Question

List and describe four areas that are likely to cause taxation issues for clients.

Answer 1

There are many areas which are likely to cause taxation issues for clients, four key areas out of those as per my view is as follows:

1. Transfer pricing :-

Companies that own entertainment content often have related entities whose engineers, programmers and artists convert traditional content into a digital format. The revised and reformatted content is likely to be marketed, sold and distributed by other related entities that provide valuable services and marketing intangibles. Distribution channels for digital content may be very different from the channels used for physical goods, and that can dramatically upset established transfer pricing analyses.

Once you have a handle on the changes in the business model, consider whether there is a new way to optimize the operations going forward. The information uncovered for transfer pricing compliance undoubtedly will be useful in assessing opportunities for achieving tax efficiencies through cost-sharing, co-production or licensing in business models may create planning opportunities that were not available under the prior model.

2. State and local tax (SALT):-

As M&E companies devise ways to monetize new digital distribution models, states are trying to get their “fair share” of the profits in ways that would have been unavailable in the physical realm. Sellers are, in some cases, dealing with new intermediaries, and in other cases they are dealing directly with end-users for the first time. These changes may raise state and local tax issues that sellers previously did not need to address on both the income and sales/use tax fronts. Much of the law in this area remains unsettled, but states are nonetheless moving forward to tap companies for potential tax revenue.

3. Value added tax (VAT):-

A US company selling a video download to a customer in Europe has nothing to worry about with respect to VAT collection, right? Not so fast. For VAT purposes, the place of taxation is determined by the “place of supply.” The place of supply is where the customer receives electronically supplied services (ESS). If a California company provides ESS to a customer in Germany, the place of supply, for VAT purposes, is Germany.

Additionally, VAT is chargeable on what the customer pays, not what the seller receives. So, the seller must collect VAT on the gross selling price, not the net amount after payment processors or platform providers have withheld their fee. Consequently, VAT exposure can be a significant trap for the unwary seller of digital content. With VAT rates on average in the 20% range and based on gross revenue, uncollectable VAT exposure can drain a profitable business. When the risk goes unnoticed, it can later surface with significant financial statement impact and can raise concerns about internal financial controls.

4. Commercial trends:-

The best opportunity to create these new business models in the most tax efficient way is at their beginning. From storing content in the cloud, to customer-driven bundles, here are just a few of the digital delivery of content, as well as the questions tax departments may want to contemplate.

• Cloud delivery
• Intermediation vs disintermediation
• Bundle vs Unbundle
• Revenue sharing etc.