OECD releases interim report on taxation of digital economy

Tax Hot Topics newsletter The Organisation for Economic Co-Operation and Development (OECD) continued its push towards finding consensus on taxing the digital economy with the March 16 release of an interim report. The report, entitled Tax Challenges Arising from Digitalisation – Interim Report 2018 comes on the heels of the OECD’s October 2015 Base Erosion and Profit Shifting (BEPS) report on Action item 1 – Tax Challenges Digital Economy.

The OECD’s evolution of the taxing framework for the digital economy has developed into a major piece of the overall BEPS project and represents an area of significant divergence among various countries. The outcome of the project could have a material impact on how and when certain multinational enterprises (MNEs) are taxed as they engage in digital activities.

The interim report is 218 pages long and provides a robust discussion of the current environment and future outlook for taxing the digital economy. The report is organized in the following eight chapters:

  1. Introduction to the Interim Report on the tax challenges arising from digitalisation
  2. Digitalization, business models and value creation
  3. Implementation and impact of BPES package
  4. Relevant tax policy developments
  5. Adapting the international tax system to the digitalisation of the economy
  6. Interim measures to address the tax challenges arising from digitalisation
  7. Special feature – Beyond the international tax rules: The impact of digitalisation on other aspects of the tax system
  8. Conclusion to the Interim Report on the tax challenges arising from digitalisation

After outlining the various business models and value creators driving the digital economy, the interim report states that the tax issues raised by the growth of the digital economy are “technically complex,” and that the report “identifies the different views among countries on whether and to what extent the features of highly digitalized business models and digitalisation more generally should result in changes to the international tax rules.”

The report indicates that there is support “for undertaking a coherent and concurrent review of two key aspects of the existing framework, nexus and profit allocation rules that would consider the impacts of digitalisation.”

However, it appears that the OECD has not, at this point, reached consensus on how to address the taxation of the digital economy. In that regard, the possibility of unilateral action by certain countries remains a possibility. Those actions could include alternative applications of the permanent establishment threshold, the imposition of withholding taxes and turnover taxes, and specific regimes targeting large MNEs. The report warns that unilateral, uncoordinated action may lead to adverse impacts and that a multilateral approach is important to reduce the distortions to investment and growth.

While specifically not reaching consensus on when such measures are warranted, the interim report provides that if and when such measures are adopted by a country, they should be (1) compliant with the country’s international obligations; (2) be temporary; (3) be targeted; (4) minimize over-taxation; (5) minimize impacts on start-ups, business creation and small business more generally; and (6) minimize cost and complexity. The report is very specific that there is no consensus at this point on the need for interim measures and recognizes that a number of countries are opposed to such measures.

Ultimately, the report concludes that the OCED’s work will continue with the goal of reaching a consensus-based solution by 2020. Further update on the work of the OECD is this area is expected in 2019.

As the work of the OECD and taxing authorities around the world continues in this area, multinational organizations should monitor local developments to ensure any enacted measures are evaluated in light of the potential liability arising. The taxation of the digital economy or changes to the consensus framework for viewing nexus and allocation or profits could represent an inflection point in taxation of multinational businesses.

David Sites
Washington National Tax Office
T +1 202 861 4104

David Zaiken
Managing Director,
Washington National Tax Office
T +1 202 521 1543

Cory Perry
Tax - Senior Manager,
Washington National Tax Office
T +1 202 521 1509

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