The taxing problem of
digital convergence


17 Feb 2006

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While digital convergence is creating opportunities and challenges for firms competing in the global market, the issue of taxation is being neglected by businesses, says Deloitte. How a business tackles tax issues can be the difference between profit and loss, according to the company.

A new report by Deloitte Touche Tohmatsu’s Technology, Media and Telecoms Group — entitled Tax Issues in Digital Convergence — asserts that convergence raises a number of critical direct and indirect taxation issues.

As convergence often involves increased use of the internet to download products and services, traditional tax residency borders may be broken down, resulting in unintended tax consequences unless there is careful planning in advance.

Issues raised include which government entity has the right to tax as borders dissolve for business purposes, and how a good or service will be defined for tax purposes as new and different products and ideas enter the marketplace.

“It is vital for the tax department to be involved in decision making from the beginning of the convergence process,” said Joan O’Connor, tax partner, Deloitte.

“As digital convergence continues to take hold there will be new and diverse products and evolving delivery platforms for businesses that will create confusion and uncertainty in the marketplace and also create tax planning opportunities.”

O’Connor said convergence also results in organisational change, including mergers, acquisitions, joint ventures and partnerships.

“Businesses that recognise the significance of convergence and structure their organisation to maximise tax efficiency from a transactional, operational and exit-route perspective are going to come out ahead,” O’Connor said.

By John Kennedy