not brought any radical unilateral changes thus providing certainty and predictability to investors. Further, as digitalization takes hold, we can expect that the MRA will issue a Statement of Practice to address areas of ambiguity.
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