The EU’s work on tax is largely connected with the OECD’s work. The EU Commission released some proposals on March 21. On short-term measures, they are fully aligned with our work. Our interim report we released on March 14.
However, worryingly, the EU will issue a directive and a recommendation for long-term solutions. These two documents seem to raise some fundamental issues about creating a new digital permanent establishment (PE) based on personal data that is collected in a country, but with a very broad definition.
Do you see the looming global trade war casting its shadow on the issue?
We consider that the tax challenges arising from the digitalisation are a really complex matter. Countries recognised that too and are committed to work together. In this process, the OECD is undertaking a role of facilitator. We are happy for having been able to get the 113 member countries and jurisdictions of the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) agreeing on the challenges to address and on preserving the possibility of durable and long-term solutions to such a complex issue by 2020.
Countries have different views, which are reflected in the OECD interim report. India has been part of the BEPS Project since its inception and has played a key role in its development through its engagement in the G20. Even though India has started to act unilaterally to tax digital transactions, it remains committed to the adoption of a broader and widely accepted solution.
What are the key differences in the approach of countries?
Different perspectives of countries can be described as falling into three groups. The first group considers that the reliance on data and user participation may lead to misalignments between the location in which profits are taxed and the location in which value is created. The view of this group of countries is that these challenges are confined to certain business models and they do not believe that these factors undermine the principles underpinning the existing international tax framework.
A second group of countries take the view that the on-going digital transformation of the economy, and more generally trends associated with globalisation, present challenges to the continued effectiveness of the existing international tax framework for business profits. Importantly, for this group of countries, these challenges are not exclusive or specific to highly digitalised business models.
Finally, there is a third group of countries that consider the BEPS package has largely addressed the concerns of double non-taxation, although these countries also highlight that it is still early to fully assess the impact of all the BEPS measures. These countries are generally satisfied with the existing tax system.
Could unilateral, short-term action by different countries to tax digital businesses derail the consensus-building process?
In some countries, including in the EU, there are pressing calls for governments to take more immediate action to address the tax challenges arising from digitalisation. There is no consensus on the need for, or the merit of, interim measures with some countries opposing them. The countries considering interim measures recognise the challenges, but consider there is a fiscal and political imperative to act, pending a global solution which may take time to develop, agree and implement.
India introduced Equalization Levy on online advertisements about two years ago. How do you see India’s role in building a consensus for a global framework to tax digital companies?
India’s equalisation levy is a separate tax that was introduced in 2016, which draws upon some features of the options described in the 2015 BEPS Action 1 report. It is a gross based tax or equivalently a turnover tax limited to revenue from online advertisement services supplied by non-residents. As such, India has introduced unilateral measures relevant to digitalisation. The common features of these unilateral and uncoordinated actions is that they aim at protecting and/or expanding the tax base in the country where the customers or users are located, generally based on an expanded view of the enterprise’s engagement in that country. In addition, many include elements linked to a market in the design of the tax base (e.g., sales revenue, place of use or consumption). More generally these measures appear to reflect a discontent among these countries with the taxation outcomes produced by the current international income tax system. This is precisely why countries must continue discussions the fundamental underlying principles the system.
How is the OECD looking at tackling tax consequences arising from the use of new technologies like crypto-currencies and blockchain distributed ledger technology?
Digitalisation is offering new opportunities as well as some challenges to tax policy and administration beyond the international tax system. These include the growth of the gig and sharing economy and how this is affecting tax compliance and revenues as a result of the rise of non-standard work. At the same time, technologies like blockchain give rise to both new, secure methods of record-keeping while also facilitating crypto-currencies which pose risks to the gains made on tax transparency in the last decade. The OECD’s interim report also describes these aspects of digitalisation.
Some work is already underway to better understand and address these developments, but further work is required to ensure that governments can harness the opportunities these changes bring while ensuring the ongoing effectiveness of the tax system. The OECD’s Forum on Tax Administration, working with the Inclusive Framework on BEPS, will develop practical tools and cooperation in the area of tax administration and will also examine the tax consequences of new technologies (e.g., crypto-currencies and blockchain distributed ledger technology).
As in other areas of our work, it will also be important to give specific consideration to how advances can be implemented in developing countries to take into account their particular circumstances.