Tax Laws and Systems: An Integral Component of the Data Foundation System

Liu Tianyong

During this year's National People's Congress and Chinese People's Political Consultative Conference sessions, the discussion of data elements and the data foundation system became a prominent topic among representative members. Zhou Yuan, a member of the National Committee of the Chinese People's Political Consultative Conference and the founder of Zhihu, proposed accelerating the implementation process of data openness and sharing in his motion. Shao Zhiqing, a member of the National Committee of the Chinese People's Political Consultative Conference and Deputy Secretary-General of the Shanghai Committee of the China Zhi Gong Party, suggested combining market-oriented allocation of data elements with top-level planning for digital trust infrastructure.

The government work report this year pointed out that in the past five years, the digital economy has continuously grown, with the proportion of added value of new industries, new formats, and new models in the gross domestic product exceeding 17%. The government work report also emphasized the need to vigorously develop the digital economy, enhance the level of routine supervision, and support the development of the platform economy. Based on this, it is imperative to better leverage the role of data elements through the construction of a data foundation system.

In December of last year, the Central Committee of the Communist Party of China and the State Council issued the "Opinions on Building a Data Foundation System to Better Leverage the Role of Data Elements" (hereinafter referred to as the "Opinions"), laying a solid foundation for better utilizing data elements. Tax laws and systems are an organic component of the data foundation system. In the author's view, in the coming period, it is necessary to fill tax policy gaps targetedly around the actual processes of data production, circulation, transactions, and distribution. This will create a more deterministic environment for better utilizing data elements and effectively unleash the greater potential of data.

In terms of attributes, data, similar to other virtual properties, possesses characteristics such as intangibility, replicability, and non-exclusivity. While academia generally considers data as an intangible asset, there has always been some controversy over its ownership. The "Opinions" clarify the property rights operation mechanism of establishing the rights to hold data resources, process and use data, and operate data products, which initially resolves disputes over data ownership. However, from a tax law perspective, further clarification is still necessary.

Based on the principle of tax legislation, the taxable object and tax items must have a legal basis and specific conditions for determination; otherwise, taxation becomes difficult. Currently, data is not explicitly listed in relevant tax items among property tax and other related tax categories. Although data can be included in the scope of value-added tax and income tax as a special intangible asset through legal interpretation, this approach somewhat contradicts the principle of tax legislation. From a practical perspective, the scope of intangible assets is very broad, with varying applicable tax rates. The author believes that it is necessary to explicitly classify data as a special type of intangible asset through tax legislation, establish clear tax items, and provide effective guidance for enterprises to conduct data business, accurately apply tax items, and measure their tax burden.

Apart from tax items, looking at the actual process of transaction circulation, there are also some uncertainties in the specific treatment of relevant data business under value-added tax and income tax.

In terms of value-added tax, as some data assets are "by-products" gradually generated along with a company's main business or are collected by numerous individuals during the process of receiving services, their corresponding costs are challenging to distinguish. This poses difficulties for input tax deduction. If a simple tax calculation model with a low tax rate but no deduction is adopted, some value-added tax will be borne by the company. Meanwhile, China has adopted a policy of tax exemption instead of tax refund for the export of intangible assets (such as customized software) with difficult-to-define input value-added tax amounts, which also affects input tax deduction in cross-border data circulation business.

Considering the legislative experience of value-added tax in overseas jurisdictions, the author believes that it may be worth considering a differentiated approach. For enterprises engaged in multiple businesses where data business accompanies the main business and the input value-added tax amount for data business is challenging to clearly distinguish, a simplified tax calculation and tax exemption model should be applied. For enterprises specifically engaged in data business, because the purpose of their input is single, the general tax calculation and tax refund model should be applied. However, this differentiated approach, although more in line with reality, may complicate the value-added tax policy and requires coordinated consideration by legislative departments and fiscal and tax departments.

Regarding corporate income tax, enterprises engaged in data-related businesses need to confirm income and taxable income when selling data holding rights, licensing usage rights, and operating rights externally. As an intangible asset, if the expenditure on data meets the requirements for capitalization, it can be amortized, and the enterprise needs to estimate the service life of the data. In reality, although data does not incur wear and tear, it has a strong timeliness. Currently, there is a lack of specific evaluation criteria. In addition, due to the complexity of data sources, significant value fluctuations, and an imperfect pricing system, there are also difficulties in recognizing historical costs and fair value in practice, creating obstacles to confirming the tax basis when transferring data externally. These issues need to be addressed based on practical considerations, finding effective assessment and pricing "benchmarks."

It is also worth noting that there may be double taxation in the process of data circulation and revenue distribution. As mentioned earlier, in cases where value-added tax cannot be deducted or is difficult to deduct, the more stages there are in the data circulation process, the easier it is to generate double taxation. In terms of income tax, as more entities participate in the development, processing, and mining of data, there may be issues with multiple taxation. For example, in practice, when the user of usage rights uses data to produce derivative products, they will pay a commission to the holder of the holding rights based on a certain percentage. This income requires two separate income taxes to be levied. Therefore, the author believes it is necessary to explore the establishment of a pre-tax allocation mechanism for data revenue or to alleviate the issue of double taxation through tax incentives, promoting better sharing and mutual benefit of the data dividend.

(Note: The author is the director of Hwuason Law Firm in Beijing and the director of the Financial and Tax Law Professional Committee of the National Lawyers Association.)