The digital economy – how should it be taxed?

The digital economy – how
should it be taxed?
ICAEW SEMINAR SERIES ON A BETTER INTERNATIONAL TAX SYSTEM: EU PERSPECTIVES
Summary of comments of ICAEW event on 22 January 2014
Venue: Stanhope Hotel, Rue du Commerce 9, Brussels
BUSINESS WITH CONFIDENCE
icaew.com
Pascal Saint-Amans, Director of OECD Centre for Tax Policy and
Administration (CTPA)
The OECD Base Erosion and Profit Shifting Action Plan (BEPS) grew from the post 2008 financial crisis and the
resultant crises in the public finances of most countries around the world. But it has been the political input
and the firm backing of G8 and G20 that has been the particular feature of this initiative.
The existing international tax system derives from work begun in the 1920s which identified double taxation
as the major tax problem arising as a result of cross border business activities. In more recent times double
non taxation has become the problem which the current international tax system is struggling to address.
Changes to the business world include globalisation, the integration of businesses and the reengineering
of supply and value chains. Business does no longer work on a bilateral country basis but works across the
globe.
The coordinated and collective approach of OECD and the non OECD G20 countries is important to prevent
countries taking unilateral measures. Not all OECD countries have the same tax perspective and some are
source taxation countries, i.e. Australia, New Zealand and Norway, rather than residence tax countries, and
the emerging, G20, countries that are party to BEPS have their own tax perspectives. At stake is the challenge
posed by the failings of the existing regime and the prospect of a breakdown of the existing consensus. The
OECD has so far been successful in setting out Model Treaties and Transfer Pricing Guidelines which have
in the main met with universal acceptance and translation, where necessary, into domestic tax and legal
arrangements.
Three basic “blocks” to the BEPS work:
• re-establishing the coherence of the international tax system
• restoring international standards
• ensuring transparency
There are then two horizontal strands, one of which is creating a multilateral legal means of putting the BEPS
decisions into practical effect without the need to revise the 3,000 existing bilateral tax treaties and the other,
the subject of this ICAEW Meeting, is to address the tax challenges of the digital economy and see whether it
needs some specific tax arrangements outside the more general rules.
Digital Economy Task Force (DETF)
OECD established a taskforce which began work with a meeting in November and meets again for two
days at the beginning of February before publishing a draft report in March to be followed by a Public
Consultation probably in April. Some of the issues emerging from the current work are: the reliance on
intellectual property (IP) the use of data in multi-sided business models, the difficulty of identifying where
value is created, the lack of a nexus with a particular country and the possibility of VAT providing part of the
solution. This debate also raises the question as to how to share taxation rights between source and residence
countries but that is not part of the BEPS project.
It would be difficult to come up with a sectorial solution for the Digital Economy on its own and although
the world’s economies have become increasingly digitalised the Digital Economy retains core characteristics
of business: it produces and delivers products that customers want to pay for or creates an environment in
which others, such as advertisers, want to make payments to access the participants in that particular digital
platform.
Philip Kermode – Director of Direct Taxation and Policy at the
European Commission
The European Union has been taking steps to create a better functioning commercial market place without
borders. On the tax side this has led to the formulation of the Common Consolidate Corporate Tax Base
(CCCTB) proposal with a draft Directive which was presented to ECOFIN a few years ago. The EU Code of
Conduct group which was set up in the late 1990s recently identified as a serious problem the mismatches
between individual country tax systems and this has led to the proposed redrafting of the Parent Subsidiary
Directive which is under active discussion at the present time.
What is going to be extremely important is to create “solutions” which are better, not worse, than the
current system. The EU has set up its own Digital Economy Expert Group which will develop a coordinated
EU position and provide a rigorous analysis and well developed views to the OECD project. The Expert Group
should finalise their report by June.
Paul Morton – Head of Group Tax, Reed Elsevier Group plc
Reed Elsevier is the fourth largest provider of digital content in the world and its own experiences show how
complicated the digital economy can be in practice and how many and various are the ways in which it
operates.
It will be tremendously difficult to identify what exactly happens within a digital business model and to
determine where value was being created by reference to a fictitious business model based broadly on real
situations.
The efforts of OECD to understand how value is created in different digital business models is to be welcomed
but pinning that profit down to a particular jurisdiction is very difficult and the attribution of costs can also be
problematic.
Armin Geyer – Head of M&A Tax Group, Global Tax, SAP AG
SAP are providers of enterprise software and have made €60bn of acquisitions over the past five years. It is
difficult to segregate digital businesses and treat them as separate from other more traditional businesses
and the concept of a digital Permanent Establishment (PE) is not helpful. It is not the collection of data that
creates value but its exploitation.
One solution to the problem faced by non-harmonised tax systems could be the CCCTB proposal. Minimum
taxes on profits would be a good idea so would be the strengthening of Controlled Foreign Company (CFC)
regimes.
Daniel Bertossa – Senior Policy and Advocacy Officer, Public
Services International
Daniel suggested an analogy with theories of cosmology 500 years ago when scientists began to put forward
a model under which the earth revolved around the sun and not as Ptolemy had set out 1,500 years earlier.
The new theory was rubbished by the establishment and at the outset there were not very many “facts” to
support it but in the end it proved correct.
The current international tax regime with its arm’s length principle and the disaggregation of groups
to determine the profitability of individual companies no longer reflects the integrated way in which
international business now operates. There is also a crisis in public confidence in the tax system as
multinational companies appear to pay very little tax on what are believed to be very substantial profits.
It would be better to take the aggregate profit and then allocate it between the activities of the group by
reference to a number of factors, such as sales, workforce and assets.
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02/14