OECD digital tax for multinationals criticised over double taxation risk

OECD plans to radically change the global tax framework to introduce a unilateral approach to taxation of digital services have been criticised over the broad reach of the proposals, risks of double taxation and potential to be the first step towards turnover tax, reports Sara White

Over 200 global professional institutes, business groups and multinationals, including Uber, Spotify, Vodafone and GlaxoSmithKline, responded to the first call for evidence from the OECD Task Force on the Digital Economy (TFDE), which sets out possible solutions to the tax challenges arising from the digitalisation of the economy. These include three options based on marketing intangibles, user participation and significant economic presence

The OECD has now published 210 individual submissions with feedback to the initial consultation, which closed 6 March and had to be extended due to the level of interest. The outcome of any discussions and future measures will be put to G20 ministers in 2020.

Any measures adopted would have a significant impact on the taxation basis for social media platforms, search engines and online marketplaces.

There was a general acceptance that the existing fragmented approach to digital tax and the changing face of international, cross border operations means that tax law is seriously outdated in this area, but global governmental agreement would be required to change current legislation.

However, there are deep seated concerns that taking a unilateral approach to global tax by focusing on one sector of the economy is not the right approach, with the singling out of digital companies being seen as unfair ‘ringfencing’.

Non-digital companies also expressed strong reservations about the scope of the proposals.

Pharma giant Astra Zeneca stated: ‘We find the proposed approaches to be of significant concern as the scope appears to go beyond highly digitalised businesses to traditional businesses where value is not created based on the impact of the digitalisation of the economy and challenges the ongoing application of the arm’s length principle.’

On the other hand, the highly digitalised tech industry feels that it is being particularly targeted.

In its submission, music streaming platform Spotify stated: ‘Attempting to isolate certain highly digitalised business esas a separate sector for tax purposes will inevitably require arbitrary lines for applicability and create an administrative nightmare for MNEs [multinational enterprises] as well as tax authorities. “Digital” enterprises should not be subject to special and differential tax rules. Any new system should be applicable economy wide.’

While the company supported the principles of fair taxation, it added: ‘The developments and debates around taxation of highly digitalised business models is of substantial concern to us. Some governments appear to see “fair” taxation as working only one way; the digital enterprises that operate in many markets should pay tax without any substantiation in value creation and realised profit.’

Taxi hailing and food delivery app Uber was also highly critical, stating: ‘The significant economic presence (SEP) proposal ring-fences highly digitalised businesses by applying new nexus standards only to those companies leveraging technology, a feature that potentially discourages investment in technology and does not justify unequal taxation of a business compared to its analogue counterpart.’

At the same, the introduction of unilateral measures in certain jurisdictions, including the UK, Australia, India and Italy, with France set to follow, has helped to create a more complex tax environment for multinationals with conflicting rules.

There were also concerns that the OECD may look to change the tax landscape with the introduction of a turnover tax, which many businesses are against, although some argue this could create a fairer environment for traditional businesses facing severe price competition from major tech giants such as Google and Amazon.

Silicon Valley Tax Directors Group, representing all significant US digital giants, warned that the proposals require significant intergovernmental cooperation, stressing that whatever approach is selected ‘must deal with both losses and profits, must refrain from introducing withholding taxes as a collection/enforcement mechanism, and must be accompanied by a true commitment to effective dispute prevention and resolutions’.

It also warned that a damaging outcome could put at risk the amount of research and development (R&D) invested by the largest digital multinationals - Google, Amazon and Facebook – and listed IT companies, which represent 37% of total R&D spend of the S&P Global 1200 at $216m a year.

Double taxation risk

A number of UK professional bodies and business groups responded, including the Chartered Institute of Taxation (CIOT), ICAEW and the Confederation of Business Industry (CBI).

The CBI submission stated: ‘It is of fundamental importance for all our members in the design of any change to the international business tax framework that it must be a tax based on profits, not revenues, and must only subject those profits to tax once.

‘For every £1 of profit that is allocated to a market country there must be an equally and opposite adjustment by another country to relinquish taxing rights over the same profits. It also follows that all business expenses are deductible in arriving at the calculation of profit. This is critical to ensuring that is not double (or multiple layer) taxation.’

The risk of double taxation is a major concern while interaction with withholding taxes on interest, royalties and technical service fees; and with indirect taxes; as well as treatment of capital gains on transfer of intangibles will all need to be considered. There will also be potentially high compliance costs.

The 100 Group taxation committee, representing FTSE 100 CFOs, said ‘any solution should be built on the principles of certainty and consistency, eliminating double taxation and minimising disputes’.

It was also concerned that the proposals would create double taxation risks, warning that it ‘if Pillar 1 and Pillar 2 proposals were introduced then this wil drivfe complexity and uncertainty, making compliance overly onerous and double taxation highly likely’.

The CBI also stressed the need ‘for clarity on treatment of cross-border transactions, particularly due to unilateral digital taxes, such as the UK’s diverted profits tax and plans to introduce a digital services tax (DST).

‘There is significant uncertainty as to whether DST would be considered a covered tax, this position would appear to be open to challenge, and bilateral treaty partners may not take the same view as the UK. This will inevitably lead to increased uncertainty and potential disputes.’

The definition of the type of business activities in scope for the new OECD approach was also seen as problematic, described as being vague and wide ranging, and the CBI said the ‘definitions should be refined and narrowed’.

‘The described in-scope activities by reference to key elements are vague and can be interpreted to apply to an extremely board range of business models. This highlights members’ concerns that the DST will not be a targeted tax as envisaged and could directly impact many businesses operating in the UK,’ the CBI said.

 ‘There is currently as underestimation of the complexities many businesses will encounter in this process, especially in highly integrated business models.’

Exhooing concerns that the proposals could net a much wider number of companies than originally expected, the CBI recommended ‘a further threshold test is included to exclude businesses from the scope of the DST where an insignificant proportion (less than 10%) of their revenue is derived from in-scope activities’.

It also highlighted problems for advertising-based models, as there will be difficulties for advertising revenues to be tracked based on user location. Users do not need to provide location information when an ad impression is viewed, therefore in order to track user location it is likely that IP address would need to be used, but this is imperfect.

CBI added: ‘Information on the location of users is not typically provided to advertisers, often for data privacy reasons. There is no reason why these businesses would need to accurately track the location of users that view ads, and track revenues based on user location.’

Report by Sara White

OECD BEPS Consultation, Addressing the tax challenges of the digitalisation of the economy, ran 13 Feb to 6 Mar 2019

OECD Consultation response comments can be downloaded here

Diary date

The OECD proposals and feedback will be discussed at a two-day public consultation meeting at the OECD in Paris this week from 11-12 March.

This meeting will be broadcast live on OECD WebTV http://video.oecd.org/  . No advance registration is required for access to this online broadcast.

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