What is it about?
As well as highlighting the current challenges faced by the OECD and multilateral initiatives in reaching a global consensus on the taxation of digital services, this paper also consolidates on the publication “Base Erosion and Profit Shifting (BEPS) and the Digital Economy”, by highlighting why the current approach to adopt an interim rule may not only trigger counter active responses by non EU member states, but may also present further double taxation challenges – as well as considerable burden for enterprises with thin profit margins – or even loss making firms, since the new proposals are based on the taxation of revenues.
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Why is it important?
Difficulties associated with reaching a multilateral consensus and longer term solution include the following (KPMG, 2019): - The OECD’s review of the impact of digitization on the economy on two key aspects of the international tax system, namely i) the nexus for taxation and ii) the methodology for allocating profit to that nexus. - Currently, there is no global consensus on whether and how to tax businesses with a substantial digital business footprint but no physical presence in a jurisdiction. Tax Challenges of Digitization: Insights from KPMG about the potential impact of proposed reforms on the taxation of the digital economy https://tax.kpmg.us/insights/global-tax-reform-beps/digital-economy-taxation.html
Perspectives
Whilst it is argued that interim measures for taxing the digital economy may create time for longer term measures to be put in place, there are also concerns that owing to difficulties and challenges presented in achieving a global multilateral consensus, a situation may arise where those interim measures become “permanent”.
Prof Marianne Ojo
Northwestern University
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This page is a summary of: Base Erosion and Profit Shifting (BEPS) and the Digital Economy, IGI Global,
DOI: 10.4018/978-1-5225-3787-8.ch005.
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Resources
OECD Interim Paper, “Tax Challenges Arising from Digitalization"
The different approaches taken by the OECD and the EU in respect of taxation of digital profits – as well as “how to identify precisely where value is created in highly digitalized businesses or concerning changing the traditional balance of source versus residence taxation”, is highlighted in the KPMG publication on the OECD Interim Paper, “Tax Challenges Arising from Digitalization — Interim Report 2018”.
Tax Challenges of Digitization: Insights from KPMG about the potential impact of proposed reforms on the taxation of the digital economy
Whilst the OECD Report (KPMG, 2018:1): - focuses on taxing where value is created, and on understanding the impact that digitalization may have had on business models and value creation; - Recognising that due to lack of consensus among the member countries, it does not reach any recommendations on whether or to what extent changes to international tax rules for dividing profits between source and residence countries may be required; - Calls for further work to examine the existing international tax rules on nexus; and - Inso doing, advocates the following, namely, that further work on nexus encompasses whether a digitalized business be deemed to have a taxable presence in a county where it does not have a traditional physical presence) and on how to allocate profit on the basis of such a nexus, The following distinctions are also highlighted: - The EC considers the issue to be more a political one over taxing rights and the balance between source and residence taxation; -The draft directives released by the EC would allocate additional taxing rights to countries in which users of digital services are located, rather than the country of residence of the enterprise providing those services; - While the interim Digital Services Tax is quite focused (taxing advertising, digital platforms and sale of data) the long term Significant Digital Presence proposal would tax a broad range of digital services — such as the provision of films, music, software, or cloud computing; - In such cases it is much less obvious that the non-resident company is carrying on business or creating value in the Source State above and beyond generating revenues from residents References Tax Challenges of Digitization: Insights from KPMG about the potential impact of proposed reforms on the taxation of the digital economy https://tax.kpmg.us/insights/global-tax-reform-beps/digital-economy-taxation.html Comments on OECD Public Consultation Document on Addressing the Tax Challenges of the Digitalized Economy https://tax.kpmg.us/content/dam/tax/en/pdfs/2019/3-6-19-kpmgi-comment-letter-oecd-consultation-document-digital-economy.pdf KPMG, ”Interim measures for taxing the digital economy allow time for global consensus” 29th July 2019
Base Erosion and Profit Shifting: Fundamental and Substantive Issues
“BASE EROSION AND PROFIT SHIFTING (BEPS) REFERS TO TAX PLANNING STRATEGIES THAT EXPLOIT GAPS AND MISMATCHES IN TAX RULES TO ARTIFICIALLY SHIFT PROFITS TO LOW OR NO TAX LOCATIONS WHERE THERE IS LITTLE OR NO ECONOMIC ACTIVITY. ALTHOUGH SOME OF THE SCHEMES USED ARE ILLEGAL, MOST ARE NOT. THIS UNDERMINES THE FAIRNESS AND INTEGRITY OF TAX SYSTEMS BECAUSE BUSINESSES THAT OPERATE ACROSS BORDERS CAN USE BEPS TO GAIN COMPETITIVE ADVANTAGE OVER ENTERPRISES THAT OPERATE AT A DOMESTIC LEVEL. “ (OECD)
Tax Challenges of the Digital Economy _The Proliferation of Unilateral Digital Services Taxes, July 18, 2019
Why there is need for multilateral consensus on the taxation of digital services..... Challenges presented from perspectives of the OECD and EU approach to digital services tax.
Recent developments in Global Efforts and Initiatives Aimed at Combatting Base Erosion and Profit Shifting Activities (BEPS)
As well as highlighting the current challenges faced by the OECD and multilateral initiatives in reaching a global consensus on the taxation of digital services, this paper also consolidates on the publication “Base Erosion and Profit Shifting (BEPS) and the Digital Economy” by highlighting why the current approach to adopt an interim rule may not only trigger counter active responses by non EU member states, but may also present further double taxation challenges – as well as considerable burden for enterprises with thin profit margins – or even loss making firms, since the new proposals are based on the taxation of revenues. Further, whilst it is argued that interim measures for taxing the digital economy may create time for longer term measures to be put in place, there are also concerns that owing to difficulties and challenges presented in achieving a global multilateral consensus, a situation may arise where those interim measures become “permanent”.
Addressing the Tax Challenges Arising from Digitalisation
OECD (2019), Addressing the Tax Challenges Arising from Digitalisation, OECD, Paris, http://www.oecd.org/tax/beps/policynote-beps-inclusive-framework-addressing-tax-challenges-digitalisation.pdf
Addressing the Tax Challenges of the Digitalisation of the Economy – Public Consultation Document
OECD (2019b), Addressing the Tax Challenges of the Digitalisation of the Economy – Public Consultation Document, OECD/G20 Base Erosion and Profit Shifting Project, OECD, Paris,
OECD’s digital economy tax reform: the race to consensus
OECD, (2019c). “OECD’s digital economy tax reform: the race to consensus” 7 February 2019
Tax Challenges Arising from Digitalisation – Interim Report 2018 In series:OECD/G20 Base Erosion and Profit Shifting
OECD, (2018). “Tax Challenges Arising from Digitalisation – Interim Report 2018 In series:OECD/G20 Base Erosion and Profit Shifting Published March 2018 Project, OECD Publishing, Paris,https://doi.org/10.1787/9789264293083-en.
Recent developments in Global Efforts and Initiatives Aimed at Combating Base Erosion and Profit Shifting Activities (BEPS).
Recent developments in Global Efforts and Initiatives Aimed at Combating Base Erosion and Profit Shifting Activities (BEPS). As well as highlighting the current challenges faced by the OECD and multilateral initiatives in reaching a global consensus on the taxation of digital services, this paper also consolidates on the publication “Base Erosion and Profit Shifting (BEPS) and the Digital Economy” by highlighting why the current approach to adopt an interim rule may not only trigger counter active responses by non EU member states, but may also present further double taxation challenges – as well as considerable burden for enterprises with thin profit margins – or even loss making firms, since the new proposals are based on the taxation of revenues. Further, whilst it is argued that interim measures for taxing the digital economy may create time for longer term measures to be put in place, there are also concerns that owing to difficulties and challenges presented in achieving a global multilateral consensus, a situation may arise where those interim measures become “permanent”.
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