The OECD on March 16 released its Interim Report on the Tax Challenges Arising from Digitalisation, noting a lack of consensus among countries on either the merit or the need for interim measures to address the tax challenges posed by the digital economy.
The March 16 report builds on the OECD’s 2015 Report on base erosion and profit shifting (BEPS) Action 1, on addressing the tax challenges of the digital economy. The report identifies the positions that different countries hold, which drive their approach to possible solutions. These approaches range from those countries that consider no action is needed to those that consider there is a need for action that would take into account user contributions, through to others who consider that any changes should apply to the economy more broadly, the report states.
According to the report, a number of countries do not agree that features such as “scale without mass,” a heavy reliance on intangible assets, or “user contribution” provide a basis for imposing an interim measure. These countries consider that an interim measure will give rise to risks and adverse consequences irrespective of any limits on the design of such a measure, including as a result of uncertainty and double taxation.
The report notes that countries that are in favour of the introduction of interim measures acknowledge that such challenges may arise but consider that at least some of the possible adverse consequences can be mitigated through the design of the measure. They also believe that, pending a consensus-based global solution, there is a strong imperative to act to ensure that the tax paid by certain businesses in their jurisdiction is commensurate with the value that they consider is being generated in their jurisdictions, the report notes.
Finally, the report states that where jurisdictions wish to proceed with consideration of interim measures, they have identified a number of considerations that they believe need to be taken into account as guidance to limit the potential for divergence and possible adverse side effects.
Moving towards a consensus-based approach
The report notes that more than 100 countries and tax jurisdictions – all members of the Inclusive Framework on BEPS – will work towards a consensus-based solution to the current tax challenges by 2020.
As part of the next phase of their work, countries have agreed to undertake a coherent and concurrent review of the “nexus” and “profit allocation” rules. In exploring potential changes, members would consider the impacts of digitalization on the economy, relating to the principles of aligning profits with underlying economic activities and value creation.
OECD Secretary-General Angel Gurría said: “The international community has taken an important step today towards resolving the tax challenges posed by the digitalization of the economy. We have underlined the complexity of the issues, and highlighted the importance of reaching international agreement, both for our economies and the future of the rules-based system. The OECD stands ready to accompany countries as they seek to build a common understanding of the issues related to the digital economy and taxation, as well as the long-term solutions.”
EU interim measures
In September last year, a group of EU Finance Ministers announced that they would consider solutions based on the concept of an “equalisation tax” on the turnover generated in Europe by digital companies.
In a keynote speech delivered at the Masters of Digital 2018 event, which took place last month, EU Tax Commissioner Pierre Moscovici said: “I know this will raise some eyebrows in this audience – it is happening. And by that I mean that several member states are determined to take action to address what they see as a ‘problem’ that must be ‘fixed.’ This perception is now shared at the highest political level in many European governments. Digital taxation is no longer a question of ‘if’ – this ship has sailed.”
The OECD’s interim report notes that “solutions are currently being explored by the EU Commission which is expected to deliver proposed legislation in the course of 2018. While these initiatives are generally taken to increase the level of taxation of digitalized businesses, they are also likely to generate some economic distortions, double taxation, increased uncertainty and complexity, and associated compliance costs for businesses operating cross-border and, in some cases, may potentially conflict with some existing bilateral tax treaties.”
“Further, they have increased the sense of urgency among many countries that common policy options need to be developed to ensure the ongoing relevance and coherence of the existing international income taxation framework,” the report adds.
Responding to the OECD’s interim report on digital taxation, US Treasury Secretary Steven Mnuchin said: “The US firmly opposes proposals by any country to single out digital companies. Some of these companies are among the greatest contributors to US job creation and economic growth. Imposing new and redundant tax burdens would inhibit growth and ultimately harm workers and consumers.”
“I fully support international cooperation to address broader tax challenges arising from the modern economy and to put the international tax system on a more sustainable footing,” Mnuchin added.
For his part, Will Morris, Chair of the Business at OECD (BIAC) Committee on Taxation and Fiscal Affairs said: “In line with the report, we agree with the OECD that ‘the digital economy’ cannot be ring-fenced. Attempts to do so will harm growth through distorting business activities and levying tax multiple times on the same profits.”
“Digitalization is the key to future growth, so a structured conversation with a very broad group of countries aimed at global solutions is now urgent. Unilateral action would only lead to costly fragmentation, double (or multiple) taxation, and harmful barriers for our economies,” he said.
The OECD’s interim report will be presented to the Group of Twenty Finance Ministers at their meeting on March 19-20, 2018, in Buenos Aires, Argentina.