Tax Challenges Regarding Online Advertising

Author:Mr Maurício Barros
Profession:Gaia Silva Gaede Advogados

It is well known that the constant increase in the number of Internet users has significantly changed various parts of the economy. Of all of them, one of the most affected is marketing, because the Internet has made it possible for companies' various strategies to be achieved faster and more effectively by directing actions to specific target audiences and, frequently, by monitoring their habits.

However, one of the digital marketing strategies - online advertising - has been the focus of some rather complex disagreements in the tax field. In certain cases, this has led to extremely large infraction notices being issued to companies.

On a global level, online advertising has been the target of some unilateral measures taken by certain countries. The basis for this taxation is the fact that the profits from running advertisements that are obtained by resident companies are normally taxed in the country, while the profits from nonresident companies, obtained in the same way, are not. Due to this, some countries have been taxing the payments made by recipients of advertising services to nonresident providers in order to "equalize" the positions of resident and nonresident providers, thereby treating them the same for tax purposes (at least for the purpose of taxing profits).

One example is India, which is the first country to impose what it calls an equalization levy on nonresidents for running advertisements on the Internet. The equalization levy rate is 6%, charged on the amounts paid to companies abroad by the recipients of the services. Other countries have adopted, or are in the process of adopting, similar measures, although incident on different fields (digital services in general) and using different names to describe the taxes. An example is Italy, which has a web tax of 3% on amounts paid abroad.

Other unilateral measures affect transactions of nonresident companies that do not even receive payments from residents. The basis for these taxes is the fact that, by directing advertising to residents of a given country, the online advertising service providers generate value in that country, even if they do not receive any income from sources located in it. An example of this is an "advertisement tax" created by Hungary that is incident on revenue with online advertising intended for the Hungarian market (for example, advertisements mainly in the local language), regardless of the place of residence of the service providers and...

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