A highly anticipated OECD interim report, published today, reveals that there is still no consensus among countries on whether changes should be made to international tax rules that apply to multinational digital firms. Countries did agree to study international tax concepts to see if improvements can be made, though.
Also, while the report states that there is no consensus on short-term interim measures to tax the digital economy either, countries interested in such measures agreed to some aspects of the design of these rules.
The new OECD report identifies three common features of highly digitalized businesses: cross-jurisdictional scale without mass; a heavy reliance on intangible assets, especially intellectual property (IP); and the importance of data, user participation, and their synergies with IP.
However, the 113 countries that make up the “Inclusive framework on BEPS” disagree on whether and to what extent these features contribute to value creation and should therefore be reflected in international taxation rules on profit allocation, the OECD report said.
Pascal Saint-Amans, director of the OECD’s centre for tax policy and administration, explained during an OECD webcast that the positions of the Inclusive Framework countries fall into three broad groups: those that see no need to change the existing system, typically smaller economies; those that believe there are pressures on the existing international tax standards because of the unique features of the digital economy and seek change; and those countries, such as the US, that are open to discussing improvements to the international tax rules, but only if the discussion is not limited to taxation of digital firms.
Following the interim report’s release, US Treasury Secretary Steven T. Mnuchin reiterated the US’s stance. “The US firmly opposes proposals by any country to single out digital companies,” Mnuchin said. “Imposing new and redundant tax burdens would inhibit growth and ultimately harm workers and consumers. I fully support international cooperation to address broader tax challenges arising from the modern economy and to put the international tax system on a more sustainable footing,” he said.
Nexus and profit allocation
While broad agreement was not reached, the Inclusive Framework did agree to conduct a review of the international tax rules on nexus to tax and profit allocation, including a consideration of “the impacts of digitalization on the economy.” The goal is to achieve consensus by 2020, the report states.
“It is important and pretty reassuring, [and] positive to see that in spite of tensions which are arising here and there, there is a common will to work together on the global framework of taxation,” said Saint-Amans.
“From China to the US, to African countries, to developing countries, emerging economies, all agree we need to keep together and to work on these with a commitment to seek a solution by 2020,” he said.
Saint-Amans said that the countries’ disagreements are due to the complexity of the subject matter, not because some are “dragging their feet” to prevent change. Now that countries’ positions on fundamental questions have been identified in the OECD interim report, steps can be taken to resolve these disagreements, Saint-Amans said.
Saint-Amans said that the OECD will continue to explore the special features of the digital firms as it prepares its final report on digital economy taxation, due 2020.
The OECD Task Force on the Digital Economy will coordinate the work. Eventually, some parts of it will be passed off to different OECD Committee on Fiscal Affairs working parties. For example, work on profit allocation may be taken up by Working Party 6 to take advantage of that group’s expertise, Saint-Amans said. He also said that the OECD expects to produce another interim report on the taxation of the digital economy in 2019.
With little sign of progress on a long-term solution to taxing digital firms, some countries, particularly EU countries, may turn to short-term, temporary measures.
A short-term interim tax has been advocated by some EU countries as a stop-gap measure that would apply until a long-term solution to taxing the digital economy is reached. Short-term measures are expected also to be part of an EU Commission proposal on the taxation of the digital economy, to be unveiled March 21. Pierre Moscovici, European Commissioner for Economic and Financial Affairs, Taxation and Customs, today said that the EU proposal will not contradict the OECD work.
The OECD release reported that there was no consensus among the Inclusive Framework countries on either the merits or need for short-term interim measures to tax the digital economy. The report recognised, though, that some countries may nonetheless adopt such taxes, in particular, an excise tax on e-services.
Achim Pross, OECD Head of International Cooperation and Tax Administration, said that countries interested in adopting short-term measures have agreed to design considerations that should be taken into account in such measures.
He said it was agreed that any interim measure must comply with tax treaties and other international obligations; thus, the tax cannot be an income tax and EU nondiscrimination rules must be complied with.
Pross also said that countries have agreed that the measures must be temporary and targeted to internet advertising and online intermediation service, namely, platforms that facilitate the exchange of goods or services between third parties. Delivery of goods, even if the contract is concluded online, will not be covered, Pross said.
Countries have also agreed that over-taxation and costs and complexity must be minimized. He said it may be possible to rely on the existing VAT infrastructure to reduce complexity. Also, the impact on startups and small businesses must be reduced, he said.
Robert J. Kovacev, a partner with of Steptoe and Johnson LLP, expressed concern that temporary measures may not end up being truly temporary. “The OECD guardrails aren’t binding on any sovereign nation, so they could be ignored without any penalty,” Kovacev observed.
He also said that if a gross revenue excise tax approach is adopted as an interim measure, the OECD’s admonition against impacting startups and small businesses is particularly important.
“A company in a loss position or with slim profit margins may be throttled out of existence by a gross revenue tax. Even for profitable companies, there is a risk that profits will be eaten away by multiple tax authorities, each wanting a bigger piece of the pie,” Kovacev said.
Also reacting to the report’s release, Will Morris, Chair of the BIAC Committee on Taxation and Fiscal Affairs, said that a structured conversation with a very broad group of countries aimed at global solutions is now urgent because digitalization is the key to future growth.
“Unilateral action would only lead to costly fragmentation, double (or multiple) taxation, and harmful barriers for our economies,” Morris said.