8Dec 18 - Jan 19IN MYOPINIONThe digital economy is growing. Its total value in most countries today may be less than 10 percent, but it's expected to grow rapidly. The global management consulting firm A.T. Kearney estimates that digital economy­related revenue in the Association of Southeast Asian Nations (ASEAN) region alone is around $150 billion annually. In Southeast Asia, e-commerce is growing apace, but it still accounts for less than 1 percent of total retail sales, compared with rates of six to eight percent in Europe, China, and the United States.This rapid growth has created challenges to taxpayers and tax administrators alike. First, it has resulted in uncertainty for companies over how they'll be taxed. Second, it threatens to erode the tax base that governments rely on to finance infrastructure and human-capital investments needed to boost growth and further expand the digital economy.Credible data on this are hard to come by, and often the subject of debate. But the European Commission estimates that digital businesses in Europe face an effective tax rate of only 9.5 percent, compared with 23.2 percent for traditional business models.The World Bank is helping more than 100 governments improve their tax systems by strengthening the capacity of revenue administrations, supporting better tax codes, simplifying rules, reducing the burden on companies, and promoting greater predictability. An increasing part of our work here is helping governments in developing countries and emerging markets institute sensible tax policies and modernizing their tax administration so that they can respond more effectively to the digital economy.One thing is clear from our work: Existing tax policies--designed primarily with physical goods and locally delivered services in mind--are being aggressively challenged. The structure of the digital economy is fundamentally different from the traditional brick-and-mortar model. For instance: (1) services are virtual and can be delivered through the Internet (e.g., music streaming, web design, and recruitment); (2) goods can be easily identified through search engines and purchased on electronic platforms hosted in foreign countries; (3) only the final consumer, and the digital intermediary, is apparent and traceable; (4) variable costs of new business models tend to be low, whereas sunk costs are high; (5) many online firms have significant cross-jurisdictional scale but no physical presence in the markets where consumption takes place; (6) some business models rely on users and companies to co-create valuable content (e.g., on YouTube, Snapchat, and Facebook); and (7) sharing-economy business models involve private individuals, who aren't typically the subject of hotel taxes, taxi fees, and the like.Businesses exhibiting these characteristics face uncertainty over how digital services and e-commerce will be taxed. Existing tax codes are usually silent on these issues--which, in turn, can open the door for a range of tax-evasion and avoidance schemes. It can also make taxpayers' and administrators' efforts to ensure compliance more difficult.Regulators are considering how to address these tax challenges. To date there's been little consensus on the taxation of income and profits. In fact, a global debate about how to tax the digital economy is raging, with divergent--and often directly opposing--viewpoints on how to tax e-services. Broadly speaking, countries that host digital-service providers By James A. Brumby, Director, World Bank's Governance Global Practice, World Bank GroupWhat CFOs Need to Know about Taxing the Digital Economy
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