26 March, 2018
More than 110 countries and jurisdictions have agreed to try to come up with an agreed approach to taxing the digital economy by 2020, according to an interim report on the tax challenges arising from digitalisation published by the Organisation for Economic Cooperation and Development (OECD).
The international tax system is based on the principle that companies are taxed in the jurisdictions in which they have a physical presence. The fact that digital businesses are able to generate revenues from markets in which they have limited physical presence, means that technology companies in particular are able to make substantial profits as a result of having customers in a particular location but not to pay tax on the profits in that location.
The OECD report acknowledges that there is currently no consensus between OECD members as to whether action needs to be taken. It is going to review the “nexus” and “profit allocation” rules with a view to coming up with an agreed solution by 2020, with an update to the G20 in 2019.
International pressure is growing for faster action to be taken. The European Commission is expected to unveil this week a digital tax targeting revenues rather than profits. The Financial Times reported that the Commission will propose a 3% tax on advertising revenues generated by digital companies; the fees raised from users and subscribers to digital music services, and the income made from selling personal data to third parties.
Last week the UK Treasury released an updated position paper making it clear that it supports reform of the international corporate tax framework to address the problem but is willing to act unilaterally on an interim basis in the absence of international agreement. It is proposing that digital businesses could be taxed on the concept of 'user-generated value'. This suggests that users can create value for certain types of digital businesses through their engagement and active contribution. One example cited is a social media company that generates revenue from selling advertising on a platform populated by users’ posts and photos.
However, the US does not support reform.
“The US firmly opposes proposals by any country to single out digital companies,” said US Treasury secretary Steven Mnuchin in response to the OECD report. "Some of these companies are among the greatest contributors to US job creation and economic growth. Imposing new and redundant tax burdens would inhibit growth and ultimately harm workers and consumers. I fully support international cooperation to address broader tax challenges arising from the modern economy and to put the international tax system on a more sustainable footing."
Tax expert Catherine Robins of Pinsent Masons, the law firm behind Out-Law.com, said: "The OECD recommendations made to date as part of the base erosion and profit shifting (BEPS) project designed to prevent international tax avoidance, have had a considerable impact – for example UK companies are now subject to a limit on the amount of interest they can deduct for tax purposes. But they have not led to significantly increased tax revenues from the US tech giants."
"Unilateral measures such as the UK's diverted profits tax, have also failed to impact significantly on digital companies. Countries such as the UK and France are losing patience and unilateral or EU action looks likely. This would be worrying as unilateral action tends to mean double taxation, particularly as the US also wants its share of the cake," she said.
This article was published in Out-law here.
For further information, please contact:
Eloise Walker, Partner, Pinsent Masons
eloise.walker@pinsentmasons.com
