All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

BEPS Action 1 – Where are we?

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.

More from across our site

The fast-food company’s tax settlement with French authorities strengthens the need for businesses to review their TP arrangements and documentation.
The full ALP model will be adopted through a new TP regime, which is set to boost the country’s investments and tax certainty.
Tax professionals have called on the UK government to reconsider its online sales tax as it would affect the economy at the worst time.
Tax professionals have called on companies to act urgently to meet e-invoicing compliance targets as the EU plans to ramp up digitisation.
In the wake of India’s ambitious 25-year plan for economic growth, ITR has partnered with leading tax commentators to discuss what the future will look like for India and for the rest of the world.
But experts cast doubt on HMRC's data and believe COVID-19 would have increased the revenue shortfall.
EY’s plan to separate its auditing and consulting businesses might lessen scrutiny from global regulators, but the brand identity could suffer, say sources.
Multinationals are asking world leaders to put a scale on carbon pricing to tackle climate change at the 48th G7 summit in Germany, from June 26 to 28.
The state secretary told the French press that the country continues to oppose pillar two’s global minimum tax rate following an Ecofin meeting last week.
This week the Biden administration has run into opposition over a proposal for a federal gas tax holiday, while the European Parliament has approved a plan for an EU carbon border mechanism.
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree