On Monday, October 5, the Organisation for Economic Cooperation and Development (OECD) released their final BEPS report including a section on ‘Addressing the Tax Challenges of the Digital Economy’.
The report – according to KPMG in the UK – is seen as the biggest rewrite of the international tax landscape since the League of Nations proposed the first bilateral tax treaty in 1928. The OECD approach has indeed been exhaustive featuring 23 discussion drafts; 12,000 pages of commentary, and 11 public consultations.
Pierre Saint-Amans of the OECD stated that it was “impossible to ringfence the digital economy. The digital economy is the economy.” It is that important.
Here are the slides used in the OECD’s presentation in Paris:
OECD digital economy plan: level the playing field
Here at Taxamo we are largely concerned with ‘Action 1: Addressing the Tax Challenges of the Digital Economy’.
The report reiterates the OECD’s quest to “level the playing field” between domestic digital service suppliers and overseas suppliers. This is a key theme that has been running through OECD guidelines since the challenge of taxing the digital economy was prioritised as Action 1 in the Base Erosion and Profit Shifting (BEPS) plan.
In Action 1 of the BEPS plan the OECD have taken into account the definition of permanent establishment, transfer pricing, and controlled foreign corporation (CFC) rules.
Tax should be paid in country of consumption
The report rubber-stamps the belief that indirect taxes (i.e. VAT, GST, sales tax) should be paid in the country of consumption. For example, if a UK customer purchases an app from a US-based digital service merchant than UK VAT must be applied to the sale.
The OECD recommends that tax jurisdictions and regions worldwide “apply the principles of the International VAT/GST guidelines and consider the introduction of the collection mechanisms included therein.” The final report states that:
“Rules have been devised to ensure that VAT is collected in the country where the consumer is located. This issue is particularly acute in the online B2C market, and greatly affects the level playing field between domestic and cross-border suppliers. The experience of countries that have already introduced simplified registration systems has been extremely positive and has had a strong impact on VAT collection.”
Admin challenges in taxing the digital economy
In box 7.1 (p.105) of the OECD’s final report the administrative challenges of the digital economy.
These challenges are outlined as follows:
- Identification: Difficulties in identifying remote sellers also make tax collection difficult.
- Determining the extent of activity: It may be impossible to ascertain the extent of sales supplied by a business, and even if the information is available it may infringe on data protection. Another hurdle to overcome.
- Information collection and verification: To verify local activity the consumer’s tax authority may request information from parties that have no operation in the jurisdiction and are not subject to its regulations. Exchange of information is highlighted as being useful but is predicated on their being a reciprocating tax authority, not always the case.
- Identification of customers: The burdens placed on businesses to track IP addresses and card billing details of consumers. Required so as to identify their place of consumption and, in turn, apply the correct tax rate.
Other potential options were analysed by the OECD
There were three other recommendation options analysed ahead of the publication of Monday’s report. The options were:
- A new nexus in the form of a significant economic presence. The OECD states (p101, section 255) that it is important not to overstate the issues of nexus. The issue raises questions about whether current rules continue to be appropriate for the digital economy.
- A withholding tax on certain types of digital transactions.
- An equalisation levy, were recommended at this stage.
While these options did not make the OECD’s recommendation list in this final report, the international economic advisory body is asking tax jurisdictions and tax regions to “introduce any of these three options in their domestic laws as additional safeguards against BEPS, provided they respect existing treaty obligations, or in their bilateral tax treaties.”
A detailed mandate in relation to addressing the tax challenges of the digital economy is now due to be adopted by the OECD during 2016.
Remember, the OECD can only make recommendations to member countries. The OECD recommends, governments decide. The recommendations are not legally binding but – according to the OECD – “there is an expectation that they will be implemented accordingly by countries that are part of the consensus.”
The final BEPS report is to be presented to G20 Finance Ministers & Central Bank Governors in Lima, Peru, on October 8.
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