The United Nations Development Programme (UNDP), through its Tax for SDGs Initiative, and the South Centre, Switzerland jointly organised a two-day capacity-building workshop on “Taxation of the Digitalised Economy” for nearly 100 officials from the Fiscal Policy Department (FPD), Inland Revenue Department (IRD), the Ministry of Finance and key private sector actors in the digital space in Sri Lanka.
The UNDP Tax for SDGs Initiative in collaboration with the South Centre’s Tax Initiative support developing countries in increasing Domestic Resource Mobilization (DRM) and achieving the Sustainable Development Goals. Domestically mobilized revenues, which form the bedrock of both development and climate finance, have been severely impacted even as they have become even more important for the recovery efforts and for reviving investments in economic and social development. In this regard, the workshop was organized at an opportune moment as Sri Lanka embarks on a path to economic recovery and course correction, particularly addressing structural issues pertaining to government revenue. Globally too, countries are increasingly focusing efforts to strengthen domestic resource mobilization as they chart up ways to manage the severe dent caused by multiple crises.
The workshop provided a unique opportunity for stakeholders to exchange and interact with their peers and international experts on the tax challenges arising from the digitalized economy. More specifically, the workshop focused on:
(1) policy options for taxing the digitalized economy, especially Multinational Enterprises (MNEs) supplying digital services such as online advertising and platform intermediation
(2) designing a minimum effective corporate income tax
(3) presenting ongoing discussions at the global level on taxing the digitalized economy
(4) obtaining evidence and perspectives of Sri Lanka on taxing the digitalized economy
(5) creating an inclusive platform for peer learning and exchange through the knowledge & experiences of the workshop participants
The workshop commenced with opening remarks by Mr. Ranjith S. Hapuarachchi, Commissioner General, IRD. He highlighted the need for tax administration to augment revenue collection in times of the ongoing fiscal challenges in Sri Lanka and expressed hope that the workshop would be able to lay the necessary roadmap and suggest measures for the Sri Lankan administration to tax income of digital companies that is sourced from Sri Lanka.
The highly interactive workshop delivered by Mr. Sudarshan Kasturirangan, Regional Programme Specialist, Asia and the Pacific, UNDP, Mr. Abdul Muheet Chowdhary, Senior Programme Officer and Mr Kuldeep Sharma, Research Consultant – Tax, South Centre, commenced with an examination of the domestic measures being undertaken in various countries such as Digital Services Tax (DST), Equalisation Levy (EL) and Significant Economic Presence (SEP). This was followed by an in-depth examination of the treaty-based solutions available, namely Article 12B of the UN Model Double Tax Convention (UN DTC) which provides a solution for taxing income from Automated Digital Services (ADS). ADS especially include services such as online advertising, search engines, intermediation platforms, social media platforms, online gaming and cloud computing.
The workshop also covered treaty-based solutions under the UN DTC for taxing income from payments for the use or the right to use computer software under Article 12 (Royalties). This was combined with a session on Article 12A (Fees for Technical Services) which covers income from managerial, technical and consultancy services and are often delivered online. There was a considerable amount of deliberations on the ongoing work in these areas at the UN Tax Committee and its significance for developing economies like Sri Lanka. Central to the discussion was also on the existing treaty framework in Sri Lanka concerning taxing royalties and fees for technical services.
Day 1 concluded with an overview of the OECD’s solution for taxing the digitalized economy, known as Amount A of Pillar One. Unlike the other options, this is a multilateral solution and can only work if the countries where in-scope companies (potentially the big technology companies) are headquartered agree to give up their taxing rights to developing countries.
Day 2 of the workshop focused on options for designing a minimum tax, which seeks to ensure that in-scope companies pay at least some taxes and do not use tax avoidance techniques to legally get away with paying no taxes at all.
The options explored included the OECD’s Global Anti Base Erosion (GloBE) Rules, alternative minimum taxes such as those based on turnover or assets, as well as treaty-based options such as the Subject to Tax Rule (STTR) of the United Nations. The UN STTR provides a solution to ensure any income covered in a double tax treaty will be taxed by the source/developing country if the residence/developed country fails to tax it above a minimum, bilaterally agreed rate.
The workshop demonstrated that regarding digital taxation, for the majority of developing countries, and Sri Lanka in particular, Article 12B and DSTs were simpler to implement and may yield much higher revenue vis-à-vis the complex Amount A proposed by the OECD.
Speaking to the success of the event, Mr N.M.M. Mifly, Deputy Commissioner General, IRD concluded the workshop by stating that the insights gained would empower the participants in enhancing their understanding of the ever-evolving tax landscape and the core rules regarding taxation of the digitalised economy that have been formulated recently and those under the process of formulation. In particular, Mr Mifly appreciated the UN Tax Committee, UNDP and the South Centre for providing coherent guidance and options to the Government of Sri Lanka and developing countries in general, and requested that more such workshops be held in the future.
The successful conclusion of the workshop under the UNDP Tax for SDGs Initiative and the South Centre laid a firm foundation for the series of joint engagements planned between the two organizations to support the Government of Sri Lanka and deepen collaboration in this field. These include a review of Sri Lanka’s tax treaty network, the design of a Model Tax Treaty for the country and capacity building on tax treaty negotiation. Technical meetings with the stakeholders will be organized in the coming months to discuss the progress made and the challenges faced during implementation.