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By Sony Kassam
The U.S. is concerned about the growing measures around the world for separately taxing the digital economy, especially regarding a digital permanent establishment, U.S. officials said.
“The United States continues to be of the view that it is not appropriate to single out such a digital economy for a special regime or treatment,” Lafayette G. Harter III, deputy assistant secretary of tax policy at the U.S. Treasury Department, said Dec. 1.
Harter was speaking on a panel at the annual international tax conference sponsored by George Washington University Law School, the Internal Revenue Service and Treasury. As the world discusses issues surrounding digital commerce, international tax rules in the U.S. are also undergoing changes, Harter noted.
“Therefore I do continue to think the discussion of digital commerce should ultimately be subsumed into any discussion of basic principles rather than treated as a special case or special regime,” Harter said. “I think ultimately we’re entering in a period where it will be necessary to re-examine first principles, and the digital economy will be a part of that but not driving it.”
The OECD’s Task Force on the Digital Economy plans to produce a report in April 2018 examining new options for taxing digital goods and services as part of a mandate from the Group of 20 nations.
The OECD’s task force initially addressed these issues in an October 2015 Action 1 report developed as part of the organization’s 15-item action plan for its Base Erosion and Profit Shifting (BEPS) project.
Solutions in the 2015 report included digital permanent establishment, an equalization levy, and a separate withholding tax.
Digital permanent establishment is “very concerning for the U.S.,” Kevin Nichols, senior counsel to the International Tax Counsel at Treasury, said Nov. 30 speaking on a different panel at the two-day conference.
That is “because it depends on this notion of ring-fencing the digital economy or finding a way to delineate what the digital economy is versus what everything else is,” he said.
Robert Stack, managing director of Deloitte LLP’s Washington National and International Tax group, agreed with Nichols’ sentiment. Stack, speaking Dec. 1 on a global trends panel, said digital PE isn’t workable.
“Whether you want to redefine transfer pricing, whether you want to give more taxing rights to markets, whether you want to do a digital PE, those are all not things that are going to happen this spring,” Stack said, “because you just know from hearing them, they’re very, very heavy lifts for a variety of reasons including scoping.”
EU countries have criticized the way digital companies are able to remotely sell into their jurisdictions—and turn large profits—while paying little in corporate income tax, Harter said. Those countries are also “expressing frustration with the pace of progress on the task force,” he said.
Several countries have either implemented individual measures, such as diverted profit taxes and equalization levies, to tax digital activities and business models, or are considering them.
Finance ministries of France, Germany, Italy, and Spain have pushed for an equalization tax on the net sales digital companies—like Amazon.com Inc. and Apple Inc.—generate in Europe. India, in 2016, enacted a levy on the advertising revenue of foreign e-commerce businesses.
In 2015, the U.K. introduced a diverted profits tax that sets a 25 percent levy, while in July, Australia began enforcing its own diverted profits tax that sets a 40 percent levy. The tax scheme goes after players in the digital economy by imposing a penalty on profits diverted offshore through related entities.
Concurrently, U.S. tax reform is taking place under a “dynamic or even unstable” international tax backdrop, Harter said. The Senate passed a tax bill early Dec. 2 that must now be reconciled with the House before it can become law. Both bills include provisions to encourage companies to repatriate past international profits. More international changes are expected.
“We’re seeing growing dissatisfaction from many sides about the current state of affairs,” he said. “As the economy has evolved over the years and intangibles have become more important, there’s been growing frustrations over the limitations of traditional transfer pricing to deal with it.”
The U.S. will need to talk to its trading and treaty partners about how new international tax rules of the U.S. tax reform “will fit into the larger international tax structure at the OECD level,” Harter said. These discussions will take into account the evolving economy and business models, including digital commerce, he said.
Although the OECD’s interim report on the progress for taxing the digital economy will come out next spring, the final report isn’t due until 2020.
“Buckle up,” Stack said. “It’s going to be quite a ride in the digital economy.”
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