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'Progress' on tax challenges of digitalisation says OECD

Out-Law News | 31 Jan 2019 | 2:20 pm | 3 min. read

The Organisation for Economic Cooperation and Development (OECD) has said that progress has been made on addressing the tax challenges of digitilisation.

The body said in a webcast and a policy paper that it would will consider four different solutions with the aim of reaching agreement on a way forward by the end of 2020.

"It is good to see the OECD making progress, although their task has not been made easy given the concepts they have been driven by countries' unilateral measures to explore," said Eloise Walker, a corporate tax expert at Pinsent Masons, the law firm behind Out-law.com.

According to the policy paper, the OECD's work will be centred around two 'pillars'. The first pillar focuses on how the existing tax rules that divide up the right to tax the income of multinationals among jurisdictions could be modified to take into account the changes that digitalisation has brought to the global economy.

At present the international tax system is based on the principle that companies are taxed in the jurisdictions in which they have a physical presence. This means that digital businesses are able to make substantial profits as a result of having customers in a particular location but not to pay tax on the profits in that location.

In relation to the first pillar, the OECD will explore three different concepts. These are 'user contribution', 'marketing intangibles' and 'significant economic presence'. User contribution is the concept favoured by the UK and involves allocating profits by reference to active user contribution. User contribution involves users creating value for a business by generating content such as by posting on social media platforms or sharing photos or videos on content sharing platforms.

Walker said: "It will be interesting to see what the OECD makes of this concept of 'user contribution' given the very real difficulties the UK is encountering in trying to explain what the concept means and how exactly it should be defined".

The concept of marketing intangibles involves recognising that, when dividing the profits of a multinational enterprise, some profit is attributable to the jurisdiction where the product or service is marketed and sold. 

Significant economic presence is a concept favoured by India, Columbia and a number of developing countries. These countries say that there should be taxing rights where there are significant sales in a country and that a solution needs to be simple to administer.

"Whilst it may be simpler to administer, this sounds a lot like VAT and it may prove hard to distinguish it from the goods and sales taxes that already exist," said Walker.

The fourth proposal to be considered by the OECD would not just be aimed at digitalised businesses and would apply much more widely. This is the concept of a minimum tax rate which is favoured by France and Germany and has similarities with the US's GILTI regime. It would be designed to counteract the shifting of profits that occurs because of the disparities in tax rates, with a number of low or no tax jurisdictions. It would involve investors being subject to a 'top up tax' if the profits had borne a very low level of tax. In addition jurisdictions could deny a tax deduction for payments to the extent that they would not bear a specified minimum level of tax \in the country where they were received.

The OECD is going to consult on the proposals in February and March and plans to have an interim report on progress in time for the G20 finance ministers' meeting in June 2019. It aims to have an agreed solution by the end of 2020 that would be developed enough to be rolled out by countries.

At the OECD's webcast Pascal Saint Amans of the OECD said that reaching consensus in this timescale would be "difficult" but "feasible".   

In light of the novelty of the approaches and significant development work required, participating countries have agreed that this work will be conducted on a 'without prejudice basis'.

"In the absence of multilateral action there is a risk of un-coordinated, unilateral action, both to attract more tax base and to protect the existing tax base, with adverse consequences for all countries, large and small, developed and developing," the OECD's policy paper says.

A number of countries have already announced unilateral action to tax the revenues of digital companies.

The UK has published proposals for its own digital services tax, which it intends to introduce in April 2020. It has proposed a tax of 2% on advertising revenue, commissions generated by digital marketplaces and social media advertising which is linked to the participation of UK users, where that revenue is above certain thresholds to be set at a level designed to exclude small businesses from the scope of the tax. The UK tax will be abolished once an "appropriate international solution" is in place, and will be formally reviewed in 2025.

France, Italy and Spain all have plans in place or pending for their own digital taxes as interim measures before the international tax system is reformed.  

The EU also proposed an interim turnover tax for digital businesses but has so far failed to get agreement from member states.