Reasons Why  countries need tax measures that are specific to the digitalized economy

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Introduction

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In the past years, the tax was imposed on the businesses and citizens by a government to
raise revenue to meet the budgetary demands. In most cases, this taxation system was imposed
on physical business activities that exist with a country. This system however never considered
business activities that did not have a physical presence hence endangering the economic growth
of such nations. Therefore, it is a great concern for countries to implement measures that are
specific to the digitalized economy. Advanced taxation measures will help governments to
finance public projects as well as developing a business environment for efficient economic
activities and economic growth. From an economic perspective, regarding the above statements,
it is vivid that the digital economy has raised significant challenges for tax policymakers. The
operating digital economy has been featured by disruptive and complex business models that
need to be regulated by specific tax measures. In this case, specific tax measures will be
formulated to incorporate direct taxes and indirect taxes on economic activities that have a
physical presence and the ones that do not have. Multiple reasons are explaining why nations
have to implement specific tax measures including the presence of intangible assets, and
convoluted transactions.
1.2 Absence of physical presence
In the past two years, it has been noted that digitalization and globalization in the
business environment have promoted aspects of tax avoidance. As suggested by Agrawal and
Fox (2017), the issues of physical presence have sparked constant debates whether the existing
principles of taxation are fit for the digitalized economy specifically on the companies without
physical presence. Organization for Economic Co-operation and Development (OECD) have
also raised issues to radically reform international principles shaping the taxation processes of
multinational companies. Alternatively, G20 reported that large international companies
Facebook and Google pay fewer taxes in nations they operate. These companies do not have a
physical presence but still in individuals a situation that translates into tax avoidance. The ability
of a nation to raise taxes know as fiscal capacity is a critical aspect for the development of any
nation. It is a truism to suggest that taxes are the cornerstones for a country’s structure and
survival.
Consequently, efficient fiscal capacity influences sufficient access of the nation to
resources required to offer public services as well as goods needed for both the economic and

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social welfare. The inability to collect tax from such businesses will result in a limping economy
especially to developing economies. Recent studies have indicated that developing nations
collect small proportions of taxes due to insufficient taxation measures- they collect only an
average of 15%, unlike developed economies that collect an average of 40%. Considering the
frequent modernization of business systems, developing nations are at greater threat of facing tax
avoidance leading to deteriorated economic development. Developed economies should also
implement sufficient measures to ensure that all business activities pay taxes as per the policies
formulated.
Besides, when a government fails to tax the multinational companies, a large informal
economy will lack enough funds to propel the nation to be regarded as a developed nation.
Ideally, developing nations tend to rely more on sales taxes from physical entities which are
comparably easier to administer. Lack of specific measures makes such countries to collect taxes
with owner revenue. Alternatively, some nations have taken great strides to ensure that online
businesses pay taxes as well. E-commerce has become the modern marketing and supply channel
where social media has created a great impact (Abdulkarimli, 2015). In the international markets,
for instance, companies like eBay and Shopify have generated billions of cash through e-
commerce.
There are distinct types of e-commerce that a government should consider to companies
without a physical presence, for example, business to business, customer to customer, business-
to-Consumer, and Facebook Commerce. Hongler and Pistone (2015) indicated that some
countries have tried to implement taxation on such companies following principles of economic
nexus; a seller or a producer must collect taxes from the customers regardless of the nation they
are located. Nations like Georgia, Hawaii, Arizona, and California have implemented tax laws
for these multinational companies hence increasing their revenues. There are, however, related
aspects that create sales tax nexus; business location, amount of sales, personnel, and trade show
sales. Therefore, it is important to consider the efficiency of these specific measures for
multinational companies to limit cases of tax avoidance.
1.3 Intangible assets
As noted above, the government often incline to tax businesses with physical presence
particularly sales tax. Conventionally, the manufacturing industry will be taxed since measures

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on taxation reflecting them are easy and cheap to regulate. Dudar and Voget (2016) posited that
it is quite a challenge to tax policymakers when it comes to intangible assets like brand
recognition, copyrights, intellectual property, Goodwill, trademarks, and patents. It has become a
challenge to tax these assets since they are not regarded as financial instruments. The existence
of such assets has been resulted by the modernization of businesses hence calling for tax
measures that are specific to the digitalized economy.
On the other hand, OECD has contributed to the topic of determining intangible assets in
the current modernized world. According to Lim et al. (2020), the intangibles are things that lack
physical presence and are not a financial asset but they are owned and controlled for commercial
activities. Some intangibles like software have raised constant topics of which software ought to
be taxed and ones not to be taxed. In this technological world, the software has been incorporated
in diverse economic models including, security, medical setting, communication, transport,
educational programs, financial institutions, and robotics. Without this software, most of the
companies would stop running leading to a staggering economy.
Alternatively, it has been observed that emerging technologies across the globe are
creating value in different ways hence disrupting existing markets. These technologies have
resulted in increased rates of unemployment hence posing a great threat to the government
because of a lack of taxpayers in form of pay as you earn. If these technologies are replacing the
contemporary source of government revenue, then specific measures should be instilled to ensure
that taxes are efficiently paid. In every industry, many new market entrants are introducing
innovative operative models as well as value propositions, for instance, marketing processes.
Preferably, consumer demands are changing and consumer markets are shifting, compelling local
and international entities to adapt alongside. If tax policymakers are not keen enough, some
measures will be ineffective thus leading to lower revenues.
1.4 Complex transactions
Modern economic models have attracted have as well attracted complex business
transactions known as financial transaction taxes. (FTT). Dávila (2020) asserted that these taxes
are applied when buying or selling financial assets but they have their associated threats to
economic development, for instance, the 2007-2008 economic crisis. The economic crisis would
never have occurred if there were specific tax measures to regulate economic activities as well as

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policy formulation. Influencing these transactions can also lead to the reduced trading frequency
and predatory financial activities. An FTT is one of the diverse terms for taxes levied on
financial assets. The term is synonymous with other expressions like securities transfer tax and
securities transaction tax.
When a financial asset is traded, for instance, a particular percentage should be paid as
tax but the tax policymakers should consider the party to be levied; the seller, buyer, or the
intermediary. When an asset worth $1000 is sold through the modern transaction channels, the
transaction should be levied 1$ as a 0.1% FTT. Therefore, the FTT tax base is determined by
what assets and venues the tax applies to where such specification is critical in deterring tax
avoidance (Dávila, 2020). When determining the transaction’s to be charged, tax policymakers
should be keen on discouraging business incentives in the economy. Sweden, for instance, lost
its market share to London when the FTT tax base was formulated to tax trades intermediated
across the country.
Alternatively, specific measures should be considered when determining whether the
taxes are imposed only on transactions on exchanges or should incorporate over-the-counter
(OTC) trades. Most of the time, transaction taxes are levied to the buyer to facilitate international
trade. Imposing taxes to sellers and the intermediaries would only make the market prices of the
commodities go high resulting in inflation and business trade would decline. For bonds and
equities, the tax base is the price paid for that security. On the other hand, market value or the
notional value can be considered to be the base of derivatives. The financial transaction taxes, for
instance, Belgium is 0.09-1.32%, for Poland is 1%, South Africa is 0.25. In the modern
economy, such complicated transaction taxes pose a challenge on tax policymakers since most of
them go unpaid.
1.5 Qualification of assets
In this digitalized world, the qualification of assets has become a challenge because of the
diverse types of assets hence making taxation impossible. To implement efficient taxation
measures, tax policymakers have to follow 5 key aspects; transparency, fairness, adequacy,
administrative ease, and simplicity. Besides, when taxing assets, policymakers have to observe 4
different canons; canon of equality, canon of convenience, canon of economy, and canon of
certainty. Based on this, without considering this statement, taxing the modern world would be

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unfeasible. Also when imposing taxes on individuals and assets, policymakers have to consider
the benefit principle; is a notion in the model of taxation from public finance (Saez and Zucman,
2019). The principle was developed to ensure that taxes fund public-goods expenditures on a
politically-revealed commitment to pay for the benefits one receives.
Alternatively, many individuals own properties in form of assets and they are expected to
pay net worth tax as an annual tax. It is often a challenge for policymakers to qualifying the
assets hence compelling tax policymakers to formulate and implement specific taxation laws to
eradicate related taxation errors. To ensure the success of the measure, policymakers should
specify individuals responsible for paying the taxes; shareholders or business owners.
Alternatively, the value of the assets should be allocated efficiently to make taxation measures
fair and just to taxpayers. Specific measures to be implemented can ensure that wealth is taxed
through various means; capital gains taxes, property taxes, and corporate taxes. Due to multiple
ownership of wealth, for instance, public or private, taxation designs should be considered; what
kinds of wealth to tax and whose wealth to tax. In some nations, impose a net worth has typically
exempted specified individual sand families from paying tax. Net worth taxes may have a
progressive rate or flat rate structure just like income taxes.
When formulating policies, policymakers should ensure that policies developed on assets
have reduced burden to taxpayers to create more incentives within the economy. Saez and
Zucman (2019) concluded that to raise substantial revenue, progressive tax instruments should
be employed on net worth tax to reduce burdens to low-income citizens who evade tax payment
and levy heavier taxes on the wealthiest families. By doing so, the economy will thus have
reduced wealth inequality but increasing the amount of government revenue. Following the
above statements, the net worth tax should be employed and substitute other forms of taxation
since it increases the overall taxation of assets.
1.6 Activities and types of income
Another problem that has raised a lot of concern for policymakers is the different
unregistered economic activities in the digitalized economy as well as types of income. This
issue is more often in democratic nations than in non-democratic nations hence determining the
type of measures that exist to ensure that citizens of a given nation comply with the established
tax regulations. Recent studies have indicated that liberalization has made some nations remain

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in a low revenue trap. Low bureaucratic capacity has resulted in civil and political freedoms.
According to PHAM et al. (2020), for countries to efficiently operate in digitalized economies
and recover from common revenue shocks due to types of income, policymakers have to
reconsider some reforms; voluntary and compulsory tax compliance. Following voluntary
compliance, have self-driven will to observe all taxation policies having a positive perception
that paying tax is a fair deal. The perception results from a belief that the government is offering
sufficient public goods regarding the tax payments. Regulation imposed by democracies makes
tax evasion easy and cost less at the same time making voluntary compliance undermined due to
high rates of taxes.
Some of the business activities are levied high taxes compared to their income as well as
the intensifying global competition. Jensen and Persson (2020) concluded that some citizens
have the belief that their contribution to paying taxes has no tangible benefit to them and the
society at large. In some cases, less productive businesses particularly ones linked by protected
industries lobby for reduced domestic taxes when engaging in competitive international trade.
Unlike importing firms that earn less income, exporting firms earn comparatively higher income
but they still demand lower tariffs and reduced taxes. On the other hand, compulsory compliance
is based on the government’s measures that compel taxpayers to observe the formulated tax
policies. Based on this ideology, a court rule can authorization of closure of businesses that are
failing to pay taxes. Formulated measures can also deny intangible assets like copyrights,
business licenses, trademarks, and patents.

2. Measures to enhance voluntary tax compliance

To ensure that taxpayers adhere to developed tax policies, the government should offer
necessary assistance citizens need to comply with the obligation. Some citizens evade tax due to
a lack of access to tax administration offices. Alternatively, there exist more tax obligations to be
met thus trying to reduce them with any means possible. Besides, the tax norms formulated are
often complex making it hard for some individuals to comply with them. Secondly, policy
formulation should be complex and should adjust as per the citizens’ demands. In this case, the
government should consider economic conditions and the ability of the citizens to pay the set
taxes. In net worth tax, for instance, assets should be evaluated to determine the value of income
it generates regardless of its buying price. An individual would be having an asset worth millions

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but the income it generates is less than expected following the business economic environment.
Additionally, all the canons as discussed above ought to be the priority when formulating and
implementing tax policies.

Conclusion

Regarding the above affirmations, it is vivid that countries need measures that are
specific to the digitalized economy to facilitate maximum revenue generation. Unlike traditional
business activities where taxation was levied on physical business activities, the digitalized
economy is featured by complex businesses. Also, the nature of the transaction in the current
economy has become multifaceted making it hard for tax administration offices to exercise FTT.
Specific measures have to be implemented due to the presence of intangible assets including
patents, software, and trademarks. In many nations, taxing these assets have become a challenge
since they are not considered financial instruments. Moreover, countries need specific measures
since it has become a contest to qualify business assets. In this case, tax policymakers have to
consider whose wealth and what wealth to tax. Many families have been exempted from taxation
systems leading to tax inequality. At the bottom line, the government should make sure that tax
payment processes have been simplified and citizens are issued with the necessary assistance to
complete the payments to make them voluntarily adhere to the policies.

References

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Abdulkarimli, O. (2015). Taxation of E-commerce. Baku St. UL Rev., 1, 99.
https://heinonline.org/hol-cgi
bin/get_pdf.cgi?handle=hein.journals/bakustulr1&section=16
Agrawal, D. R., & Fox, W. F. (2017). Taxes in an e-commerce generation. International Tax and
Public Finance, 24(5), 903-926. https://link.springer.com/article/10.1007/s10797-016-
9422-3
Besley, T., Jensen, A., & Persson, T. (2019). Norms, enforcement, and tax evasion (No.
w25575). National Bureau of Economic Research.
https://www.nber.org/papers/w25575
Dávila, E. (2020). Optimal financial transaction taxes (No. w27826). National Bureau of
Economic Research. https://www.nber.org/papers/w27826
Dudar, O., & Voget, J. (2016). Corporate taxation and location of intangible assets: Patents vs.
trademarks. ZEW-Centre for European Economic Research Discussion Paper, (16-015).
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2753656
Hongler, P., & Pistone, P. (2015). Blueprints for a new PE nexus to tax business income in the
era of the digital economy. Available at SSRN 2586196.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2586196
PHAM, T. M. L., LE, T. T., TRUONG, T. H. L., & TRAN, M. D. (2020). Determinants
Influencing Tax Compliance: The Case of Vietnam. The Journal of Asian Finance,
Economics, and Business, 7(2), 65-73.
https://www.koreascience.or.kr/article/JAKO202014862060697.page
Saez, E., & Zucman, G. (2019). Progressive wealth taxation. Brookings Papers on Economic
Activity.https://emlab.berkeley.edu/~saez/saez-zucmanBPEA19slides.pdf