The in-house tax leaders at International Tax Review’s Taxation of the Digital Economy Summit in London said tax authorities are coming up with new applications of value creation and establishment principles in the EU and US to extract more taxation from their companies.

“The different ways that we do business face challenges around PEs, direct tax and indirect tax,” said a tax director from the hotels industry during a roundtable discussion at the invitation-only event on September 26.

The majority of issues around the world come in the area of valuation as tax authorities improve their knowledge of transfer pricing and feel emboldened by the BEPS project to demand more information and tax.

An increasingly common situation is tax authorities asserting taxing rights on online sales to consumers in their jurisdiction by companies selling remotely from other jurisdictions. While destination based taxes are helping to resolve the question of which authority holds the taxing rights, there are still some grey areas when a consumer goes to the store and the product isn’t there and then they order it in-store for home delivery.

“If it all happens in the UK [where the e-commerce business is based] it is not a problem. But if they see it in a Dutch store [of the same company] and then order it online [the tax authority has a case].”

Other retailers have also experienced this problem, and have come up with ways to get around it.

“We are using iPads in-store [for online orders] and we apply a service fee,” said one tax director at an online retail company, explaining that this method is for transfer pricing purposes when the product is purchased from the same company from a foreign branch. “Also, the franchise owners will not provide [the parent company] with profit for nothing!”

“I think this will only apply in countries where we have a local presence.”

Another conference attendee spoke about how their company’s business model means they could be caught by the concept of a significant digital presence.

“The difference between us and a normal retailer is that our users spend time creating their product with us [online]. This phase is important value creation.”

“The users are creating data which you can then use to create a better service,” another attendee said. Under the EU’s digital services tax proposals this can be looked upon as value creation.

A tax director at an oil and gas company spoke about similar tax issues arising from their retail operations at their filling stations. “We have a lot of data through loyalty cards,” they said. This user information is used for various purposes, but determining its monetary or percentage value is difficult.

“From a transfer pricing perspective it is hard to allocate profit,” said one summit attendee. “You need to make assumptions.”

For tax directors of companies with customers in the US, the use of online bloggers and vloggers (video bloggers) can be worrisome.

Several industries commonly use bloggers and vloggers as an inexpensive way of gaining exposure at grassroots level. Some brands will send clothes, makeup, toys, and other goods to bloggers to encourage them to review them on their websites or on platforms like YouTube. Some will send further products as ‘payment’ for positive coverage.

This distinction is often a blurred line, and one that the tax authorities in the US have looked to target.

“Some US states in their quest to bring in sales [or corporate] tax are saying that this blogger or vlogger is an employee” to prove nexus, said a source in the fashion industry.

“Never mind that you don’t have a federal tax status, it can give you a local tax nexus,” they added.

In an industry that commonly operates on profit margins between four and 13%, an additional state tax burden can put a significant dent in profitability.

The retailers were also scathing of the EU’s short- and long-term measures aimed at taxing the digital economy.

The long-term option adds more complexity and uncertainty to the already fiendishly difficult corporate tax and transfer pricing system, while the short-term option impacts indirect tax, said attendees.

“I think the DST [digital services tax] interferes with the way indirect tax works,” said the tax director of a fashion retailer with online and offline operations. “Costs should be proportionate and linked to the recovery of input tax.”

While some of those present at the summit said they were unaffected because they do not meet the €750 million ($876 million) threshold, even these companies said they were “scared of the collateral damage of digital taxation measures”.

“Amazon is so dominant that it can just pass on any costs,” said a transfer pricing advisor, concerned that companies which use the platform would be the ones to suffer – not Amazon itself, as the politicians who have come up with the tax intend. “It would just pass it on.”

Overall, there is a long way to go and many tweaks need to be made if the OECD or EU proposals on the digital economy are to be applied rationally.

“I think the OECD was very conscious in the BEPS process that they were 10-15 years behind the times,” said one taxpayer. “Digital aspects of business are going to keep changing. The fundamental thing is the allocation of taxation rights.”

Ultimately, they added, the corporate tax system will not be able to cope with the rapidly changing nature of the economy.

“Environmental taxes and consumption taxes will ultimately prevail,” they concluded.