As opposed to other actions, BEPS - Action 1 addresses a somewhat wider scope of taxation issues, including (among other subjects) VAT and CFC (controlled foreign company) aspects.
Digital economy is a corollary of the explosive growth and development of ITC (information and communication technology). As the traditional economy is also increasingly moving towards digital platforms (we only have to think of webshops),it is fairly difficult – if not impossible – to separate the digital and non-digital industries for taxation purposes.
The business models of this “virtual” economy contain a number of such characteristics that potentially may be relevant to taxation, including but not limited to mobility (in terms of intellectual properties, users and business functionalities),reliance on consumer data and similar information, the impacts of interactions between users/consumers, the spreading of multilateral business models, tendencies towards monopolies or oligopolies, volatility and fast developing technology due to lower barriers to entry into the market.
The BEPS report focuses on risks that are generated by the digital economy
Although, in itself the digital economy does not raise individual BEPS related problems, some of its characteristics may aggravate emerging BEPS risks. In the context of this BEPS project these risks are being analysed and rated.
According to the report, in terms of the digital economy it is important to consider such aspects that are specifically associated with the digital economy, including:
- It is necessary to ensure that by disguising the core activity as ancillary activity or by artificial arrangements on the sale of products and services no one can illegally benefit by circumventing the rules on the place business (i.e. to avoid the need to set up an establishment or branch).
- The impact exerted by the use of intellectual properties on the global chains of sales and their impact on transfer price (e.g. the application of royalties to reduce the tax base or their relocation to more preferably taxed countries).
- The extension of CFC rules to the players of the digital economy (considerable differences can be encountered in various tax legislations with regard to CFC rules, frequently no CFC rules exist for digital transactions).
- Encouraging the implementation of the guidelines on the taxation of services and intellectual properties that were outlined in the directives of the OECD on indirect taxes and the assessment of VAT implications from the standpoint of companies that pursue VAT-exempt activities.
The study investigates in more detail if, by taking into account the “’virtual” nature of the digital economy, the rules that stipulate establishment (economic presence) for taxation purposes and the creation of business establishments (branches) can still be properly applied.
Recommendations for change and the setting of objectives
Specific recommendations for changes include ones for both direct and indirect taxes.
Regarding the taxation of income (direct taxes),key recommendations include the changing of the definition of permanent establishments or replacing PE with significant presence and, having regard to digital presence, introducing the definition of significant digital presence (the study also provides several examples for this),the introduction of a withholding tax for digital transactions, or the introduction of a bandwidth or “Bit” tax in one form or another.
With regard to indirect tax, the study puts forward two proposals: on the one hand proposes revising the thresholds of existing exemptions from import duties and, on the other hand, recommends simplifying and streamlining the tax registration obligation of remote digital services provided to end users.
The Study also outlines further objectives:
- The efficient collection of the VAT of digital products and services provided to end-consumers (non tax-subjects) is an important issue that must be addressed within a reasonable timescale, in order to protect the tax base and to eliminate the detrimental differences between domestic and foreign suppliers. In this context it is necessary to amend the VAT/GST guideline of the OECD with an objective to include parts on the digital economy. The deadline for this is December 2015.
- The work that addressed by BEPS - Action 7 (prevent the artificial avoidance of PE status) also needs to scrutinize the opportunity that would classify activities that were previously regarded as preparatory/ancillary activities as core activity, with an objective to prevent the circumventing of rules on permanent establishment.
- The rating and management of so called “cloud services” (in which a service provider practically provides the user with virtual storage space) in agreements should be further clarified.
As outlined above, it is obvious that the action that addresses the challenges posed by the digital economy will bring about very considerable changes in international taxation. Therefore, going forward it makes sense to keep an eye on this work.