Page 248 - Kaleidoscope Academic Conference Proceedings 2024

2024 ITU Kaleidoscope Academic Conference

3. INTERNATIONAL TAXATION OF ICT The illustrative examples for the purpose of this paper are
SOLUTIONS : WHY IS IT IMPORTANT? three forms of cloud computing ICT technologies namely,
the Software as a Service (‘SaaS’), Platform as a Service
The international taxation framework helps to regulate the (‘PaaS’), and Infrastructure as a Service (‘IaaS’). It is
taxation rights of different countries in the form of domestic pertinent to note that while each of the SaaS, PaaS and IaaS
tax systems and a network of bilateral tax treaties.[2] The use the term “service” within their name, that is a misnomer
adherence of the taxation system takes place on the basis of inasmuch as the monetary benefit derived from such
the doctrine of economic allegiance, which mandates the transactions may be treated as business profits, service
necessary pre-requisite of a connection between the income, supply of service for service tax, etc. Furthermore,
economic activity which is taxable as well as the country this paper does not delve deeper into the mixed models
which exercises its right to tax that particular activity. wherein the SaaS, IaaS, and PaaS are used together with
synergy due to the word and space limitations on the analysis
The traditional and age-old form of taxation relies on the as they lead to a paradigm of “bundle of rights” or “mixed
jurisdiction or physical presence of the residents. In the case contracts” respectively.
of legal persons such as Companies, businesses, non-profits,
the place of incorporation / permanent establishment / place 5. NECESSITY FOR THE STANDARDS OF
of effective management are used to determine the taxation TAXATION OF THE ICT SOLUTIONS
imposition on the legal entity. AROUND THE GLOBE
The fast-paced adoption and implementation of ICT In reaction to the fast-paced rapid development of the ICT
solutions has severely exacerbated the difficulties of solutions and their movement across the international
determining a single geographic location where the borders, the OECD took the initiative to describe the
connection is sufficiently strong to amount to tax residence. principles of computer software transaction for the first time
in the year 1992. Article 12 of the OECD Model initiated in
Another mechanism taking root is the taxation of the legal the year 1992 was amended in 2000 to include the dichotomy
entities who are not the residents of particular country by the of business profits and royalties derived from ICT’s.
strong nexus of their economic activities within the country. Furthermore, the classification of income from digital
Liberalization, Globalization and privatization combined products was brought in 2003 to bring the Harmonic System
with the ICT developments have highlighted the difficulties Nomenclature (HSN) classification in alignment across
prevailing in respect of attributing a particular geographic countries. [4]
location of intangible assets as these activities lack any
physical presence. Thus, the fast-paced digitalization of the The majority of the cases involving the ICT solutions in the
economy through the ICT solutions has resulted in a form of standard cloud services which delve deeply into only
misalignment between the location where profits are taxed one aspect of the remote-control software is limited in scope
and the location where value-creating activities are taking and the income can be directly classified as “income from
place. business profits”. However, in the instances where the ICT
solution service providers provides multiple services
4. CLOUD COMPUTING AND ICT integrated into one single service leads to an interpretation
SOLUTIONS : INTERPRETATIONAL complexity which requires the customization of the
COMPLEXITIES regulatory mechanism of taxation for such transactions.

ICT Companies are not just new business models entering The current standard of taxation regulatory mechanism of the
the traditional business solutions, rather they are ICT provides that the transferor/ seller of the particular
fundamental spokes in the wheels of acceleration of the product or program does not provide the unequivocal right
digitalization of all the previous businesses and thereby, the of alteration of the product to the transferee / buyer. Thus,
entire economy. The pace of change along with the novelty there is only a transfer of license for a particular
has resulted in a paradigm wherein the regulation of ICT consideration in such a scenario. This has been described by
solutions is not only difficult but impossible to fit into the the OECD as ‘data transmitted in the form of digital signal’
traditional regulatory mechanism of taxation. which relies on the payment of taxation on the usage of the
information of the ICT solutions, rather than the right of
The OECD, EU and UN all have their conventions relating exploitation of the copyright or patent rights which forms a
to international taxation and trade of goods and services, different discourse by itself. Such transactions are not
however, they are all based on the traditional economy and included as royalty as the intellectual property is not
do not include the ICT solutions taking root in today’s exchanging hands.[5]
world.[3] Thus, the current treaty provisions, domestic
legislations and international conventions, fall short Thus, the action of transfer of license for a particular
regarding the correct classification of the ICT solutions as consideration of the ICT Solutions are distinguishable from
well as the regulatory mechanism of taxation of the monetary the transfer of intellectual property rights and thereby, are
benefit derived from such ICT solutions based transactions. covered within the ambit of “service tax” or “tax on business
profits”.

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