Leading Women in Tax Forum
The taxation of the digital economy.
Today 26 March 2019, it was precisely one month ago that Margriet Lukkien had the pleasure to speak at the Leading Women in Tax Forum of the International Tax Review in New York about a hot topic in global tax: the taxation of the digital economy. In the meantime, there have been various interesting developments on this topic, so it’s time for an update!
On 12 March last, the Ecofin discussed the taxation of the digital economy, following the proposals for among others a digital services tax (DST) and a digital permanent establishment as published by the European Commission (EC) in March 2018. Despite all the efforts of the EU, it looks like the EU digital tax plans are laid to rest until the end of 2020. However, some EU Member States are working on unilateral rules similar to the EC’s proposals.
On 13 and 14 March last, the OECD hosted a public consultation meeting to discuss the proposals laid down in its consultation document of 13 February 2019 regarding the tax challenges of the digitalization of the economy. Interesting insights were gained during this public consultation meeting. It is clear that the proposed measures are likely to have a broad impact, affecting a wide range of companies and not only digital tech companies.
Where do we currently stand on this hot topic? For a concise overview, see below!
One month later…
EU’s directives proposals
Not awaiting the progress of the OECD, in March 2018 the EC published two proposals for the taxation of the digital economy: a DST as an interim measure and a “digital permanent establishment” as a long term solution. After significant push-back from EU Member States on the DST, a ‘lighter’ version of the DST in the form of a “digital advertisement tax” (DAT) was explored by the Romanian Presidency. In this context, the EC furthermore proposed to change the decision making on tax matters (including the introduction of new taxes) from unanimity to a qualified majority. However, a number of jurisdictions, including the Netherlands, are opposed to this proposal.
During the Ecofin meeting of 12 March last, it became clear that no agreement could be reached on the watered down version of the DST in the form of the DAT. In brief – and subject to certain thresholds - the DST would be levied at 3% over revenues derived from online placement of advertising, sale of collected user data and digital platforms that facilitate interactions between users. The DAT would be levied at 3% over revenues derived from digital advertising services only.
Despite the broad support from a large number of EU Member States, some EU delegations maintain reservations. Furthermore, it was discussed that the Romanian Presidency will formulate an EU viewpoint on the international discussions on digital tax, specifically in view of the OECD consultation document of 13 February 2019 regarding the tax challenges of the digitalization of the economy (Consultation Document). Despite all the efforts of the EU, it looks like the EU digital tax plans are laid to rest until the end of 2020. For the time being, the multilateral digital taxation ‘fight’ will continue via the OECD instead of the EU. However, in the meantime, some EU Member States are working on unilateral digital taxation measures, such as France, Italy, Spain and Austria. The Netherlands and Luxembourg are not in favour of such unilateral measures and at this moment do not have any plans to take such approach.
Digital economy taxation OECD: where are we now?
In 2015 the OECD published its first report on BEPS Action 1, dealing with the tax challenges of the digital economy. This Report recalled the measures provided by other BEPS Actions and affecting the digital economy. In March 2018 an OECD interim report was published, with the clear outcome that there was no consensus on short term measures, such as a DST. On 13 February 2019 the OECD published its Consultation Document, with a two pillar approach to deal with the pervasive, cross-border effects of a digitalizing economy. The two pillar approach would affect a wide range of companies and not only digital tech companies.
OECD Consultation document and two pillar approach
In its Consultation Document, the OECD aims to outline an all-encompassing plan to tax the digitalizing economy. The OECD proposes two ‘pillars’: the first pillar focuses on the allocation of taxing rights, with the idea that businesses allocate more profits to markets with whom they interact, regardless of whether they have a PE there. It sets out three approaches to profit allocation: “active user participation”, “marketing intangibles” and “significant economic presence”. The second pillar deals with remaining BEPS issues. Taxing profits that are subject to very low or no tax elsewhere, by using an income inclusion rule and a denial of deductions and tax treaty benefits for base eroding payments. This pillar boils down to the question, do we need a global minimum tax?
Public Consultation: developments and takeaways
On 13 and 14 March 2019, the OECD held a Public Consultation meeting in Paris with regards to the Consultation Document. Preceding the Public Consultation, interested parties were invited to provide comments to the OECD. Comments were provided by a diverse base of companies, ranging from digital companies to law and accounting firms. In total, over 2000 pages of comments were filed.
During the Public Consultation, a number of relevant points arose:
- There will be significant changes from the current tax framework (for example the arm’s length principle);
- Broad consensus should be achieved between countries that will lead to deep agreement;
- Ring-fencing the digital economy is not a good idea, for which reason the “user participation” proposal is not favored;
- Both dispute resolution and dispute prevention should be well-developed, for example by applying safe harbors.
Digital economy taxation: what to expect?
There is still a lot of work to be done in order to turn the concepts of the OECD into clear-cut reality. The following steps on digital economy taxation have been planned:
- In early April 2019, the steering group of the OECD Inclusive Framework will meet and discuss issues on digital economy taxation;
- At the end of May 2019, the steering group of the OECD Inclusive Framework will convene again. The Committee on Fiscal Affairs will start working on technical plans;
- On 28-29 June 2019, at the G20 summit in Japan the OECD will present a working plan;
- In 2020, more technical work will be performed. The OECD would like to issue final recommendations for a global solution in 2020;
- Until the end of 2020, the EU digital tax plans are laid to rest pending work at OECD level.
It is to be seen how the OECD’s plans on taxation of the digital economy will evolve. They are expected to have a significant impact on all kinds of businesses. Hence it is wise to closely monitor the developments on this front. Interested? Stay tuned for further updates, or contact your trusted adviser at Loyens & Loeff or Margriet Lukkien for further information on this topic.