BEPS Action Plan: Action 1 - The digital economy

“Solving” the digital issue — specifically identifying appropriate tax rules to deal with digital business — has been designated the number-one action in the BEPS Action Plan. Below we provide commentary and links underscoring why this is perhaps the hardest problem facing the OECD.



Read our response to the latest discussion draft

5 October 2015

The Action 1 report on Addressing the tax challenges of the digital economy was finalised at the last meeting of the Task Force on the Digital Economy (TFDE)…

then ratified by the Committee of Fiscal Affairs, issued with other BEPS reports on 5 October, with approval by the G20 Finance Ministers on 8 October in Lima.

On the digital tax options (i.e. the digital nexus, withholding tax, or excise taxes), the report’s conclusions remain that none of the options outlined are recommended by the Task Force but it doesn’t stop there. It notes the opportunity to build practical experience of how such options would operate if countries unilaterally adopt them in the short term, potentially encouraging countries to do so. Any country taking this route needs to respect its existing treaty obligations, and to recognise that the outlines provided are not a blueprint and would need more work, it states.

Work will continue with regard to monitoring developments in the digital economy, although it has been left open whether this will be undertaken by the TFDE or otherwise.  The scope of this work is to be decided in 2016, including if and to what extent it will involve further consideration of the above digital tax options.

A report will be published in 2020 to indicate whether there remain digital tax challenges that need to be specifically addressed.


19 December 2014

Draft input to the International VAT/GST Guidelines, prompted in substantial part by the need to clarify VAT/GST application to digital transactions (BEPS Action 1), is in two parts providing...

  1. Guidelines on the place of taxation for B2C supplies of services and intangibles

General rule - most B2C services should be taxed using the ‘destination principle’. This approach uses the customer’s usual residence as the best proxy for identifying the place of consumption, and is consistent with the OECD’s Guidelines on B2B supplies of services and intangibles (services).

‘On the spot’ services - because the general rule may not be useful here, they should generally be taxed where the services are actually performed. This would apply where such services:

  • are physically performed at a readily identifiable location
  • are ordinarily consumed at the same time as, and at the same place where, they are physically performed
  • ordinarily require the physical presence of both the provider and the consumer at the same time and place.

Specific rules - certain transactions will not fit either the proposed general rule or the rule for on-the-spot services. The OECD proposes a two-step procedure for developing specific rules for such transactions. Basically, that procedure would involve testing whether the relevant general rule would not lead to an appropriate result and the proposed specific rule would lead to a significantly better result.

Immovable and movable property services - the draft suggests some rules for real estate-related services and movable property services.

  1. Supporting provisions to facilitate proper and consistent implementation of the Guidelines’ principles in national legislation, including consistent interpretation by tax administrations.

The draft includes an annex recommending a simplified system of VAT registration and compliance, similar to a new EU system.

The OECD addresses the VAT Guidelines section dealing with cross-border tax avoidance and dispute resolution, recommending more comprehensive exchanges of information among governments and with taxpayers.


24 September 2014

While the final version of the report issued 16 September does not introduce any conclusions that were not trailed in the initial draft, it does …

bring greater clarity over the issues which have given rise to the need for the digital economy workstream. The report also explains the role of the Digital Economy Task Force (DETF) for the remainder of the BEPS project.

The primary conclusion remains that the digital economy is so widespread that it represents not a special part of the economy but the economy itself. In consequence, it is not possible to isolate it for the purposes of creating separate tax rules. 

Nonetheless, it is clear that, if the other BEPS workstreams do not address the specific concerns and challenges identified, the DETF has the remit to propose its own solutions. Indeed, in referring to the continual developments of how technological innovation affects business, the DETF implies that its work may need to survive the end of the BEPS process to deal with a recurrence of the issues which it identifies. It also notes as yet unidentified issues which may come from: the Internet of Things; virtual currencies; advanced robotics and 3D printing; the sharing economy; access to government data; and reinforced protection of personal data.

The report focuses on the fragmentation of international business models, aided by developments in technology, as being the key tax area to address, identifying the specific remedies to be considered by the other BEPS workstreams – specifically, controlled foreign company (CFC) rules; artificial avoidance of permanent establishment (PE); and transfer pricing measures.

A new suggestion in the report (which picks up on a request in the public consultation) is that Working party No. 1 of the CFA should consider the characterisation of various payments arising in the new information and communication technology enabled world (a couple of examples are given in the report, namely Cloud computing and 3D printing).


26 May 2014

The OECD’s webcast today noted that the Working Party/Task Force was meeting for three days this week to …

reconsider the initial analysis of options (including some additional options suggested in consultation responses) and to reach conclusions on how to address interaction between work in the BEPS Project and the broader tax challenges posed by the digitisation of the economy.

The final report then agreed will also firm up on some of the 'background' issues included in the interim discussion draft


16 May 2014

Any recommendations from the OECD’s Digital Economy Task Force to tax digital business differently from its physical equivalents would, we outline in a tax policy bulletin,…

be illegal within the EU and, therefore, likely to be of practical use only for sales between businesses and customers located outside of the EU and EEA.

An EU State aid issue could potentially arise in respect of any regime whereby a digital transaction were to be taxed more harshly than the equivalent physical transaction, including where the taxation of the digital transaction is the usual position or reference framework, and the exemption (or preferential treatment) of the physical transaction effectively a derogation.

This would also apply to any unilateral action by an EU or EEA territory.

We also consider that there are other consequences of trying to tax digital ways of doing business differently from their pre-digital equivalents and, therefore, suggest that this is not an attractive policy route for Governments to go down


6 May 2014

The OECD hosted a very interesting and lively Public Consultation on the Tax Challenges of the Digital Economy on 23 April in Paris and ...

there is now a consensus at the highest levels that in the current tax debate there is no separate ‘digital economy’ but rather a ‘digitising economy’. It fits well with our thoughts on the fact that what organisations need is a business strategy fit for the digital age rather than a digital strategy.

Agreement is still likely to prove difficult to reach on the actions needed to tackle the resulting tax challenges. Some stakeholders appear to be tending toward the view that the issues are best dealt with by the working parties addressing other items within the BEPS Action Plan. Other stakeholders seem to want to pick out particular ways of doing business digitally and create tax solutions to the perceived problems which this creates.

In a discussion paper published in mid-March, the OECD/ governmental working party focusing on the digital challenges set out a mixture of approaches to dealing with this. Those included firstly modifying the permanent establishment (PE) definition to bring direct tax into play more easily, secondly using VAT instead but in a way that would mean the corporate bears some of the tax, or thirdly devising alternative taxes. Apart from a withholding tax, some of the novel suggestions for new taxes included a bandwidth tax, or possibly trying to value and tax data collection. At this moment in time, the final recommendations could include a mix of some or all of these.

The biggest difference in views is probably around whether data has value or not. Going down this route creates a whole new way of measuring and taxing business activities. What lies behind it seems to be an attempt to find a way to tax the monetisation of business activities where that monetisation comes from someone other than the apparent consumer (e.g. advertising revenue). The other areas of disagreement are more about how to apply the existing rules - e.g. where is the permanent establishment (PE) threshold and how to make sure transfer pricing is appropriate - than fundamental differences of view.

There are some interesting contrasts between the ways that the some countries consider the appropriate use of controlled foreign company (CFC) rules and indirect taxes in the digital area.

There have been some keen discussions about VAT and whether it should not be seen, where it is applied to digital services, as more of a sales tax. Where pricing is not fully elastic the VAT becomes effectively a profits tax on the gross revenues. In any event it was clear that politically any thought that VAT should replace direct tax would not be accepted by governments.

Overall, a sensible approach, expressed most clearly by the business and industry advisory committee (BIAC), suggests waiting to see what the other working parties recommend and whether there are any residual issues which need to be dealt with. At that point it would be sensible to debate other tax approaches.


16 April 2014

The OECD has now published our submission alongside 59 other responses in a 463 page consolidated document …

available on the OECD’s website from a dedicated page:


15 April 2014

In our submission to the OECD, we welcome the growing consensus reflected in the Discussion Draft that the digital economy cannot be ring-fenced from the rest of the economy and …

that businesses should not be subject to a different set of rules of taxation simply by reason of the use of information and communications technology (ICT).  We fully endorse this principle of neutrality.  In that regard, the Ottawa Taxation Framework principles are still relevant today and should constitute the basis to evaluate options to address the tax challenges of the digital economy.

The Discussion Draft provides a good background summary concerning the development and widespread use of ICT, and shows that nearly all sectors of the economy rely on advances in ICT to deliver their products and services, digital or otherwise.  It seems to us that where the Discussion Draft speaks of a “digital business”, it is referring to businesses which make more extensive use of ICT, i.e., any difference between a digital versus other business is a quantitative difference in the use of ICT, not qualitative.  Therefore, because the rest of the economy cannot be separated from the digital economy, any option for addressing digital economy tax challenges should consider not only neutrality, but also should avoid creating unintended collateral consequences for the rest of the economy.

We recognise that the BEPS Action on the digital economy is driven by a concern as to whether existing international tax rules have kept pace with emerging new business models enabled by the rapid development of ICT.  However, we caution that these concerns should not lead to the discarding of long-established principles of international taxation on which there is international consensus.  OECD treaties are valuable to support and encourage trade in goods and services.  Any perceived concerns with, and any potential changes resulting from, the work on the digital economy should neither endanger this nor stifle innovation and the continued use of ICT which increases both business efficiency and productivity.


26 March 2014

The Discussion Draft released by the OECD on 24 March 2014 confirms the view that tax measures designed exclusively for the digital economy are likely to …

prove problematic, primarily because of the difficulties in identifying a specific "digital" sector.  Rather, the potential use of modern information and communications technology by all businesses seems to raise "digital" tax issues. Nonetheless, the OECD clearly believes that the perceived weaknesses in the territorial tax system and the international tax rules as a whole as require change in the tax rules in order to cope with modern business practices.

Click here to read our Tax Policy Bulletin on this Discussion Draft


21 February 2014

The OECD has published dates for the release of a Discussion Draft of its report under Action 1, for the deadline for responses and for a public consultation meeting and …

while it's been reported in the press that the OECD is not able to come up with a response to address the issues, Pascal St Amans has clarified the position in an interview with PwC.

He said “… we will be addressing this, and one of the questions we're struggling with is, are we in a position to design a specific solution for a specific sector, which would be a digital permanent establishment for online sales or online services? Or is, actually, the question more about the digitalisation of the whole economy, and what is at stake there for the architecture of the international tax system? We're struggling with this because it's not easy, and that's why, by the way, we are not expected to deliver actions, solutions, but rather a menu of possible solutions that we will have to work out.”

The OECD’s report is due to be published on 24 March and comments would then be requested by 14 April. Public consultation would follow on 23 April.

In PwC terms ‘digital’ refers to business change that is triggered and enabled by digital technology. It’s something that all businesses have to embrace if they are to survive. Digital business is really just … business. Organisations will be going through a variety of business changes as they use technology to develop new products, new routes to market, new ways to manage their operations. With each business change comes tax, people and legal issues and opportunities.

Pascal expressed some similar views when he told us: “So, we're doing a diagnosis, and the diagnosis so far is more about, we face a new phenomenon which is the digitalisation of the economy with some new business models emerging and spilling over the whole economy, and that will require us to be very careful in the way we'll address this question by providing overall responses … We do think that most of the other actions in the action plan will be quite key in addressing the challenges of the digital economy.”


14 January 2014

The OECD’s published compilation of comments shows there was a disappointing list of respondents to the November call for evidence. It could be said that fewer than ten …

groups towards which it seemed largely targeted provided information on their business models either in the digital sector or in other sectors impacted by digitalisation. Those groups largely represented the music, communications or data industries although financial services also featured.

Some representative bodies, advisers and CSOs responded.


26 November 2013

The OECD is asking for comments by 22 December 2013 on an approach to addressing the tax challenges of the digital economy, as well as …

gathering information on specific business models employed in the sector and how the overall digitalisation of the economy has impacted business models and supply chains in traditionally non-digital industries. Specific questions seek information on the background of any organisation responding to the call, including the nature of the work or activities performed. In particular it asks, for different business models, what assets and activities contribute to the generation of value.

Interested parties should also be aware that a number of revenue authorities and territory groups (eg the EU) are appointing their own task forces to consider the digital economy. Given the concerns expressed about unilateral action, it is hoped that they will feed into the OECD working party charged with responding to this area of the Action Plan.

There is a strong cross-over with other Action Plan areas too, including those which deal with permanent establishment issues.

A discussion draft of the Action Plan report on the digital economy is expected by March 2014.


2 September 2013

On the direct tax side, the identification of a so-called ‘server PE’ or the presence of one or more dependent agents has been considered in relation to …

certain digital operations and might be more actively pursued. However, we don’t think that the widening of the definition of a permanent establishment (PE) to cover the digital economy beyond these concepts will produce an appropriate solution. Further, the desirability – and feasibility – of any ‘solution’ solely for digital business seems a long way off, given the technical and practical problems in this area.


28 August 2013

It’s interesting to note that in refuting calls for an online sales tax in the UK, David Gauke (the Exchequer Secretary to the Treasury), said …

the Government favoured “an approach which aims to ensure common principles apply to all businesses whether operating online, from physical premises or with a combination”. He also added “This area is extremely complex; with large parts of the economy moving towards having some form of digital presence, it’s important to ensure fair competition between digital and non-digital businesses.”


19 August 2013

Indicators of a path to an indirect tax solution …

  • Current initiatives in the US, where states have been resolving nexus issues around digital business in relation to sales taxes, and in France, where the government commissioned a report and announced plans to tax the digital economy as part of the 2014 French budget, seem to provide some indications of a path to an indirect tax solution.
  • The possibility of some sort of ‘digital transactions tax’ is arguably more likely since VAT options appear limited (and the switch to a destination basis for EU suppliers of various e-services to consumers from 2015 which aligns the B2C with the reverse charge restrictions already in place for equivalent B2B services should effectively end VAT ‘rate shopping’ where supplies might in some circumstances be made via territories applying a low rate).

5 August 2013

Widely differing views exist on how to approach the digital economy and discussions about very different alternatives are still taking place. A tax policy debate …

on the relative merits of seeking direct and indirect tax solutions still needs to be played out for digital business as for economies more generally (see, for example, our June 2013 publication Shifting the balance: From direct to indirect tax).


19 July 2013

Technically, the first action in the Plan is arguably one of the hardest. The Plan calls for a review of different business models and a better understanding …

of the generation of value in the digital sector. It also notes that indirect action is to be considered and this is a hint that the tax challenges raised by digital business may be addressed more by an indirect, not direct, tax response.

The action point (to be completed within one year) is the production of an OECD report identifying the relevant issues raised by digital business (including the lack of tax nexus under current rules; the attribution of value created from the generation of marketable location-relevant data; the characterisation of income; the application of related source rules; and the effective collection of VAT/GST) and “possible actions” to address them.