New OECD policy note on the taxation of the digitalisation of the economy
On 29 January 2019, the OECD published a policy note and hosted a webinar on this topic.
Last year, the OECD launched a new phase in their attempt to deal with the tax challenges of the digitalisation of the economy. They committed to reach agreement on the topic by 2020 and provide an interim report by mid-2019. In the new policy note, they provide further information on their action plan and the timeline. They also provide some information on where they currently stand. Although not all views expressed are new, the following is worth noting.
Digital economy cannot be ring-fenced
The policy note confirms, as already noted in the 2015 Final Report on Action 1 of the Base Erosion and Profit Shifting (BEPS) project, that the OECD acknowledges that the digitalisation of the economy as a whole makes ring-fencing of the digital economy difficult, if not impossible. It is interesting to note that the policy note has been endorsed by the BEPS Inclusive Framework, which implies that the view that the digital economy cannot be ring-fenced is widely shared.
Working together without prejudice
The OECD expressly stated that so far the countries have not agreed on a specific solution for tackling the tax challenges caused by the digitalisation of the economy. In fact, it has been expressed that countries do not all agree that the tax framework needs to be adjusted at all. However, the policy note indicates that the 100+ members of the Inclusive Framework have agreed to coordinate their efforts and analyze the proposals made in-depth. They also agreed to work together ‘without prejudice’.
The OECD presented a two-pillars approach for the possible solutions for the taxation of the digitalisation of the economy.
The first pillar focuses on the nexus and allocation of taxing rights. The OECD states that a nexus approach may have to be defined that will go beyond a physical presence. They refer to concepts such as a ‘significant economic presence’ or a ‘significant digital presence’ in order to address the nexus for taxation. With respect to the allocation rules, they state that they may go beyond the arm’s length principle.
Furthermore, the OECD acknowledges that the simplicity of administration as well as the accuracy and tax certainty are important factors for any possible solution. The Inclusive Framework will explore solutions taking these considerations into account. In this way, they seem to endorse the so-called ‘Ottawa Principles’. Various other elements, such as scope limitations, business line segmentation, profit determination and allocation as well as treaty considerations will have to be included in any solution.
Under the second pillar the Inclusive Framework will explore the possibility of strengthening taxing rights of countries in case the jurisdiction that is entitled to tax profits related to the digitalised business in other jurisdictions would be considered to insufficiently tax such earnings. Coordination in order to ensure the avoidance of double taxation shall be included. This aspect closely ties in to the fact that the earlier proposals as presented by the European Commission seemed to ignore the impact of other BEPS Actions and the recent US tax reform.
Around 11-12 February 2019 a public consultation document will be published. Around 12-14 March 2019 a public consultation meeting will take place in Paris, allowing all parties to discuss the proposed measures. In May 2019 the Inclusive Framework will discuss and prepare a report, which will subsequently be discussed at the G20 meeting in June 2019. The OECD confirmed their commitment to find a solution by 2020.
The policy note can be found on here.
DennisSchäferSenior associate Tax adviser
Dennis Schäfer is a tax adviser in our Investment Management group in our Amsterdam office. His work focusses on investment funds, both from a manager’s and investor’s perspective, real estate investments and international taxation.T: +31 205 785 456 M: +31 6 12 47 60 89 E: firstname.lastname@example.org