Copying and distributing are prohibited without permission of the publisher

BEPS Action 1 – Where are we?

26 October 2017

Email a friend
  • Please enter a maximum of 5 recipients. Use ; to separate more than one email address.


Widening the tax rules to address the evolving digital economy is a regular talking point for many. Channing Flynn, partner and global digital tax leader, and Jennifer Cooper, senior manager of international tax services, at EY highlight what’s next on the agenda.

The evolution of tax rules is gathering pace to keep up with the digital economy

As countries move toward implementing the recommendations of the other OECD BEPS recommendations, the OECD has refocused its attention on Action 1 (addressing the tax challenges of the digital economy) announcing an updated timetable for completion of its work. The OECD is likely to re-test the hypothesis that the digital economy heightens BEPS risks and to review the effectiveness of other BEPS action items in combating those risks.

More specifically, it seems likely that during the next few months, the OECD will draw on certain measures already implemented unilaterally by certain countries – such as the UK's 'avoided PE' (permanent establishment) concept and India's equalisation levy. No doubt it will also draw on the work currently being undertaken by the EU, discussed below.

Looking back

The OECD's 2015 final report on Action 1 concluded that certain key features of digital business models exacerbate BEPS risks, but that it would be difficult, if not impossible, to ring-fence the digital economy from the rest of the economy for tax purposes.

Some features highlighted as matters of particular concern were the mobility of functions, the definition of taxable nexus, the importance of data and the difficulty in characterisation of certain transactions in new and emerging business models. Some of these issues were expected to be addressed by other BEPS actions, such as changes to the definition of PE. The OECD also analysed – but stopped short of recommending – some new options, including a new definition of nexus based on "significant economic presence", a withholding tax for certain digital transactions and an equalisation levy.

Deadlines approaching

A stakeholder consultation on the next steps is scheduled to take place in San Francisco in November, followed by an interim report in April 2018 – a slightly faster pace than might have been expected when the 2015 report was released. It is not yet clear how substantive this interim report will be, however. As the OECD noted in June 2017, the effects of the digital economy are far-reaching, and digital business models are still stabilising across a number of sectors.

At the same time, it is clear that governments are becoming increasingly concerned about the digital economy. While the US has been seen as resistant to change in this area, other countries appear willing to move ahead with reform, and there are broadly three types of reform that might be envisaged.

First, a global response (excluding the US) could be agreed by countries, e.g. as facilitated under the OECD Action 1 task force. Alternatively, as the trends to date would suggest, we might see more countries taking unilateral action. This second option would increase the chance of double taxation, which may not be covered by tax treaties. Third, some compromise of the above may see groups of countries agreeing to rules or approaches among themselves. For example, the recent EU Economic and Financial Affairs Council meeting focused on the digital economy, and the EU is moving forward with assessing the viability of two measures – in the short-term, an equalisation levy, and a longer-term, a model focused on the adoption of a 'digital PE' definition. The EU's work on these options is expected to progress quickly, with further details expected to be released during the final quarter of 2017.

In any case, recent activity shows that, at the very least, governments have a shared ambition to make progress. For businesses, this indicates that they should not be complacent in thinking that changes to international tax laws are not on the horizon, and they should familiarise themselves with the options and their potential impact.

Channing Flynn is partner and global digital tax leader at EY, and Jennifer Cooper is a senior manager in EY international tax services. The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.






International Tax Review Profile

RT @CLivingston96: Proud that @vertexinc CTO @b_pinamont is speaking at the @IntlTaxReview Women in #Tax Forum in NYC on 3/1! Who else is a…

Feb 19 2018 05:55 ·  reply ·  retweet ·  favourite
International Tax Review Profile

RT @Richard_Asquith: Political uncertainty says IMF means 18 month+ delay on VAT in Bahrain Kuwait Qatar or Oman https://t.co/IAJOQyYYAh ht…

Feb 19 2018 03:54 ·  reply ·  retweet ·  favourite
International Tax Review Profile

Good news for tax professionals as US Treasury proposes to repeal 298 outdated tax regulations. https://t.co/U2ipmjA8gi

Feb 13 2018 03:40 ·  reply ·  retweet ·  favourite
International Tax Review Profile

RT @MPAgnew: Roses are red And subject to VAT Unlike other things Such as garments not suitable for older persons made from Tibetan goat fu…

Feb 8 2018 03:48 ·  reply ·  retweet ·  favourite
International Tax Review Profile

RT @jmfeiner: If violets are red and roses blue, no worries, it's in s 14AZ(3),(bb)(ii) #TaxValentines #Simplification

Feb 8 2018 02:14 ·  reply ·  retweet ·  favourite
International Correspondents