The Digital Economy is So Taxing

– By Stephen Díaz Gavin and Claudio Palmieri

Economic activity is not only transnational, but increasingly digital.   A business is physically located in one country, sells goods or services in another country and then declares its profits in yet a third country?  Who is the taxing authority? Where is the transaction taxed and to which government do taxes get paid? This has never been a simple question internationally, but in today’s digital world, where borderless transactions are more frequent and more common, the leaders of the G-20 countries, in the Summit declaration of 18-19 June 2012 in Mexico, decried the consequences of these developments — tax base erosion and profit shifting to lower-tax jurisdictions.  Even the proposed U.S. tax reform currently before the U.S. Congress addresses concerns about tax base erosion.

In 2013 the Organization of Economic Cooperation and Development (“OECD”) began a project to combat tax base erosion and profit shifting and the first action item of their Final Report of 2015 concludes the digital economy cannot be considered separate from the rest of the economy for tax purposes – it is increasingly becoming the economy itself.   Significantly, the OECD believes solutions lie not so much in creating new rules, but adapting existing regulations to address the new, digital environment.  Meanwhile, the European Union and some countries in Europe are making their own provisions for dealing with changes caused by the digital economy. With its Communication of September 2017, A Fair and Efficient Tax System in the European Union for the Digital Single Market, the European Commission (“EC”) announced a legislative proposal for the Digital Single Market in Europe, that is intended to be available for implementation if an adequate, ready and preferably international solution inside the G-20/OECD project framework is not implemented.  The two main policy challenges addressed by the EC are: (1) where to tax digital services provided by companies with little or no physical presence and (2) what is taxable (e.g., the value created by intangible assets, data and knowledge).  While a long term approach is favored, the EC is focused on short term measures to address some of these problems quickly such as a tax on untaxed or insufficiently taxed income generated from internet-based business activities (whether creditable against the corporate income tax or as a separate tax); a standalone gross-basis withholding tax on certain payments made to non-resident providers of goods and services ordered online; a levy on revenues generated from the provision of digital services or advertising activity.

In addition to European-wide solutions, some individual countries are also attempting to address the taxation of the digital economy.  For example, in September 2016, a bill was introduced before the Italian Parliament regarding tax measures applicable to competition in digital commercial activities (DDL S.2526 “Misure in materia fiscale per la concorrenza nell’economia digitale” del 10 novembre 2016).  The bill would not only reinforce the powers of Agenzia delle Entrate, the Italian governmental agency which collects taxes and revenue, but would introduce a “hidden permanent establishment” (“stabile organizzazione occulta”) concept which would consider revenues generated from certain types of international transactions, as income generated in Italy. For example, fees paid to non-Italian companies by Italian consumers for the purchase of software licenses distributed on the Italian market. Thus, if a U.S. company engages in online business regularly, with greater than 500 transactions in any six-month period and collecting more than € 1 Million in that same period, that company would be considered to have a “hidden permanent establishment” subject to tax by the Italian authorities.  In addition, the proposed Italian 2018 Budget Law (not yet adopted), includes a proposal for a 6% web tax on services provided by nonresident companies and individuals on revenues generated from the sale to Italian residents  of fully “dematerialised services” (e.g., intangible services such as video and audio downloads).

The common theme in these new proposals in the European Union and EU member countries suggests that governments will look increasingly to tax where economic value is delivered.   If your business is part of the digital economy you clearly need to monitor these developments and pay attention to the legislative and regulatory initiatives being considered at the national, regional and multinational levels, especially in Europe, an important market and one which appears to be moving more quickly than other regions of the world.  You can read the full Client Alert on this issue and if you need more information, have questions or would like assistance, the International Practice Group at Rimon, with an office in Rome, is particularly well suited to serve your needs.  Feel free to contact Stephen Díaz Gavin, Partner based in Washington, DC and Rome or Claudio Palmieri, Counsel to Rimon and principal of Studio Legale Palmieri – Rimon Italia,  based in Rome.   Of course, you can always contact me, Joe Rosenbaum, or any of the lawyers at Rimon with whom you regularly work.

 

Global Social Media Handbook

I am proud to be among the 22 legal professionals, including 7 of my colleagues at Rimon, who contributed and co-authored a new book entitled Handbook on Global Social Media Law for Business Lawyers, published by ABA Publishing. This comprehensive work, sponsored by the Business Law Section of the American Bar Association, was co-edited by Valerie Surgenor, a partner in the Glasgow, Scotland, law firm MacRoberts LLP and John Isaza, my friend and partner here at Rimon, P.C.   Although principally focused on the United States, there are contributions from foreign lawyers in key regions around the world, including Canada, the European Union, Australia, Russia and Asia.

The Handbook deals with national and international law principles and emerging issues related to social media law, ethics, compliance and governance, including cybersecurity, cyber terrorism and risk management in a social media environment (e.g., hacking, corporate espionage, data loss and data breach); intellectual property issues in social media;  defamation, “fake news” and social media;  implementation of a social media crisis plan; use of social media as a tool in recruitment of employees and the privacy implications to employers;  promotional, endorsement and social media disclosure guidelines promulgated by the Federal Trade Commission in the US; and recent trends in UK and European social media legislation and regulation.  There is a separate chapter that discusses information and records management within the context of social media.

If you are interested, you can order a copy directly from the ABA (Handbook on Global Social Media Law for Business Lawyers) and of course, if you need more information or want to discuss your particular requirements with knowledgeable and experienced professionals, feel free to reach out to me, Joe Rosenbaum, or to any of the lawyers at Rimon with whom you work with regularly.

 

A Cryptocurrency by Any Other Name May Still Smell Like a Security

Dror Futter, Partner, Rimon, P.C.

Although the U.S. Securities and Exchange Commission (SEC) has been studying blockchain and cryptocurrencies since 2013, until its recent pronouncement, the SEC had been silent with respect with respect to its regulatory authority with respect to Initial Coin Offerings. An Initial Coin Offering (“ICO”) is a company’s release of its own cryptocurrency in exchange for tokens of a pre-existing cryptocurrency (e.g., bitcoins and in rare instances, a fiat currency – currency backed by the issuing government such as Dollars or Euro). The ICO issuing company effectively ‘sells’ a pre-defined number of coins or crypto-tokens to purchasers.

The surge in ICO’s has been so dramatic, that in 2017 ICO’s surpassed venture capital as the primary source for funding blockchain ventures and recent news reports suggest that funds raised through an ICO were “crowding out” venture investors. Most ICO’s in the United States have been conducted without registration under U.S. securities laws. Typically, the issuer simply provides potential investors with a “White Paper” outlining how they intend to use the money raised by the ICO.  To put it charitably, the quality and detail of these White Papers varies widely.

The similarity between the term “Initial Coin Offering” and “Initial Public Offering” or IPO is more than coincidental and these similarities have now prompted the SEC to issue its first pronouncements on the subject of ICO regulation under the securities laws and on July 25, 2017, the SEC did just that and issued the following three documents:
• An SEC Report of Investigation;
• A Press Release about the report; and
Guidance to Purchasers of Digital Tokens

The issue the SEC has been grappling with is the application of the definition of a “security” to the tokens being issued in an ICO.  In a 1946 Supreme Court case Securities and Exchange Commission v. Howey Co., the U.S. Supreme Court identified four criteria (which have evolved a bit since that decision) that need to be present for an investment contract, within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, to be a security.  They are: (1) the investment of money or other consideration, (2) In a common enterprise (although there is a split over how “commonality” should defined), (3) where investors expect a profit, and (4) any returns to the investors are derived solely from efforts of the promoters (issuers) or other third parties. The Court noted that the facts and circumstances of each case will determine whether an instrument is a security, even if it does not technically fall within the narrow criteria of their specific decision.

In short, the SEC press release stated:
• Tokens offered and sold by “The DAO” (the case that had been investigated) were securities, subject to the federal securities laws;
• Issuers of blockchain technology-based securities must register offers and sales unless a valid exemption applies;
• Those participating in unregistered offerings may be liable for securities law violations; and
• Securities exchanges enabling trading in these securities must register unless an exemption applies.

The SEC’s documents are silent on so-called “utility tokens” or “service tokens” – tokens that allow the purchaser to obtain a service (e.g., data storage; online games) and it is likely we will hear more from the SEC in future, since their press release contained a clear warning the securities laws and regulations apply to ICO’s. Although not all tokens sold in an ICO will automatically be considered a security, there remains significant uncertainty and most knowledgeable attorneys in this arena have already been advising their clients to avail themselves of the exemptions to the registration requirements (e.g., Reg D, Reg A+ or Crowdfunding under the JOBS Act).

This is an extremely complex and challenging (and evolving) area of the law and regulation and you can read the entire Client Alert: Casting Light Over Recent Events Concerning the SEC’s views on ICOs, Cryptocurrencies, Tokens, Securities and their Legal Repercussions.  Of course, if you want to know even more or need guidance, you should contact Dror Futter directly and you can always contact me, Joe Rosenbaum, or any of the attorneys at Rimon Law with whom you regularly work.

FCC Drops ‘App’ Plan to Open Set-Top Boxes

–  Joe Rosenbaum

The Federal Communications Commission (FCC), under its new Chairman Ajit Pai, removed from its list of items for consideration, a proposal originally put forth by prior Chairman Tom Wheeler that would have allowed consumers to access pay-TV content on third-party devices.  Previous Chairman Wheeler’s original proposal took an “apps” based approach, but also included a licensing scheme that would require implementation of a standardized license for placing apps on such platforms or devices.

Critics, however, noted this particular proposal would actually have the opposite effect and more restrictively limit the choices available to consumers.  The original proposal also put the FCC in the position of acting as supervisory authority in order to ensure, in each case, that such a license wouldn’t harm competition.  Critics immediately raised concerns over the need for such intrusion by the FCC at all (some raised questions regarding the authority of the FCC to require or supervise such a licensing scheme), with many preferring to simply get rid of restrictions and limitations on access devices altogether.

While the FCC has removed the proposal from its list of items being considered for a vote, it remains on the Commission’s circulation list. Thus, the FCC’s action removes the proposal from immediate consideration, but doesn’t close the file officially – something over which industry groups remain concerned.   Their concerns continue to relate to the uncertainty of having a proposal still open for consideration, which, if resurrected, could pose problems for many in the industry, including distributors and content creators whose existing contracts might be in violation of such a new FCC requirement or policy.  Stay tuned.

The Paradox of Illumination

I first heard about the paradox of illumination from Lee Loevinger, an extraordinary gentleman I was privileged to know professionally.  Lee was a multi-faceted, multi-talented, thought-provoking lawyer whose sage advice and stimulating ideas continue to resonate with those honored to have known him, and everyone else wise enough to read his work and the words he left behind.

In a nutshell, the paradox of illumination is extraordinarily complex, but simple to describe.  Much like Albert Einstein who, when asked about his theory of relativity and the notion that time is not constant, described it in personal terms: if a man is at dinner for 10 minutes with a beautiful woman, it seems like a fleeting instant; but sit on a burning hot stove for 10 minutes and it seems like an eternity :).

The paradox of illumination can similarly be described on a personal level.  Sit in completely dark room.  Really.  Completely dark.  What can you see?  Nothing.  You know little about your surroundings and can only sense your own body – in fact, you don’t even know how far your surroundings extend beyond your immediate sensations.

Now light a match.  The circle of illumination allows you to see a little of what is around you – but the perimeter and beyond are still dark.  Now light a candle.  The circle of what you can see illuminated by the light is larger than before, but the size of the perimeter beyond which you cannot see is also a lot larger than before.  The larger the light, the larger the area of illumination, but larger by far is the perimeter beyond which we know nothing.

The more we can see and the more we know and understand about the world around us, the larger the amount becomes that we don’t know.  In other words, as the circle of our knowledge grows, so does the amount of knowledge we cannot see and don’t know.  The paradox of illumination is the paradox of knowledge.  Perhaps that is why Michelangelo, when he was more than 87 years old, still said, “Ancora Imparo” (I am still learning).

mHealth – Mobile Health Care

Last year, I was invited to participate in and present a paper at the “mHealth and the Law Workshop” in Washington, D.C. [See mHealth – The Future of Mobile Health Care].

Then last month, I was invited to participate in a panel at the Mobile FirstLook 2015 Conference in New York, and as a result of my participation, the editors of Mobile Marketer asked if they could republish (with attribution of course), the paper.

In case you missed it, you can view “Exploring legal challenges to fulfilling the potential of mHealth” online, or you can download the original from the Legal Bytes posting above.

As always, if you have questions, or need advice or guidance, just contact me, Joe Rosenbaum, or the lawyer with whom you regularly work at Rimon.

Bond Meets Bond Street: Mannequins are Watching You Shop

An Italian company, Almax S.p.A., is selling a mannequin (price tag about $5,000) in a development that is being closely watched – literally – by retailers, consumers and, of course, regulators and privacy gurus. The new product, marketed as the EyeSee Mannequin, contains a camera embedded in the mannequins eyes, and according to the company’s website: “This product will do much more; it would make it possible to ‘observe’ who is attracted by your windows and reveal important details about your customers: age range; gender; race; number of people and time spent.”

In Europe and the United States, the mannequins are making sporadic appearances – perhaps in showrooms and even in street-side display windows, gathering data as people saunter by the store gazing into the windows. According to reports, Almax may also be testing auditory capabilities that would allow a mannequin to not only see, but to hear what customers are saying as well. Hey, did you just call that mannequin a dummy?

 


(Image from Almax Website)

 

The EyeSee Mannequin has a camera placed as an “eye” that includes facial recognition technology that records information about passersby, such as their gender and race, and the software guesstimates the approximate age of each person scanned by the camera. Typically, cameras can be used in retail stores for security, but in many jurisdictions the shop owners are required to post signs alerting consumers browsing the aisles that they are subject to being recorded. Now, the EyeSee Mannequin gives retailers the ability to collect and store information for marketing purposes – a commercial purpose that may put the technology squarely under a microscope (these vision puns really must stop), since it collects personal data about individuals without their consent. That said, the current product is only supposed to record information, not any actual photographs or image scans, but . . . it could, couldn’t it?

Need to know more about the legal implications of technology in advertising and marketing? Concerned about your rights (and wrongs) in deploying surveillance equipment and gathering data and information about customers and consumers? Are you up-to-date on the latest privacy and compliance requirements? Not sure? Need to see these issues more clearly? OK, don’t be a dummy (I mean mannequin) and consult your lawyer. Don’t hesitate to contact me, Joseph I. Rosenbaum, or the Rimon lawyer with whom you regularly work. We would be happy to see you, hear you and help you.

Insight from California’s Special Assistant Attorney General for Technology

In a recent interview with Travis LeBlanc, California’s Special Assistant Attorney General for Technology, Amy Mushahwar and Joshua Marker of Rimon’s Data Privacy, Security & Management practice, obtained some interesting insight on California’s new Privacy Protection and Enforcement Unit. Mr. LeBlanc addresses current and upcoming privacy trends, and the focus of California’s enforcement actions.

You can read the entire discussion and the insights obtained right here: Rimon Attorneys Interview Travis LeBlanc, of California’s New Privacy Protection and Enforcement Unit

As always, if you need help or more information, contact the Rimon lawyers mentioned above; me, Joseph I. Rosenbaum; or any of the Rimon lawyers with whom you regularly work.

What’s in a (Domain) Name? ICANN by any other name would still…

On June 13, the Internet Corporation for Assigned Names and Numbers (ICANN) revealed the list of applications for new gTLDs to be launched as part of its proposed expansion of the top-level domain space. A total of 1,930 applications were filed for strings, including brand names, generic words and abbreviations, geographic terms, and non-ASCII strings (such as Chinese or Arabic). If this is allowed to move forward as it is currently envisaged, it will be a striking change to the domain name system, with dramatic new risks and evolving threats, as well as opportunities. Brand owners – applicants or not – need to strategize and prepare now, to protect their marks and brands. Some may also need to decide whether or not to challenge any pending applications. 

Rimon has assembled a global team of thought-leaders to counsel and guide you. Experienced lawyers who have been following and assisting for years – ever since the proposal was first announced. Rimon is now offering a teleseminar intended to cover:

  • How to develop a strategy to protect your rights – marks and brands
  • What brand owners should be thinking about now
  • Commenting on and objecting to applications
  • The Trademark Clearinghouse and other supposed protections in the new system
  • Updates on industry, governmental and regulatory efforts to provide more protection for brands and trademark owners

You can register through the link here: The gTLD Applications Have Been Revealed: What Brand Owners Must Know Going Forward.

As always, if you need legal or regulatory counsel, call me, Joseph I. (“Joe”) Rosenbaum, or any of the lawyers highlighted in the full Client Alert or, of course, the Rimon lawyer with whom you regularly work.

Taxing Storm Clouds Gather Over Utah

In June 2010, we announced the launch of an initiative focusing on Cloud Computing (‘Transcending the Cloud’ – Rimon Announces White Paper Series & Legal Initiative on Cloud Computing), showcased with a series of individual and topical white papers, in time being compiled into a comprehensive work entitled, “Transcending the Cloud: A Legal Guide to the Risks and Rewards of Cloud Computing.” One of the first in our series was a paper on the state tax implications of cloud computing, entitled: “Pennies From Heaven”

Just as clouds have different shapes, sizes and shades of gray, different states are approaching taxation of cloud transactions differently. Well now, our State Tax practice reports that taxing storm clouds are gathering over Utah. In a marked about-face from the state’s previously issued guidance, the Utah Sales Tax Commission has ruled that web services that charge a fee constitute sale of a service, subject to sales tax. The implication being that mere access of or to an application is enough to subject the provider to a tax liability.

Notable for cloud computing providers, even though the product at issue was access to remotely hosted software that allowed users to conduct webinars "in the cloud," allowing customers to download a free device application for access to that service had the state seeing "software" (sales of which are subject to sales tax in Utah). With at least one state looking at clouds from the application side now, it will be interesting to see if other states quickly follow.

For more information about the Utah ruling, or to stay on top of the developments in the taxation cloud products and platforms, visit www.taxingtech.com. To get legal assistance and guidance from someone who really knows that state of state taxation of cloud computing, contact Kelley C. Miller directly. Of course, you can always find out more about our Cloud Computing initiative or get the assistance you need by contacting me, Joseph I. ("Joe") Rosenbaum, or the Rimon attorney with whom you regularly work.