OECD digital economy discussion draft
The OECD published a discussion draft on the “Tax Challenges of the Digital Economy” this week, relating to Action 1 (address the tax challenges of the digital economy) of the action plan (AP) on base erosion and profit shifting (BEPS).
As stated in the AP: “The spread of the digital economy also poses challenges for international taxation. The digital economy is characterised by an unparalleled reliance on intangible assets, the massive use of data (notably personal data), the widespread adoption of multi-sided business models capturing value from externalities generated by free products, and the difficulty of determining the jurisdiction in which value creation occurs. This raises fundamental questions as to how enterprises in the digital economy add value and make their profits, and how the digital economy relates to the concepts of source and residence or the characterisation of income for tax purposes.”
This new OECD discussion draft examines the evolution over time of information and communication technology (ICT), including emerging and possible future developments (in Section II).
It discusses the spread and impact of ICT across the economy, provides examples of new business models and identifies the key features of the digital economy (in Section III).
The Discussion Draft then provides a detailed description of the core elements of BEPS strategies in the digital economy (in Section IV) and discusses how the development of the measures envisaged in the BEPS Action Plan and the OECD work on indirect taxation are expected to address them (in Section V).
Finally, it identifies the broader tax challenges raised by the digital economy (in Section VI) and summarises the potential options to address them that have been presented to - and initially discussed by - the Task Force (in Section VII).
The OECD invites comments on this draft and in particular on the:
• examples of new business models in the digital economy and whether (and if so which) other business models should be considered;
• broader tax challenges raised by the digital economy which have been identified by the Task Force and how these challenges should be addressed, taking into account both direct and indirect taxation; and
• potential cost of compliance arising from the options proposed to address the tax challenges of the digital economy and suggestions for more cost efficient alternatives.
The OECD Task Force has held initial discussions of several options, which were received from a variety of sources, including written input, proposals from delegates, discussion at meetings of the Task Force, and discussions of other working groups.
While the options are still at an early stage of development, the Task Force considers it important to receive input from the public in evaluating the following potential options:
1. Modifications to the Exemptions from Permanent Establishment Status, in paragraph 4 or Article 5 of the OECD Model Tax Convention, primarily intended to exempt preparatory or auxiliary activities.
2. Introducing a new nexus and/or a significant digital or virtual presence suffices to create a (taxable) permanent establishment.
3. Creation of a withholding tax on digital transactions (and to require withholding of such tax by the financial institutions involved with related payments).
4. Consumption tax options.
The digital economy has allowed businesses to significantly increase their ability to market and sell goods and services from remote locations to consumers in foreign jurisdictions. This resulted in significant growth in cross border B2C supplies which present challenges to VAT systems as these supplies often result in no or an inappropriately low amount of VAT collected and create potential competitive pressures on domestic suppliers.
VAT options mentioned by the draft are VAT exemptions for imports of low valued goods and to require the non-resident supplier to register an account for the VAT on remote digital supplies in the jurisdiction of the consumer to make VAT collection on these supplies to consumers more effective and efficient.
Persons and organisations who intend to send comments on this OECD discussion draft should do this before April 14 2014 and are invited to indicate as soon as possible - and by 7 April 2014 at the latest - to the OECD whether they wish to speak in support of their comments at a public consultation meeting on Action 1 (Address the tax challenges of the digital economy), which is scheduled to be held in Paris at the OECD Conference Centre on April 23 2014.
Finally, the authors are of the view that the existing OECD transfer pricing guidelines should suffice to address the digital economy challenges. In this respect the challenge is on tax authorities to resolve the matters under local tax law, while at the same time preventing an increase in the regulatory and compliance burden yet again for multinational enterprises.
The authors also emphasise the need to take a coordinated view (at least at the EU level), to avoid the issues that have risen in Italy, for example (risk of challenges for infringement of EU laws), or in France.The French government commissioned a report on the taxation of the digital economy. This report (by Pierre Colin & Nicolas Collin) has accelerated legislative discussions and French government plans towards a forthcoming proposal to tax the digital economy as part of the 2014 French budget.
by Maria Eugenia Palombo, Partner, at Studio Associato Consulenza legale e tributaria, Rome, (KPMG) Italy and Eduard Sporken, Director at KPMG Meijburg & Co, Amsterdam, the Netherlands