The biggest disruption in this world is that the concept of physical boundaries is constantly challenged by internet and more pronounced through rapidly changing technologies.
Globalization has not only made companies to do things in new ways but has also forced governments and sovereign nations to think differently to attract businesses around the world (and therefore attract income from taxes).
Mr John Perry Barlow in his letter ‘A Declaration of the Independence of Cyberspace’ addressing sovereign governments has stated that “cyberspace does not lie within your border” and that “you have no sovereignty where we gather”. His intentions were to strictly warn the sovereign governments, who in 1996 were thinking of governing and regulating cyberspace; however, under this article attention has been restricted only to the literal meaning of the two statements quoted above.
Estonia with only 1.3 million inhabitants has proved the statements of John Perry Barlow true by becoming the first country in the world to introduce e-residency. E-residency is a mechanism to enhance the prospects of digital trade, by providing remote access to its own digital infrastructure, economy and trade. E-residency has proved to blur the interstate borders which have long existed on the world map.
‘Vasudhaiva Kutumbakam’ is a Sanskrit phrase found in Hindu texts, such as the Maha Upanishad, which means “the world is one family”. Is this possible?
Physical boundaries of nations have its many reasons namely formation of governments, constitution, citizenship, currency, legislative and judicial powers, taxation and many others following from these. We are living in exciting times where the operative word is “disruption” – cryptocurrency to traditional currency, internet to physical borders and Estonia is now creating a new kind of disruption to residency/ citizenship.
In Estonia as an e-resident, one will be able to:
- establish and run a company online, from anywhere in the world;
- conduct banking online (e.g. open a bank account, make electronic bank transfers);
- have access to international payment service providers;
- digitally sign documents (e.g. annual reports, contracts) within the company as well as with external partners;
- verify the authenticity of signed documents;
- encrypt and transmit documents securely; and
- declare taxes online.
E-Residency thus offers the opportunity to establish and run a location-independent international business in Estonia. Estonia has been ranked highly for its transparent and competitive business environment and was placed sixth among the European Union economies by the World Bank for the ease of doing business (World Bank, 2016).
How do they do it?
It is very simple. All one has to do, is fill out an online application form. Then the Estonian Police and Border Guard will do a background check. Upon this background verification, the person will receive a digital card, which is nothing but a digital access to Estonian economy and trade.
Currently, one can choose any one of the Estonian consulate or embassies out of the 38 across the world to physically pick up this e-resident card, one being in Delhi. Applicants for e-residency undergo a background check, submit biometrics, and meet face-to-face with an Estonian official before obtaining the e-Residency digital ID. The program claims strong privacy protection, reinforcing trust in the internet as a place to do business and manage personal data.
The European ‘Digital Single Market’
The European Union has created a Digital Single Market. To support this, the regulation on electronic identification and trust services for electronic transactions in the internal market (eIDAS Regulation) adopted in 2014 aims to enable secure and seamless electronic interactions between businesses, citizens and public authorities. In this regard, the eIDAS Regulation ensures that: (a) people and businesses can use their own national electronic identification schemes (eIDs) to access public services in other EU countries; and (b) creates an European internal market for eTS – namely electronic signatures, electronic seals, time stamp, electronic delivery service and website authentication – by ensuring that they will work across borders and have the same legal status as traditional paper-based processes (European Commission, 2015).
E-residency does not have any direct influence on the tax residency. Being an Estonian e-resident does not mean that one becomes the Estonian tax resident.
An individual is a tax resident in Estonia if
- his or her place of residence is in Estonia or
- he or she stays in Estonia for at least 183 days over the course of a period of 12 consecutive calendar months
If an e-resident has established the Estonian company, then such company is regarded as Estonian resident. The profit of the Estonian resident company derived from all countries is taxable in Estonia, which is subject to the tax regime in Estonia and the Double Tax Treaties entered with Estonia and the country of the incorporator.
The Tax and Customs Board of Estonia, mentions that the profit is taxable at the moment of payment out, for example as dividends. It is really nice to know that double taxation is avoided, which means, if the actual activity of the Estonian resident company is only in foreign countries, the profit paid out as dividends in Estonia from profit taxable abroad, may be exempted in Estonia.
Estonia is experimenting with a concept called “data embassies”, where friendly countries would host servers housing Estonia’s critical data and applications and, in the event of an attack, the Estonian government could switch over to those external databases to keep the country running and keep the data safe.
Food for Thought
Can Aadhar provide for being such a game changer? (i.e., assuming after Aadhar addresses all the teething trouble that it currently has, in terms of security, privacy, confidentiality, robustness, authenticity, etc.). Would such a program enable e-residency to foreign directors to set up companies in India and conduct trade?
Can Aadhar provide a digital gateway for interested companies to virtually enter the Indian economy and market?
There is a lot of flak Aadhar is facing and below is an “only if” scenario:
Aadhar provides a very strong foundation to build upon for doing business with accountability, without any hassle and to cut short the bureaucracy. Aadhar uses bio-metric information of an individual to identify and verify their authenticity which provides an additional layer of cybersecurity while trading or doing business digitally.
For a country this large as India, with 1.2 billion population, it is a daunting task to recreate something like what Estonia has achieved.But, wouldn’t virtual businesses, who become tax-residents in India, be another income possibility for the country?
With ‘Digital ho Raha hai India’ can we create a virtual economy, with KYC, with security, with legislative backing, with ease, with new India Shining? Can we use programs/disruptions such as these to jump-start and skip the moves, to becoming a highly developed nation?
It might also be a way to not get caught in the digital-divide that the world is moving towards.
Author: Manas Ingle is an Associate with NovoJuris Legal.
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