As predicted, international work on extending taxing rights against tech giants is continuing at a fast pace. On 22 September 2017, the OECD invited public comments on the tax challenges posed by a digitized economy and potential solutions to these challenges. This forms part of the Task Force on the Digital Economy’s (TFDE) ongoing work on Base Erosion and Profit Shifting (BEPS) Action 1. At EU level, EU leaders held a Digital Summit on 29 September 2017 where, though not officially on the agenda, taxation aimed at the tech giants was discussed. (For background, please see our earlier briefing on 22 September 2017.)
Request for Input on work regarding the tax challenges of the digital economy (RFI)
The RFI begins by recounting that the OECD was of the view, when the Action 1 Report was issued in 2015, that implementation of the BEPS package would substantially address the issues raised by a digital economy. Despite this, certain states have proceeded unilaterally to implement domestic measures aimed at taxing the digital economy, as described in our earlier note.
The mandate for the TFDE was renewed in January 2017 and, in order to support the development of its 2018 interim report, the RFI was published to gauge the public’s view on this area of taxation.
The RFI has five categories of questions. In Section A, the TFDE asks for comments on the impact digitalization has had on existing business models, including use of IP, sales techniques and data collection, and value creation. Section B asks for views on the current issues with the international taxation framework and the opportunities digitization creates for tax administration and compliance. The third section relates to the implementation of BEPS and its success in the digital economy specifically in relation to VAT and goods and services taxes. Section E simply asks for any additional comments on this area of law.
It is Section D which is of most interest. This asks for comment on three legislative options aimed at addressing the broader direct tax challenges driven by digitalization. The first option is to supplement the concept of permanent establishment (PE) to capture businesses with a "significant economic presence" in the state concerned. This echoes the Estonian proposal, at the informal ECOFIN meeting on 15/16 September 2017, to expand the concept of PE to capture virtual PEs. The second option is for withholding taxes to apply to payments under certain digital transactions. The last policy described is the "digital equalization levy", which was also proposed at EU level by a number of member states at the 15/16 September meeting.
The very short window for comments closes on 13 October 2017. All comments will be made publicly available. A public consultation meeting will follow on 1 November 2017. We will be happy to submit comments for any clients who would prefer their views to remain anonymous.
Digital Summit of EU leaders in Tallinn, 29 September 2017
On 29 September 2017, EU leaders met in Tallinn for a Digital Summit to discuss the EU’s response to digital innovation to ensure it keeps ahead of the "technological curve" and becomes the global "digital leader".
Though tax was not officially on the agenda, it is evident that it was discussed. After the Summit, French President Macron confirmed to a news conference that the EU "equalization tax", proposed by France and other member states at the 15/16 September meeting, now had the support of 19 member states. This would provide a short term solution whilst the OECD works on its interim report to be published next year. This has attracted the support of the Italian Prime Minister Gentiloni who has advocated the use of a special enhanced cooperation procedure, instead of the unanimity typically required for tax legislation, to ensure the measure is adopted. A recommendation from EU finance ministers on the "equalization tax" is expected in December 2017.
Other competing measures at EU level are the Commission’s proposal to revise the CCCTB to include digital services, and Estonia’s proposed amendment to the concept of PE to include virtual PEs. However staunch opposition to such EU measures remains, such as from Ireland, Cyprus, Malta and Luxembourg. Luxembourg's Prime Minister has remarked that, as the EU is not a state, OECD-level reform is preferable whilst of particular concern to Cyprus is the potential risk posed to state sovereignty.
The Digital Summit confirms that the dust has not settled at EU level. Nevertheless, President Juncker remains confident that an EU deal will be reached resulting in new tax rules for the digital economy in 2018.
1. Request for Input on work regarding the tax challenges of the digitalized economy, OECD
2. OECD invites public input on the tax challenges of digitalization, 22 September 2017, Press Release
3. Tallinn Digital Summit, 29 September 2017, EU2017.EE
4. Tax fight draws divisions at EU digital summit, 29 September 2017, EURACTIV
5. EU to propose new tax rules for online sector in 2018: Juncker, 29 September 2017, Reuters
6. EU Countries Seek Legislative End-Around on Digital Tech Tax, 2 October 2017, Bloomberg BNA