This is the first in a series of three articles from Grant Thornton on the tax issues and tax opportunities associated with the digital economy, internet of things, and data analytics The digital revolution affects nearly every aspect of our lives. It impacts the way the world does business, both today and in the future, and poses a number of challenges for decision makers. This article explains how digital is impacting the economy, its effect on the business enterprise, and, how your tax strategy needs to align to your digital strategy to avoid double taxation. In addition it outlines what action is required to minimize tax risk and maximize tax opportunities in the digital economy.

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The Digital Economy: How to
develop effective tax planning for
your digital strategy
First in a series of three articles on the tax issues and tax opportunities associated with the digital
economy, internet of things, and data analytics.
Thedigital revolution affects nearly every aspect ofourlives.
It impacts theway theworld does business, bothtodayand in
thefuture, and poses anumberofchallenges for decision
makers. This article explains how digital is impacting the
economy, its effect on thebusiness enterprise, and, howyour
tax strategyneeds to align to yourdigital strategyto avoid
doubletaxation. In addition it outlines what action is required
to minimizetax riskand maximizetax opportunities in the
digital economy.
I. The Digital Economy
Technology– including theexplosion ofdigital, data,
analytics, artificial intelligence, mobile, and cybersecurity –
impacts every business and everyindustry. Somepeopleare
calling this timein historythefourth industrial revolution:
everywhere leaders are highlighting theimpact oftechnology.
For example, JohnChambers, Cisco ChiefExecutivestated,
“Everybusiness is a digital business.Thefact is, the
heads of most bigcompaniesthesedays will tell youthat
they arereallyrunningbigtechnologycompaniesthat
happen to sell groceriesor shoesor gasgrillsor
professional services.Everycompanyisatechnology
company.”1
Thestart ofthe 21st century began with transformational
change in the global cultureand economy. Initiallylimitedto
a few, theinternet has becomegloballyavailableto billions of
peopleevery day through theuseofsmart phones, tablets and
otherdevices. Internet search engines haveopened thedoor
to vast amountsofinformation. Business models have
changed; brick and mortarstores havebeen replaced by
business-to-consumerecommercecompanies likeNetflix
selling streaming videoand Amazon providingaccess to
products onlinewhich areshipped to yourdoor. Digital is
1 Wall Street Journal – February 2015
2 Digital Economic Value Index, Accenture, January 2016
enabling and disrupting all industries, and companies
everywhere are looking at digital strategies to succeed.
Experts expect thetransformational change, caused bythe
Digital Economy, to significantlyincrease overthe next 10
years. Advancements in datacollection, storage, and
computingtechnologies areleading morecompanies to
question, “Howcan I makemyproducts smarter?” And
“How can I derive maximum valuefrom thedatamy
companyhas access to?”
A leading changeagent is the Internet ofThings (IoT), which
includes connected devices such as machines, household
appliances, and wearables that generatehugeamounts ofdata.
If captured and mined, this“big” datawill create the divide
between profitable, high-valuebusinesses and thosewhich go
down thepath ofthedinosaurs. Anothercritical change
agent is advancement in theuseofadvanced dataanalytics
(i.e. includes predictive, prescriptive, machinelearning and
natural languageprocessing) which permit decision makers to
minethehaystack ofbig datafor the small needleofgood
datato makeimpactful decisions which can significantlydrive
up revenueor drivedown costs, leading to higherprofits and,
in turn, highersharevalue.
Theimpact of potential digital disruptionto theglobal
economyis illustrated bythese key datapoints;
 According to a recent Accenture study25% ofthe
world’s economywill bedigital by20202;
 Global flows ofgoods, services, and finance in 2012
equal 36% ofglobal GDP. Digitization is
transforming all flows and is expanding
opportunities forsmallerplayers to participate.3
 A Gartner2015 surveyindicates that morethan
75% of companies areinvesting orare planning to
invest in big datain thenext two years.4
3 McKinsey Global Institute, April 2014
4 Gartner survey September 16, 2015

2. As a result of digital disruption, companies need to askand
understand“What business is mycompanyin?” Forexample
are you a manufacturerofaproduct ora manufacturer ofa
product combined withthesaleof advanced analytic services?
With so manynew and emerging technologies, business
models, and customerpreferences, every companyneeds to
stress test its business strategyto ensureit is targeting the
right customers, products, and services to maximize
opportunities alignedto theircompetitiveadvantage. In doing
so, a company’s C-suiteshould considerthefollowing
questions as it assesses theimpact ofdigital across the
business enterpriseand theresultingtax implications:
 What is yourcompany’s shareofthe25% of GDP
of theglobal digital economy?
 How is technology, such as connected devices and
dataanalytics, going to disrupt mycompany’s
products, services and valuechains?
 How will mycompanyintegrateeffective tax
planning intoits evolving businessstrategy?
II. Impact across the Business
Enterprise
Todaywelive in a world wheresocial networking, mobile
devices, thecloud, big data, analytics, sensors and evolving
digital technologies areubiquitous. Therealityis digital
impacts theway businesses operatewith customers, suppliers
and employees. Digital impacts themarketing, selling,
production and distribution ofbothproducts and services.
Digital impacts thewaycustomers behaveand interact with
businesses.
A mere20 years ago successful businesses focused on
seamless integrationoftheirmanufacturing, supplychain,
distributionand sales functions to create efficiency that drove
down costs and increased revenue. Overlapping this
traditional model business changewas limited, to alarge
degree, to a company’s ERPsystem.In manycases the
functions ofthecompanywerenot portable.
With today’s technology, research and development can be
successfully conducted from multiplelocations using labour
savings in countries such as Indiaand thePhilippines.
Companies engaged in B2Cecommercecan rely on shipping
companies to supplementtheirdistributionsystems.
Marketing is no longerlimited to asales force on theground
but is complemented bytheinternet which has national and
global reach to new global markets.
In thenext 10 years thedigital economywill continueto
create new revenuestreams. Forexample, dataanalytics
permits companiesto driveexternal new revenuestreams or
increase sales. For example
 a manufacturing companywhich sells machines in
thefuturewill havethosemachines connected to
theinternet and will, fora service fee, collect data
which will be converted using advanced analytics
into informationthecustomercan useto determine
when and how to optimallymaintain themachine
 A well-knownretailerhas an app for smart phones
which remembers when customers comein their
storeand what theyhave purchased. Thecustomer
mayplan to spend $100 but during thevisit receives
coupons and reminders on thingsto buy. At the
cash register $200are spent.
In thesebusiness models thepoint ofsalebecomes blurred.
Is thelocation for tax purposes where:
 Theconsumeris?
 Theserver with thesoftwareis located?
 Wherethe datascientists providing theservice is
located?
Theimpact of thedigital economyis not limited to theB2C
or B2B space. The digital economywill also transform how
businesses operate. Theoverarching themeis that big data, if
captured and used effectively, will enablecompanies to work
smarter, faster, and moreefficiently.
For example, dataanalytics is impacting internal enterprise
functions, including thewaybusinesses operatewith
suppliers and employees, productionand sales, and
distribution. Usingtheprocurementfunctionas an example,
based on working with customers to create procurement
efficiencies wehave seen thefollowing results:
 decrease procurement costs by7%
 decrease production costs by10%
Thenext decade will see a significant increase in how digital
impacts thebusiness enterprise in ways not currently
imagined today
Onelesson companies havelearned is that theirdigital
business model will continueto changeat a rapid pace (e.g.
thinkofhow often you haveupdatedyourmobilephone and
thesoftwarethat runs it and therelated technological changes
over time). Successful companies will bethosewhich embrace
and anticipatedigital change and havetheframework to
execute on a real timebasis changes in theirstrategy. An
effective tax strategywill need to keep up with changes in the
business whileat thesametimedeal with tax authorities
including amyriad ofhistorical and ever changing tax laws
and regulations.
III. Tax Strategy Alignment with Your
Digital Strategy
Developing effective tax planning requires alignment with
yourdigital strategyand flexibilityto changethetax strategy
over timeas yourdigital strategychanges. Yourdigital

3. strategymayincludeaspects related to mobile, social media,
cloud, dataprivacy and cyber security. You will need to
considerhow yourtax strategyneeds to be modifiedto
considereach of thesekey business elements.To effectively
managetax costs we recommend aholisticapproach to
address global direct, indirect, withholding, and personnel
taxes.
Tax Lawsand Tax AuthoritiesStruggle to Keep Pace with “Digital
Disruption”: Taxpayer’sRisk
Countries and tax jurisdictions arehungryforrevenueand are
seeking ways to increase revenuethrough direct and indirect
taxes. At the sametimetax authorities and politicians arevery
concerned about thedigital worldand getting theirfairshare
of taxes related to thedigital economyprofits enabledby
portabletechnologyand information.
TheOrganization forEconomicCo-operation and
Developments (OECD) best describes theenvironment as
"the digital economy is increasinglybecomingthe economyitself, it would
be difficult, if notimpossible, to ring-fence the digital economyfromthe
rest of the economyfor tax purposes."TheOECD has
acknowledged that “the digital economycontinuesto develop, it is
important tocontinue workingon these issues andto monitor
developments over time.” In recognition ofthecomplex fluid
environment theOECD has recommended “A report reflecting
the outcomeof the continuedwork in relationto the digital economy
shouldbe producedby 2020.”5
Thepace of technologychanges and theglobal political and
economicenvironment createongoing tensionbetween
certain and uncertain tax results,changing tax laws, and
regulations. Existing federal, state, and foreign tax laws were
typically not enacted to anticipate futuretechnological
changes. Howevertoday, manytax authoritiesarechanging,
or contemplating changing,tax laws in responseto current
technological advances and entrepreneurial and corporate
applications oftechnology.
All businesses, regardlessofsize, will continueto innovatein
developing new products and services and bring them into
themarketplace. Technologydevelopment is likelyto
continueto outpacetheabilityoftax authorities to create tax
legislation to address technologychanges.
Thetax risks and opportunities presentedbythedigital age
are illustrated bythefact that key tax issues mayvaryby type
of tax and by tax jurisdiction.
5 OECD report issued October5, 2015
IV. Tax Considerations to Avoid
Double Taxation
Thedirect and indirect tax issues a companyengaged in the
digital world needs to analysewill depend onthecountry or
stateit is located in, the countries orstates it interacts with,
and whetherits focus is intercompanyorthird partydigital
transactions. Thekey tax factors to considerare:
 Nexus to paytax in the digital economy
 Characterization oftransaction: What did I sell?
 Sourcing ofrevenue
 TransferPricing and BaseErosion and Profit
Shifting (“BEPS”)
 Merger and Acquisition tax implications
 ValueAdded Tax (VAT)
Nexusto pay tax in the digital economy
Determining nexus to paytax (i.e. also referred to as a
permanent establishment)in thedigital economycontinues to
evolveand requires ongoing analysisforcompanies to
develop effective tax planning. Werecommend companies
review theirtax digital footprint on aregularbasis, at least
annually, and wheneverthereis a significant event such as a
mergeror acquisition ora significant changein tax legislation
to updatetheirtax planning. Thestarting point foreffective
tax planning is havingagood baselineofyourtax digital
footprint and aprocess in place to updateyourtax footprint
for changes in yourdigital/business strategy, such as
expanding marketsordevelopment of new types of
technology, etc.
Since digital is portable, therewill beopportunities to
considermoving profitabledigital activities to lowertax
jurisdictions as long as the moveis driven bybusiness
purposeand has substance. Even ifthe businessis not ready
for international expansion, significant stateand local tax
benefits can be achieved by effectively locating profitable
digital activities in optimum locations. Tax savings can be

4. achieved through minimizing tax rates, useofincome
apportionment rules and ortaking advantageof available
credits.
Characterization: What Did I Sell?
Theincomestream ofwhat you sell and its character for
direct and indirect taxes mayvary, and it maybe certain or
uncertain as to when theincomeis recognized. As new and
existing digital products and services are sold companies will
need to determinetheircharacter fortax purposes. Areyou
selling goods,services, or rights to an intangible? This
distinction maybedifficult fortechnologycompanies that are
providing softwareas aservice (SaaS), platform as aservice
(PaaS) and other“as a service” offerings sincestate and local,
federal and foreign tax authorities mayseekto characterize
thedigital transaction differentlyand often times seeka
characterization that results in tax being paid. A fundamental
tax planning questionis whetheryou get thebest tax result by
bundling (e.g. services vs product vs license) or unbundling
yourdigital offerings.
Sourcing of Revenue:
Sourcing, likecharacterization, has similartax considerations
that determinethetax consequences. At times thesourcing
maynot becertain given theevolution ofdigital revenue
streams, and therewill bedifferences in how local, national,
and foreign tax authorities determinetheappropriate
sourcing.
Query– How is this transaction taxed fordirect and indirect
tax purposes?
Theansweris this: it depends on thefunctions performed by
each of thecompanies and thelaws ofthecountries orstates
in which thecompanies do business.
Transfer Pricing and BEPS
TheOECD’s BEPSproject addresses tax avoidancestrategies
and mismatches in various tax rules to artificially shift profits
to low or no-tax locations. Theimport ofsubstancein setting
up yourglobal operations supportedbyappropriatetransfer
pricing methodologies arekey to integrating and executing an
effective tax strategyaligned to your digital strategy. Statetax
jurisdictions havealso increased theirfocus on transfer
pricing throughtheMultistateTax Commission’s Arm’s-
Length AdjustmentService, a program to increasestates
abilityto audit intercompanytransactions across statelines.
Further, an appropriatetransferpricing analysis can ensure
yourcompany’s allocation ofprofits arein line with where
valueis created.
Merger and AcquisitionsTaxImplications
Thedigital economypresents new opportunities andpitfalls
as companies seekto grow viamergers and acquisitions to
supplementtheirorganicgrowth. In duediligence, buyers will
need to considerthe nexus, characterization and sourcing of a
target’s digital business models to evaluateboththedirect and
indirect tax risk associated with theacquisition. In addition, it
will be imperativethat companiesconsidertheplanning
opportunities associated theacquisition structure, and post-
acquisition integration.
Value Added Tax (VAT)
Virtuallyevery majoreconomyoutsidetheUnited States has a
VAT orGST in place. Digital services are generallytaxable
and indeed thereis a growing trend to tax supplies ofdigital
services bynon-resident businesses. Whileabusiness
customeris generallyable to self-account forVAT/GST due,
underthereverse charge mechanism, manycountries will
require a non-resident to registerand chargeVAT/GST on
digital services supplied to privateconsumers. Thereis often
a grey area in ascertaining thebusiness status ofthecustomer,
and there is generally a requirement forthesupplierto
evidence this by obtainingand validating aVAT registration
numberfrom thecustomer. Whereanumberis not held on
file there is a riskof assessment from thetax authority.
Othercomplexities relating to VAT on digital services
include:
 Evidenceof customerlocation (e.g. theEUrequires
two pieces of non-contradictoryevidencesuch as IP
address and credit card address, to achieve safe-
harbourprotection).
 Selling through intermediaries such as marketplaces
/ app stores
 validating VAT registrationnumbers in real-time

5. What action is required to avoid tax risk
and maximize tax opportunities in the
digital economy?
Thedigital futureis rapidlyevolving creating new ways for
companies to create revenue, decrease costs, and interact with
theircustomers, suppliers, and employees. Werecommend
you proactively engageyourtax advisor to:
 Understand thevaluedrivers of yourdigital strategy
and what legal entities own thevaluedrivers and the
functions theentities perform
 Review yourdigital footprint to identifyexposures
for taxablenexus
 Determinethecharacter and sourcing ofyourdigital
transactions.
 Implement atax strategywhich supports your digital
strategyand identifies and mitigates tax risks and
recommends appropriatetax planning strategies to
optimizeyourdigital strategy
 Updateyourcurrent tax strategyfor changes in your
digital strategyand orfor changes in tax laws in the
countries in which you operate.
Next Article in the Series
Thesecond article in theseries will explorethe explosive
growth oftheconnected world “theinternet ofthings” and
thetax considerations ofconnected devices.
Who should I contact?
If you wouldlikeadvice on any ofthe points covered in this
article, pleasecontact:
Erich Pugh Randy Free
Minneapolis,US Irvine, US
T +612 677 5570 T +949 608 5311
E erich.pugh@us.gt.com E randy.free@us.gt.com
Doug Watson Martin Lambert
Minneapolis, US London, UK
T +612 677 5220 T +44 (0)20 7383 5100
E doug.watson2@us.gt.com E martin.lambert@uk.gt.com
Joseph Coniker Elizabeth Hughes
Raleigh, US London, UK
T +919 881 5893 T +44 (0)207 728 3214
E joseph.coniker@us.gt.com E elizabeth.hughes@uk.gt.com
Connect with us
grantthornton.co m
@grantthorntonus
linkd.in/grantthorntonus

6. Grant Thornton Global Digital Economy, IoT
& Data Analytics Tax Team
GT Data Analytics
Joseph Coniker Shannon Kreps
Raleigh, US Raleigh, US
T +919 881 5893 T + 919 633 4385
E joseph.coniker@us.gt.com E shannon.kreps@us.gt.com
Richard Cline
Charlotte, US
T +980 282 1980
E richard.cline@us.gt.com
GT Strategyand Performance Improvement
Chris Smith Luke Ekhoff
Bellevue, US Bellevue, US
T +425 214 9820 T +425 214 9861
E chris.smith@us.gt.com E luke.ekhoff@us.gt.com
Elliot Savoie Tim Michaels
Minneapolis, US Minneapolis, US
T +612 677 5104 T +612 677 5479
E elliot.savoie@us.gt.com E tim.michaels@us.gt.com
GT Technology Solutions
Chris Unruh John Stilwell
Overland Park, US Overland Park, US
T +913 2762 2723 T +913 272 2721
E chris.unruh@us.gt.com E luke.ekhoff@us.gt.com
GT Transfer Pricing
Nick Scott Liz Hughes
Minneapolis, US London, UK
T +612 677 5220 T +44 (0)207 728 3214
E nick.scott@us.gt.com E: elizabeth.hughes@uk.gt.com
Matt Piper
Minneapolis, US
T +612 677 5377
E matt.piper@us.gt.com
GT International Tax
Erich Pugh Randy Free
Minneapolis, US Irvine, US
T +612 677 5570 T +949 608 5311
E erich.pugh@us.gt.com E randy.free@us.gt.com
Doug Watson Stephan Baumann
Minneapolis, US Zurich, SW
T +612 677 5220 T +41 43 960 71 04
E doug.watson2@us.gt.com E stephan.baumann@ch.gt.com
Doug Wood Peter Vale
Raleigh, US Dublin, IR
T +704 632 6837 T +353 (0)1 6805 952
doug.wood@us.gt.com E peter.vale@ir.gt.com
Martin Lambert Onno Backx
London, UK Rotterdam, NL
T +44 (0)20 7383 5100 T +31 (0)1 886 769 376
E martin.lambert@uk.gt.com E onno.backx@nl.gt.com
Jennifer Zins Kyle Brandon
Minneapolis, US Minneapolis, US
T +612 677 5226 T +612 677 5269
E jennifer.zins@us.gt.com E kyle.brandon@us.gt.com
GT Industry Teams
Steve Perkins
Alexandria, US
T +703 637 2830
E steven.perkins@us.gt.com
GT Indirect Tax
Bill Lunka Alex Baulf
Minneapolis, US London, UK
T +612 677 5220 T +44 (0)20 7728 2863
E Bill.Lunka@us.gt.com E alex.baulf@uk.gt.com