Today, the digitisation of the economy is undoubtedly a new challenge for the international tax community. As part of the OECD's BEPS project, the Interim report of 16 March 2018 shed light on a wide variety of proposed solutions and
the respective positions of the individual states.
Taxation of consumption as a possible solution in the digitised economy is probably one of the most controversial points among the individual member states. European states are in favour of such taxation - while the US is vehemently opposing it. The reason is obvious: corporate profits are taxed at the location where the company has its registered office. International corporations such as Facebook, Google etc. are mainly located in the United States. If taxation of consumption were introduced, this would lead to a drop-in tax revenues for the US tax authorities.
Switzerland is also sceptical towards this taxation of consumption. On the one hand, new income could have a positive effect on the tax authorities; on the other Hand, taxation of consumption is contrary to corporate profit tax. To date, this has secured Switzerland a considerable amount of tax substrate from international corporations. A detailed analysis of the effects of these new tax rules will take place in the future - it seems clear, however, that the Swiss tax authorities will have to accept cutbacks in the future.
Tax Talk #9 regarding the digitisation of the economy
On 16 March 2018, for the first time in the new year, Pascal Saint-Amans, Director of the Centre for Tax Policy and Administration, reported back in a webinar alongside David Bradbury, Head of Tax Policy and Statistics, Achim Pross, Head of International Cooperation and Tax Administration, Giorgia Maffini, Deputy Head of Tax Policy and Statistics Division, Caroline Malcom, Senior Advisor to Director and Deputy Director, and Eric Robert, Adivsor Tax and Digitalization.
Pascal Saint-Amans started the webinar with a review of the year 2015 when the final reports of the 15 BEPS action points were submitted to the G20 states. With regard to action point 1 on the tax challenges of a digital economy, it was agreed at the time that one should rather speak of a «digitisation of the economy» than of a «digital economy». The reason being that digitisation cannot be limited but covers the entire economy and if there are tax challenges, then these exist for the entire economy. It was also decided that a comprehensive review of this topic will be drawn up by 2020. In March 2017, however, the G20 states asked the OECD to provide an interim report by April 2018. The Task Force on Digital Economy (TFDE) was able to publish this interim report a little earlier, on 16 March 2018, and will present it at the G20 meeting in
The interim report comprises eight chapters, with Pascal Saint-Amans attaching particular importance to the following points: There is a global consensus on the urgency of tackling the issues surrounding the digitisation of the economy together and developing solutions by 2020. According to Saint-Amans, there is
also agreement on the complexity of the issue. Nonetheless, each of the states respectively envisages a wide variety of solutions. «People shouldn't expect a Magic solution out of this Report» warned Saint-Amans. With its profound analysis, the interim report merely paves the way for overcoming existing differences between states and adapting and implementing long-term solutions as quickly as possible.
Giorgia Maffini provided information on chapter two of the report entitled «Digitalisation, business models and value creation». Maffini admitted that they had initially been confronted with an enormous complexity of different business models. Thus, in this chapter they tried to reduce this complexity to a comprehensible package of key features of these digitised companies. Through the consultation of a wide range of stakeholders on 1 November 2017 at the University of Berkeley, the following three key features were identified:
Monitoring BEPS Implementation
Eric Robert first addressed chapter three of the interim report: the implementation and effects of the BEPS project. In this chapter, the task force focused primarily on action points 1, 3 and 5 to 10 of the BEPS project, which were identified as particularly relevant for the digitisation of the economy. While these measures have so far had quite a positive impact on BEPS-specific issues, they have had only a limited impact on the general challenges in the area of direct taxation.
Afterwards Eric also provided information on chapter four entitled «Relevant tax policy developments». Here, the task force tried to thoroughly identify and analyse the uncoordinated measures of individual member states that go beyond the BEPS measures and are relevant for the digitisation of the economy.
Remaining Tax Challenges
David Bradbury addressed chapter five of the interim report, which aims to adapt international tax rules to the digitisation of the economy. First, he pointed out that the Nexus rules and the profit allocation rules constitute the basic rules of the international income tax system.
Regarding the question of how the international tax system should be adapted to the digitisation, however, the viewpoints of the individual states still widely differ. The interim Report summarises the different viewpoints into three groups of countries:
The first group of states is of the opinion that the place of profit taxation is no longer identical to the place of value creation. The second group of states is of the opinion that the challenges do not only concern highly digitised companies, but that the changes in taxation should apply to the broad economy. The third group of states is generally satisfied with the current tax System and feels that no fundamental reform is necessary at present. According to Bradbury, an attempt to overcome these divergences is now imminent.
Achim Pross presented the possible short-term solutions and provisional measures (chapter six). However, there is no general consensus among member states regarding the design of possible short-term solutions. As a result, the interim report does not recommend the introduction of such measures. Again, there are two positions among the member states.
Those countries which oppose such short-term measures justify this as follows: Interim solutions can have adverse consequences for welfare, innovation and investment. There is also constant concern that these solutions may take on a permanent character and by no means remain of a temporary nature. Increased
administrative effort and higher costs are further arguments.
On the other hand, there are those states that are advocating temporary Solutions and see finding a global solution as a political compulsion. They developed principles for the design of temporary solutions: Only temporary approaches are to be used which do not undermine individual tax agreements in any way. They
see using these measures in a targeted manner as the right approach to achieve minimisation of overtaxation, complexity and costs.
In the end, Caroline Malcom provided information on chapter seven of the Interim report, regarding the impact of digitisation on other aspects of the international tax system. For example, Big Data and better online services shall help to improve tax compliance. Caroline concluded by emphasising that digitisation offers many new possibilities and tools, but also new challenges and risks, as the current debate on cryptocurrencies and blockchain shows.
Pascal Saint-Amans concluded the ninth Tax Talk with a few words on the next steps of the task force. The main goal now would now be to settle the existing differences between the states. «The next step for you, is to read the report», Saint-Amans challenged the audience with a twinkle in his eye. In just a few weeks, Pascal Saint-Amans and his team will be reporting back again.
Switzerland also addressed the interim report of 16 March 2018. On 15 January 2019, the State Secretariat for International Finance (SIF) published an update regarding Switzerland's position on the taxation of the digital economy.