On 27 October 2017 the OECD published comments received on the tax challenges of digitalization. A request for input had been published on 22 September 2017 inviting responses from interested parties with a deadline of 13 October 2017. Despite this tight deadline comments were received from more than fifty interested parties including multinational companies, advisory firms, professional associations and educational establishments.

Digitalisation, business models and value creation

Some commentators point out that there is public concern that some internet-based businesses are not contributing a fair amount of taxation to the countries in which they operate. On the other hand, any taxation specifically aiming at this type of business could also hit more fragile internet businesses. This area of business is competitive and depends on risk-taking, and the potential downside was illustrated by the fate of many pioneer internet businesses in the dotcom crisis of the year 2000.

Commentators point out that the digital economy is not just a particular sector but a technology that is an enabler of the broader economy and of society, spurring innovation, promoting knowledge transfer and easing access to new markets. The digital economy enables more choice, price benefits and convenience for consumers and gives young people an opportunity to start their own business at a time when youth unemployment in the OECD is high. Tax rules should not target digital enterprises as this would discourage businesses from growing and delivering services.

Commentators note the need for consistency between unilateral measures on the digital economy such as those proposed by the EU and the proposals of the OECD. It was noted with concern by some commentators that EU policy would consider formulary apportionment in a way that is potentially inconsistent with OECD proposals.

Challenges and opportunities for tax systems

It is noted by some commentators that countries have been redesigning their tax systems, partly in response to the difficulty of taxing profits of companies, to collect more tax from property, labour and consumption. This combined with lower corporate income tax rates is leading to a decrease of the share of corporation tax in the tax borne by large companies.

Potential problems of tax changes for smaller, more fragile digital businesses could be avoided by ensuring a large turnover threshold for the application of new measures to companies. Such measures would have to be carefully framed to comply with nondiscrimination provisions and the potential for double taxation would need to be taken into account.

Implementation of BEPS measures

Although implementation is at an early stage the BEPS measures generally are considered by some commentators to have adequately counteracted BEPS risks generally. Many countries are implementing the transparency measures contained in BEPS action 13 (master and local file and country by country reporting) and this appears to be having a significant immediate impact.

Digitalisation of certain elements of a supply chain does not in itself necessarily create new tax risks and the general BEPS measures appear sufficient to mitigate the risk arising from profit shifting. With regard to aligning transfer pricing outcomes with value creation the impact of measures on the digital economy depends on gaining an understanding of how the digital economy creates value.

Options to address the broader direct tax policy challenges

According to the OECD’s request for input these include the tax nexus concept of “significant economic presence; withholding tax on certain types of digital transaction; a digital equalization levy; or other specific tax measures including diverted profit taxes, turnover taxes or new withholding taxes.

Further specific tax policies could be formulated after detailed analysis of current digital business models. This could be provided by the next report of the Task Force on the Digitalised Economy and this would enable better answers to be put together.

An example of a specific tax measure is the Diverted Profits Tax in the UK, designed to discourage diversion of profits outside the UK. Although the measure was introduced in response to avoidance by a small number of companies it was not well targeted and therefore potentially applies to most large multinationals. This has created a large compliance burden for those groups.

The equalization levy in India has also led to greater uncertainty and compliance costs for business. As with the diverted profits tax in the UK the measure is outside the existing double tax treaty network, contrary to the collaborative spirit of the OECD work. These unilateral measures will tend to lead to double taxation and more cross-border disputes.