The interim report on tax challenges of the digital economy was published on 16 March 2018.

The 2015 report on action 1 of the action plan on base erosion and profit shifting (BEPS) on tax challenges of the digital economy outlined the ways in which the digital economy can exacerbate BEPS issues and can also give rise to broader tax challenges. The member countries of the OECD/G20 Inclusive Framework on BEPS are committed to working towards a consensus-based solution by 2020, as set out in the interim report. The report is to be presented to the G20 Finance Ministers at their meeting on 19-20 March in Buenos Aires, Argentina.

The interim report notes that in addition to presenting tax challenges digitalization also offers new tools to develop and implement effective policies. The OECD’s “Going Digital” project launched in 2017 aims to help policy makers to have a better understanding of digitalization and to foster an inclusive digital economy. Digitalisation also brings important advantages for businesses.

The report acknowledges that digitalization has had an important effect on entrepreneurship by lowering barriers to entry and reducing transaction costs. Businesses can more easily communicate with suppliers and customers and new business models are emerging. Output and productivity can be increased by the use of data driven decision making and new technologies can improve financial performance by adopters. Even in the relatively short time since the BEPS final report in 2015 the use of some new technologies such as cloud computing services has increased significantly.

Scientific innovation is further pushing forward the digital economy with new technologies such as the Internet of Things (online connectivity between devices); crypto currencies; the sharing economy; 3D printing; advanced robotics and open government data.

Interim measures

The report notes that there is no consensus among member countries of the Inclusive Framework on the need for interim measures to deal with the tax challenges of the digital economy. A number of countries consider that interim measures could give rise to risks and adverse consequences.  These countries do not consider that features of digitalization such as “scale without mass” a heavy reliance on intangible assets or “user contribution” provide a basis for imposing interim measures and point to the risks of such measures. The risks include an impact on innovation and growth; potential economic incidence of taxation on consumers and businesses; the possibility of over-taxation; possible difficulties of implementing a tax as an interim measure; and compliance and administration costs.

However other countries consider that the risks do not outweigh the need for interim measures and that some of the adverse consequences can be mitigated by appropriate design of the interim measures. The countries in favour of such interim measures have set out guidance on design considerations for the measures. These countries consider that user participation is a key driver of value for certain digital businesses because user participation contributes to the content of a platform, builds network effects and provides date through the activities and sustained engagement of users.

These countries believe that in the absence of reform there is a mismatch between value creation and taxable profit. There is therefore a need for immediate action, for example by a tax on certain supplies of e-services. This would be designed to compensate countries for unrecognized value created in their jurisdiction.

Such interim measures would need to be compliant with a country’s international obligations; be temporary; be targeted; minimize over-taxation; minimize the impact on start-ups, business creation and small businesses generally; and minimize cost and complexity.

Further work

Other elements of the tax system are affected by the disruptive effects of the digital economy. These include the rise of business models facilitating the growth of the gig and sharing economies; an increase in other peer to peer transactions; the development of technologies such as blockchain; and growing data collection and matching capacities. The interim report looks at areas where further work in the coming years will provide tools for governments to understand and harness the opportunities while conserving the integrity of the tax system. Some of the advances can be effectively implemented in developing countries to take into account the environment in which they are operating. The report notes that as a result of the digital economy new tools are available to tax administrations to deliver improved taxpayer services; more effective data matching; and greater capabilities to detect and investigate tax fraud.