01 August 2018
Fear over double taxation has emerged as a key issue in the taxation of the digital economy debate. Corporate tax directors and advisers tackle the challenge a virtual permanent establishment will present and try to anticipate potential disputes.
So far the only agreement on taxation of the digital economy is that it should be decided upon on an international level.
While OECD and EU proposals are still in their consultation stages, taxpayers are hoping for more emphasis on dispute resolution mechanisms and safeguards against double taxation.
Achim Pross, head of the OECD’s International Co-operation and Tax Administration Centre for Tax Policy and Administration, will be speaking at TP Week’s Global Transfer Pricing Forum in Munich on September 20 & 21. He has previously said: “Individual countries going after their own solutions risks increased compliance costs and double taxation.”
The EC’s short-term proposal outlines applying a tax, likely to be around 3%, to gross revenue from certain digital activities, such as digital intermediary business tied to users, or revenue generated from the sale of data. Meanwhile, the long-term proposal sets out a profit tax based on the concept of a virtual permanent establishment.
“The specific technical issues of taxing a digital permanent establishment can be ironed out later, it is on the political level where this question has to be solved first on a general level,” Till Reinfeld, partner at WTS Germany, told TP Week.
“It is really about finance ministries securing or increasing their tax base in a digital world. As we saw in the OECD BEPS discussions and the increased transparency due to Action 13, countries and treasuries are looking to secure or increase their own income, but did not in the same intensity focusing on dispute settlement,” said Reinfeld.
Reinfeld warned that a unilateral solution without the integration of a digital PE into double taxation treaties disputes would arise automatically.
“In the end the taxpayer has to bear the double taxation risk. If you look at the European Union, they have been trying to agree on the Common Consolidated Tax Base for many years now. It will be as hard to find common ground with regard to the multilateral introduction of the digital PE,” said Reinfeld.
“In Germany and other countries where you have a real strong base of customers using digital platforms it is fair to say there is some kind of nexus in that country because the customers and their data contribute to the value of e.g. Facebook. If Facebook should pay more taxes in Germany in the future due to a digital PE, it will pay less tax in the US,” said Reinfeld.
“Taxpayers would have to rely on the countries that there is a common understanding and a dispute settlement and I’m not too confident this is going to happen in the near future,” he added.
The global economy’s take-off into the virtual world and the cloud has brought the current order close to a breaking point.
“The OECD needs to determine what a significant digital presence is and how profit should be attributed to it, then apply this to treaties to prevent double taxation,” Glenn Price, head of international tax at Vodafone, told TP Week.
“It starts with naming the thing. It can’t be permanent establishment. If you look at a virtual operator in the cloud, they will not have any degree of permanence in many of the countries in which they operate and they won’t be established there,” he said, adding he prefers to use the term ‘doing business in’ when talking to non-tax specialists.
Price favours a digital tax based on a substantial threshold for the number of transactions and the level of revenue in a market, rather than a physical presence.
“It may be better to define an appropriate threshold and criteria for how a digital company is ‘doing business in’ a country rather than shoe-horning those activities into a permanent establishment definition when there may in fact be no degree of permanence nor any establishment in that country.”
Gian Luca Nieddu, head of transfer pricing and tax value chain at Italian tax law firm Hager & Partners, told TP Week that the current stage was lacking a shared approach.
“The US initiative clashes with the EU, especially for US headquartered companies, and then there are clashes within the EU with states advancing their own rules such as Italy and Spain. India and Australia have implemented their own regimes and China is still checking out what everyone else is doing,” he said.
“There is a need for convergence, and convergence on the OECD level is a major pillar,” Nieddu stressed.
“Over the past three to four years we have seen several cases in Europe, like those in Italy, where the Revenue Authority has raised tax challenges on Google, Amazon and Facebook. They paid huge sums of additional tax on undisclosed DEMPE, because they thought it was worth to pay on the local level and bearing double taxation from a group-wide perspective instead of opening MAP or EU arbitration conventions.”
While tax treaties and the OECD’s multilateral instrument will offer opportunities for countries collaborate on avoiding double taxation disputes, APAs, in particular bilateral ones, are expected to increase in importance.
“It’s difficult for administrations to discuss disputes regarding intangibles, especially HTVI, royalties for brand licensing in specific industries; it is hard and takes very long. How to handle international procedure in order to solve double taxation of the digital economy will be a very hot topic and the work around MLI will play a relevant role. Once there will be some sort of convergence for at least some of the major pillars of this new type of taxation, there will be an incentive for MNES to go for APAs, at least bilateral or even multilateral, to limit – from the very beginning – double taxation issues,” Nieddu said.
While the fight over who gets the biggest cut of the tax pie rages on, what can MNEs do to positions themselves favourably regardless of the outcome?
Price said the philosophical question would become how countries will raise their revenues if in the future all services are provided by virtual cloud-based businesses.
“Unless there is a change in the taxation model corporate tax revenue will fall significantly. Many MNEs are just saying ‘no’ to the digital services tax or significant digital presence but I think unless we look at where taxation revenue will come from in the future digital economy, we will miss the opportunity to contribute on how corporations should be taxed in the future,” said Price.
Price said businesses should take an active interest in the proposals to see in which road the regime is likely to go down.
“To prepare businesses can become more aware of the EC proposals and input their view on the impact the taxes might have on their industry. Business can look at their business models and try to surmise how much their existing business will be impacted and could also partner with new business leads to identify and raise awareness on new activities that could be subjected to the taxes,” Price said.
Meanwhile, Reinfeld pointed to the concurrent rise of artificial intelligence in tax as a means to deal with the increasing complexity of taxing the digital economy.
“Taxpayers have to deal with all the different rule sets in all their jurisdictions, and value chains are increasing in complexity in a digital word. The digital revolution with all its developments especially in the field of artificial intelligence can help us to structure and solve many of the problems arising from that complexity,” said Reinfeld.
Achim Pross, Glenn Price, Robert Page, Gian Luca Nieddu and Till Reinfeld will be speaking on a panel at the upcoming Global Transfer Pricing Forum in Munich on September 20 & 21. Join us there to hear more on taxation of the digital economy.
The above article was published on www.tpweek.com on August 1 2018 and has been republished with the approval of the Publisher.