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.

 

Updates

 

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.

 

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).

The digital economy archive

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.



Explore additional BEPS action plans: