Research On Cross-border Taxation Of Royalties Under The Digital Economy

The digital economy is characterized by a high reliance on intangible assets,data and user participation,and the virtualization of trading venues.There are two problems in the cross-border taxation of royalty income under the digital economy: the characterization of royalty income and the distribution of royalty income tax rights.Regarding the characterization of royalty income,taking typical cloud computing service income and online advertising income as example,the difficulty in characterizing royalty income is as follows: the dispute between royalty income and operating profit;the disputes between royalties and technical service fees.To this end,it is necessary to clarify the boundaries between royalties,operating profits,and technical service fees.In addition,consideration may also be given to the UN Article 12 B Rules for the Classification of Service Income from Automated Digital Services.By introducing a new type of income,it avoids the disputes arising from new types of transactions in the digital economy.For the characterization of royalties,the "property of the subject matter of the transaction","the nature of the contract" and the "time of intellectual property formation" can be used as the factors to be considered to clarify the royalties and operating profits;Different from the technical service fee,the main criterion is "whether knowledge is imparted or not".In addition,it can also be considered to learn from the UN Rule 12 B,by introducing the type of income from automated digital service services,to avoid disputes arising from new types of transactions in the digital economy.Regarding the distribution of cross-border tax rights on royalties,at the level of unilateral tax reform,the experience of sovereign countries represented by Slovakia,the United States,and India in amending,updating and overturning the traditional permanent establishment principle is worth learning from.Through the introduction of virtual permanent establishment rules,the loopholes in the loss of tax rights of the source country of royalties caused by the "desubstantiation" of the digital economy are effectively plugged.At the multilateral tax reform level,we can learn from the experience of Two-Pillar Approach.Among them,the "pillar one" amount A can redistribute the new tax right of royalties;the "pillar two" global minimum tax rules can effectively curb the BPES behavior of royalties.China has the following problems in cross-border taxation of royalties: the scope of royalties is not clear;the principle of permanent establishment is lagging behind and the digital economy tax legislation is absent.In response to the above problems,at the level of unilateral tax reform,consideration may be given to amending the principle of traditional permanent establishments and using virtual permanent establishments as its supplementary rules.In view of annual deficit in the balance of payments for royalties,China should continue to adhere to and consolidate the principle of sharing royalties income based on its own development orientation and "going out" development strategy.As for whether equipment rental income and technical service fees are included in the category of royalty income,it is necessary to combine the actual situation of China and the contracting partner to maximize the tax benefits of the country in the negotiation.At the level of multilateral tax reform,China can consider localizing the Amount A and the global minimum tax rules in the dual pillars of OCED,and build stable,easy and neutral new digital tax rules in a timely manner.In addition,China should actively carry out multilateral tax collection and management cooperation,implement BEPS results,and improve China’s influence and voice in the international tax field.