Digital Services Taxes:
Impact on Financial Services Industry
28 January 2021
A number of countries across the Asia Pacific region are seeking to implement Digital Services Taxes (or similartaxes, as discussed further below) either in lieu of, or in addition to, any new or expanded nexus and profit
allocation rules arising from the implementation of Pillar 1 of BEPS 2.0.
For the purposes of this paper, in addition to those measures which are named as such, Digital Services Taxes
also refer to:•••

any turnover or revenue based taxes applicable to the provision of digital services, or digitalized businessactivities;
any expanded applications of corporate income tax withholding provisions to digitalised activities; andany measures which seek to tax or expand upon traditional concepts of a permanent establishment so
as to create a liability in a jurisdiction in which customers are located.

Excluded, however, are Value Added Tax or Goods and Services Tax (or similar transaction taxes) measures
which are also subjects of concern to ASIFMA.
This paper sets out in high level terms the industry’s key concerns with the application of any Digital ServicesTaxes. For the reasons set out further below, ASIFMA members hereby advocate:•Any forms of Digital Services Taxes should ideally not be imposed. However, should this be necessarythen any such measures should be temporary, narrowly scoped and specifically targeted (only) at highly
digitalised businesses which are able to deliver new types of business models, services or products withlimited (or no) human intervention. The mere enhancement or transformation of existing business models,
services or products through greater use of automation is not intended to be within scope of thesemeasures;•Countries in the Asia Pacific region ensure that any Digital Services Taxes contain an express exclusion
for financial services activities, consistent with the exclusion proposed by the OECD under Pillar 1 ofBEPS 2.0; and•The imposition of any temporary Digital Services Taxes should be revoked upon the implementation ofPillar 1 of BEPS 2.0.

1. Core Principles of Sound Tax Policy
The Ottawa Taxation Framework Conditions 1, articulated in the context of taxation of electronic commerce,
outlines the generally accepted principles of tax policy as being:
1.1

Neutrality – Taxation should seek to be neutral and equitable between forms of electronic commerceand between conventional and electronic commerce.

1.2

Efficiency – Compliance costs for businesses and administrative costs for tax authorities should be
minimised as far as possible.

1.3

Certainty and Simplicity – Clear and simple to understand so taxpayers can anticipate the tax
consequences in advance of a transaction including knowing when, where and how to account for thetax.

1 confirmed at the Ministerial Conference on Electronic Commerce held in Ottawa on 7-9 October 1998

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1.4

Effectiveness and Fairness – Taxation should produce the right amount of tax at the right time. The
potential for tax evasion and avoidance should be minimised while keeping counteracting measures
proportionate to the risks involved.

1.5

Flexibility – The system for taxation should be flexible and dynamic to ensure that it keeps pace withtechnological and commercial developments.

2. Specific Concerns with Digital Services Taxes
In applying the principles of sound tax policy, ASIFMA members raise the following matters of concern:
2.1

The original intent of Digital Services Taxes was to act as a temporary stop-gap measure, pending theintroduction of more permanent solutions, such as Pillar 1 of BEPS 2.0. Digital Services Taxes were
ultimately not advocated for by the OECD (refer to the OECD’s Interim Report of March 2018), while they
were initially promulgated by the EU Commission (though at the end not harmonised). The intended
objective of a Digital Services Tax was to ensure an appropriate amount of taxation could be collected
on a narrow and very specific range of activities carried out by highly digitalised businesses which areable to access markets without a physical presence in a jurisdiction. By contrast, many types of financial
services activities do require a physical presence in the jurisdiction, and in reality, they are being
subjected to Digital Services Taxes simply because of potential problems around discriminatory laws in
only subjecting non-residents to the tax. What follows from this is that any Digital Services Tax introduced
by a country should be narrow, specific, temporary and targeted. The business models used in thefinancial services sector do not generally accord with the intended target of these measures.

2.2

The OECD proposes that Pillar 1 of BEPS 2.0 contain an express carve out for financial services. The
rationale for such a carve out is because the digitisation and automation taking place in the financial
services sector primarily acts as a substitute for activities previously carried out manually. Moreover, theextent of automation in the financial services sector is not a complete substitute for human judgment anddecision making. To put it another way, the digitisation and automation seen in financial services does
not create something entirely new which gives rise to a new taxing right – it merely improves the efficiency
of certain tasks previously carried out manually. It is therefore inapt to apply Pillar 1 of BEPS 2.0. It
therefore follows that the same rationale should be applied to Digital Services Taxes.

2.3

The other key rationale for the exclusion from Pillar 1 of BEPS 2.0 is because the financial services
sector, banking and insurance in particular, is already the subject of significant local regulation in respectof their consumer facing businesses. Such local regulations generally require that appropriately
capitalised entities are maintained in each market jurisdiction to carry on business in the market
concerned. Accordingly, the profits from consumer facing business activities that arise in a particularmarket jurisdiction will generally be taxed in that market location. Just as this warrants an exclusion from
Pillar 1 of BEPS 2.0, the same is true under Digital Services Taxes.

2.4

Further to point 2.2 above, it is also noted that the UK’s Digital Services Tax contains an express
exclusion for financial services too. As the HMRC has noted (see DST18700 - Digital Services Tax
Manual - HMRC internal manual - GOV.UK (www.gov.uk)):“There is an exemption from the online marketplace definition for online financial marketplaces. This
reflects that financial services businesses have certain features that mean the policy rationale behind
DST applies less strongly in their case than it does for other marketplaces.
The exemption is intended to be broad and to encompass all types of financial services activity. It applies
when more than half of the marketplace’s revenue in the accounting period arises in connection withfacilitating the trading of financial instruments, commodities or foreign exchange.”
ASIFMA members believe that a similar broad exclusion for financial services should be applied bycountries in the Asia Pacific region to their Digital Services Taxes.

2.5

The exclusion of financial services from Pillar 1 of BEPS 2.0 is intended to be focused on a definedconcept of financial services activities, recognising that the regulatory environment for financial services
differs from one jurisdiction to another, including in respect of key areas like FinTech. The intent of suchPage 2 of 3

Digital Services Taxes: Impact on Financial Service
an exclusion is to ensure consistency in the application of Pillar 1 amongst different countries, and for thescope of any exclusion to apply equally amongst market competitors – for example, a bank carrying out
FinTech would be treated on the same footing as a pure FinTech company. Again, we would submit thatthe same policy rationale applies here to warrant an exclusion from Digital Services Taxes to a broadly
defined concept of financial services. Exclusions should also be sufficiently broad to capture intra-groupservices and transactions, especially intra-group IT and other support services which may be enabled ordelivered digitally.
2.6

ASIFMA members have noted a growing and concerning trend of countries in the Asia Pacific region
seeking to either implement, or proposing to implement, further alternatives or variations to a Digital
Services Tax. Examples include:
••
•
••
•

India’s equalisation levy;
Indonesia’s ‘Electronic transaction tax’;
the deeming of certain digital business activities as constituting a permanent establishment (e.g.,Cambodia, Bangladesh);
the inclusion of digital services provided to consumers in a jurisdiction as being locally sourced
income (e.g., Taiwan);
the expansion of withholding measures to capture digital services (e.g., Vietnam); andthe concept of a ‘significant economic presence’ as a basis for the imposition of turnover taxes(e.g., India).

These measures go significantly further than the perceived tax policy problem which needs to be solved.
That is, the policy response has been disproportionate to the revenue threat, and it is submitted that suchpolicy response has no real role to play in the context of the financial services sector.
2.7

A further concern with the imposition of Digital Services Taxes is that they are generally not creditabletaxes. They create an exposure to double taxation.

2.8

A further significant concern with the imposition of Digital Services Taxes is that they are generally applied
as turnover based taxes. Consequently, loss making entities may be exposed to such taxes. It is notablethat the UK’s Digital Services Tax contains alternative measures for low margin or loss-making entities,
which seek to mitigate these concerns (to an extent).

2.9

Digital Services Taxes in most jurisdictions apply not only to non-resident businesses, but also todomestic businesses. As such, should it be necessary to proceed, the imposition of Digital Services
Taxes would need to be deductible against any domestic corporate income tax. Otherwise, double
taxation arises. Again, notably the UK’s Digital Services Tax seeks to address this concern.

Disclaimer:This paper does not purport to give any legal or financial advice and shall not have any liability to anyone who takes or omits
to take any action based on the content hereof. The opinions expressed herein are those of the ASIFMA and have been
provided for reference and educational purposes based on information available at the time this paper is prepared. Industryand statistical data cited in the paper are from sources ASIFMA deems to be reliable, but no representation is made by
ASIFMA on the accuracy or completeness of such information.

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