The OECD’s interim report sets out their progress so far and proposed next steps, and the EC’s paper describes what steps will be taken within the EU.
On 16 March, the OECD published its interim report on the tax challenges arising from digitalisation. The report analyses changes to business models and value creation stemming from digitalisation, as well as identifying the different positions held by the member countries and how this will affect their approach to various solutions. The interim report also sets out the next steps that will be taken before the final report is released in 2020, as the 110 member countries of the Inclusive Framework work together to agree and implement long-term solutions. In addition, on 21 March the EC published a package of documents set around a theme of ‘Fair Taxation of the Digital Economy’. These documents set out the action the EC intends to take within the EU.
OECD report – Tax Challenges of Digitalisation
The report was released at the end of last week, and as KPMG’s Matthew Herrington writes, it emphasises the need for coordinated and multilateral action, which is a welcome stance from the perspective of business. It identifies three key characteristics of digitalised businesses:
There is currently no consensus among members of the Inclusive Framework on the impact of these three factors on value creation, and it is acknowledged that these factors are not necessarily exclusive or unique to digitalised businesses. There are also differences of opinion on the extent to which data and user participation create value for these businesses, so the report considers at length all of the ways in which digital businesses can create value.
With no consensus on the need for interim measures, the report does not recommend any, but does note that where countries feel they are necessary, they should take steps to make sure that interim measures are designed to be compliant with international taxation obligations, temporary, and targeted. They should also be designed so they do not stifle start up innovation.
The report considers the impact of the BEPS measures released in 2015 on the behaviour of digitalised businesses, including those focusing on permanent establishment, transfer pricing, CFCs and treaty abuse, and the new VAT guidelines. It also covers how digitalisation affects other areas of the tax system, including opportunities to enhance tax services and compliance, and risks associated with new technologies such as blockchain.
For the next steps, the members of the Inclusive Framework will undertake a review of the ‘nexus’ and ‘profit allocation’ rules which allocate the taxing rights between jurisdictions and the determination of the relevant share of the multinational enterprise’s profits that will be subject to taxation in a given jurisdiction. In exploring potential changes, members will consider the impacts of digitalisation on the economy, relating to the principles of aligning profits with underlying economic activities and value creation. The final report is expected to be delivered in 2020, with a further update due in 2019.
In their package of documents published on 21 March, the EC sets out two main legislative proposals to tackle the issue of taxing the digital economy. Our initial response to these proposals can be accessed here.
In summary, the EC is proposing both an interim measure and a framework for a longer term solution:
Affected businesses should be familiarising themselves with these proposals as a matter of urgency, and watching the developments in this space closely – the next step is for the legislative proposals to be submitted to the European Council for adoption. For more details, see KPMG’s EU Tax Centre’s European Tax Flash here.
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