What We Think
October 26, 2020
Tax Challenges from Digitalisation: Where are we at?
In March 2018, the European Commission (EC) proposed two rules to tax digital activities in ‘a fair and growth friendly manner’. The proposals related to the creation of a new permanent establishment where companies have a significant digital presence and an interim digital services tax on revenues.
In parallel, the OECD has been working to achieve a global solution on how to tax the digital economy. The OECD has always stated that it didn’t want a fragmented approach, but that it would like to achieve global consensus to change the current international tax principles to be relevant in today’s digital world.
In order to avoid different systems at EC and OECD level, in March 2020, the EU stated that it is committed to support the work of the OECD, but if no solution is found by the end of 2020, it will again make a proposal for its own digital tax.
Whilst the EC and the OECD have been working on their proposals, a number of countries have taken unilateral action, and have introduced tax laws specifically to target companies within the digital economy. A number of countries have introduced a Digital Services Tax, these include Austria, Italy, France, & the UK, amongst others. Naturally, one will need to see how these unilateral actions will co-exist once (and if) global consensus is achieved, and what risks of double taxation do companies operating in these counties have.
Earlier this month, the OECD issued a Cover Statement to explain what the current status of the 2020 consensus-based solution is. In its statement, the OECD announced that the members of the OECD/ G20 Inclusive Framework on BEPS (Inclusive Framework) have made substantial progress towards building consensus. The IF released a package consisting of the Reports on the Blueprints of Two Pillars.
Although no agreement has yet been reached, these pillars are meant to provide a solid foundation for future agreements. Pillar One tackles the issue that digital businesses are able to generate profits in a number of jurisdictions with or without having a physical presence. The solution, which is being presented in this pillar, would be to allocate a portion of residual profit to market/user jurisdiction. A new multilateral convention would need to be developed to implement this solution.
The Report on Pillar Two Blueprint is presented as a solution that would address remaining BEPS challenges and provides a right to jurisdictions to ‘tax back’ where other jurisdictions have not exercised their primary taxing right, or payment is otherwise subject to low level of taxation. One of the aims of this proposal is to ensure that all large internationally operating businesses pay at least a minimum level of tax.
One needs to understand what type of consensus will be reached next year, if any, and how this will fit with existing measures which a number of countries have taken on a unilateral basis. What is certain is that we need to watch this space, as this could result in a complete overhaul of international tax principles which we have been used to for the last years.