Shedding Light On The Digital Tax Debate
The OECD’s base erosion and profit shifting project is intended to bring 20th century tax regimes up to speed with 21st century business models. However, one aspect of BEPS that is proving particularly difficult for the international community to resolve is the taxation of businesses that operate largely in the digital domain.
What’s The Problem?
In a nutshell, the problem for tax policymakers is that digital business models don’t tend to have a major physical presence in the jurisdictions in which they make most of their sales. This means that it is difficult for countries to legally claim taxing rights on often-substantial income associated with these sales.
The Multilateral Option
The taxation of the digital economy was covered in Action 1 of the BEPS project. However, when the final BEPS recommendations were published in October 2015, the Action 1 report did not include any specific recommendations, more a discussion of the issue and an acknowledgment that more work needed pursuing, with the OECD mindful that a rush to legislate before all options were properly considered could do more economic harm than good.
In the meantime, the OECD has been keen to stress that as wide an international consensus as possible must be achieved on any future proposals in this area, warning that attempts by governments to introduce their own digital tax measures could backfire badly, including by reducing levels of investment and punishing innovation, especially by small businesses and startups.
In March 2018, the OECD issued a long-awaited update on its digital economy work. This essentially re-emphasised the importance of a multilateral solution and reported that members of the OECD and the BEPS Inclusive Framework – a body committed to the implementation of certain BEPS minimum standards, which now includes over 100 jurisdictions – agreed with this stance. The update also mentioned that the OECD would seek to conclude its work by 2020 and publish another interim report in 2019.
Significantly, on 23 July 2018, G20 finance ministers and central bankers supported the OECD’s approach following their meeting in Argentina.
The EU’s Interim Digital Tax
Nevertheless, some jurisdictions have said that digital companies should be subject to stricter tax rules while the OECD deliberates on the issue. And while the European Union has also expressed support for the OECD’s work and for a multilateral tax agreement, it has proposed that digital firms in the EU should pay a special “interim” tax on their revenues.
Under proposals published by the European Commission in March 2018, certain companies would be required to pay a 3% tax on revenues. The interim measure would be levied on revenues created from selling online advertising space; created from digital intermediary activities; and those created from the sale of data generated from user-provided information. It would apply only to companies with total annual worldwide revenues of at least €750m ($875m) and EU revenues of €50m.
Meanwhile, it also committed to seeking new digital permanent establishment rules in the longer term.
The EU has rapidly lost support for its interim tax idea, with several member states warning that the proposal has many negative economic and legal implications and could block the path to a more consistent international solution. Some have even warned that the measure could sour trade relations between the EU and US even further, given that many large US-based tech firms will be targeted by it.
Most likely, an ongoing waiting game as we await the contents of the OECD’s 2019 progress report.
France and Germany expect an EU-wide agreement on the Commission’s digital tax proposals by the end of 2018. However, given that so many other member states oppose the interim tax, this objective looks highly ambitious.
Nevertheless, it looks increasingly likely that some countries will take matters into their own hands, both in the EU and beyond.