The OECD’s long road to a 2020 consensus on digital tax

The OECD’s Tax Challenges Arising from Digitalisation – Interim Report 2018 warns against short-term fixes – like the ones proposed by the EU – for the long-term problem of taxing the online economy. Facing a lack of agreement since the release of the BEPS Action 1 Report in 2015, the OECD hopes this latest report will set the groundwork for a “consensus-based global solution” by 2020.

More than 100 countries have committed to reaching a global agreement, yet many national governments are unconvinced change will come soon, and have implemented their own solutions instead. The threat of unilateral action remains very real, while the OECD races to find a solution that can please everyone involved.

International Tax Review spoke to David Bradbury, the head of the OECD’s tax policy and statistics division, who suggests there is plenty that can be achieved over a short timeline.

“Everyone within the inclusive framework – 113 countries – have all agreed that we should continue to work towards a global consensus-based solution,” Bradbury said. “That is the ultimate answer, and unless we’re able to achieve that it’s likely that there will be a range of adverse economic consequences that will flow from unilateral measures. So the best way is to move forward together.”

He added: “When you consider some of the things that have been achieved in international taxation in the last five years if you had suggested to people 10 years ago that those things might be possible they would’ve thought you were being overly optimistic.”

Just as Bradbury suggested, there are plenty of sceptics that the 2020 deadline can be met.

“To say there is a ‘lack of consensus’ is a considerable understatement,” Dan Niedle , partner at Clifford Chance in London, told ITR. “There is certainly a lack of consensus as to whether there is a problem,” he continued. “But then those who think there is a problem differ on what the problem is. Those who agree on the problem disagree on what tax policy should do about it.”

Heather Self, partner at Blick Rothenberg, suggested that the struggle to find an international answer could be lost.

“The OECD is trying its best to keep control of the process, but there are signs that it’s losing the battle – its latest report explicitly does not recommend interim measures, [and] recognises that political pressures may mean that countries want to use them in any case,” Self said . “The suggestion that a consensus could be achieved by 2020 seems ambitious, to say the least.”

There are three schools of thought on digital tax worldwide. One set of countries like France and Germany want targeted policy changes that create specific tax measures for digital companies, whereas other countries argue that the existing international tax system needs to change to resolve this existing issues. Then, the third set sees the BEPS project as the answer and no need for further reform.

The OECD has its work cut out for it. The difficulty is not just how to find a multilateral solution based on a consensus, but how to tax online businesses without stunting the growth of this highly innovative sector.

The interim report identifies key fiscal challenges from the high-tech sector, particularly the fact that tech companies have scale without mass across multiple jurisdictions, relying on intangible assets like intellectual property (IP) and user participation to create value.

All of these factors are the subject of debate, but the last point is especially contested. If the users of an online platform are the source of the value created, then there may be an argument for taxing those platforms on the basis of user participation.

“Value creation is a very subjective term,” Dan Niedle , partner at Clifford Chance in London, told ITR. “It is not clear to me how someone viewing a video on YouTube is fundamentally different from someone watching TV.”

“The person who created the video is completely different, of course, but the current proposals don’t distinguish between the two cases,” he added.

The questions don’t stop there. Tech companies like Google and Facebook have the capacity to conduct business in multiple countries without a physical presence, thanks to the internet, the role of IP assets, users and data in raising revenue. Others, such as Amazon, may need storage facilities and supply chains to deliver tangible goods, but their sales are still conducted remotely. While the taxation challenges of e-commerce are being increasingly resolved with the place of supply rules, the lack of a permanent establishment (PE) is still a problem.

The international tax system is designed to target profits on the basis of physical presence and location, but the high-tech economy is not reliant on a PE and can thus locate itself in a low-tax jurisdiction. As a result, the average effective tax rate for digital enterprise in the EU is 8.5%, while traditional businesses face an average rate of 20.9%.

Tommaso Faccio, head of secretariat at the Independent Commission for the Reform of International Corporate Taxation ( ICRICT ), said OECD’s BEPS project “failed to address the crucial issue of criteria for apportionment of profits”. ICRICT recommends that the focus should be on corporate profits and not just on high-tech enterprise. This may be crucial as the global economy is increasingly digitised.

“Tax multinationals as single firms by combining their global profits and then allow each country where the corporation operates or sells goods to tax only the portion of profits attributable to the corporation’s economic activity there,” Faccio said.

After a series of media reports exposing the low tax bills of MNEs, there has been a rise in public demand to ensure these businesses pay their fair share of tax. And, in the absence of consensus, national governments are left to find their own answers.

Despite the OECD’s warning in its report of the potentially adverse economic impact of interim measures, nations are considering their options on digital tax – and there are many possibilities in the short-term, such as a turnover tax.

“Countries thinking about introducing interim measures should take into account the issues that have been raised in the interim report,” Bradbury told ITR.

The OECD report singles out how a special tax for online companies could hold back economic growth by slowing down investment in innovation, raising prices for consumers and increasing the compliance burden for business. But this warning is unlikely to stop some governments looking for a quick fix.

One possible response would be an equalisation tax levied on the turnover of digital companies, which is being considered by the EU as it has support from France, Germany, Italy and Spain. This proposal has also drawn wide support from outside the EU. A version of the levy has either been put in place or being developed in India, Singapore, Malaysia, Indonesia and Thailand. But it’s questionable just how viable the turnover tax is in the long-term. Another option would be a withholding tax on digital transactions, as mentioned in the BEPS Action 1 Report. A third possibility would be a levy on revenues generated from the provision of digital services or advertising activity.

Chia Seng Chye, partner at EY in Singapore, said that the turnover tax could only serve as an interim measure because it sits outside of the existing treaty framework.

“A turnover tax could end up unduly penalising loss-making start-ups and businesses with low margins,” Seng Chye said. “Depending on the scope and rate of such turnover taxes, it could cause businesses to rethink their investments and potentially cease or exit certain markets and jurisdictions.”

Another approach taken in India and Taiwan is to lower the permanent establishment (PE) threshold or implement a virtual PE standard. This shows just how many possibilities are on the table.

The hope is that the OECD will be able to find possible solutions when the task force on digital economy (TFDE) reconvenes on July 6. In the absence of a global consensus, many taxpayers are facing growing uncertainty over tax policy and this is unlikely to change in the months ahead. Not only do they have to deal with media and public scrutiny of their tax bills, but they face a high risk of tax audits and litigation.

“Taxpayers are very concerned that they may face double taxation, a higher cost of doing business and risks arising from uncertainties, in the face of multiple unilateral actions taken by countries and the absence of consensus on long-term solutions,” Khoon Ming Ho, head of tax at KPMG Asia Pacific, told ITR.

“It’s either higher taxes, a greater compliance burden or more uncertainty,” he added. “Eventually a solution may surface that reconciles the positions of different countries, but it will take time.”

Seng Chye added: “The real challenge is in the implementation and in particular, getting countries to agree on a consistent and consensual taxation framework for the digital economy.”

It may be too early to tell what the solutions will look like, but it is clear that this is just the beginning of a long road to resolving how to tax online business.