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The OECD may look to revise controversial rules on how to define a taxable branch, with an eye toward online transactions, the organization’s tax chief said.
Pascal Saint-Amans, the Organization for Economic Cooperation and Development’s director for tax policy and administration, said the OECD would consider expanding the definition of permanent establishments—recently tweaked in the organization’s base erosion and profit shifting (BEPS) project—as it develops a 2018 report to the Group of 20 on tax issues in the digital economy.
“That’s what we’re working on, with the idea of further expanding the PE definition that includes something that would track the digital presence of a company,” Saint-Amans said during an Aug. 28 panel discussion at the International Fiscal Association Congress in Rio de Janeiro.
He added that the OECD would also look at profit attribution rules and possible interim measures such as an alternative tax on e-sales. He suggested “ALES” as a potential acronym for the alternative tax.
How to source taxation in the online world has become an increasingly difficult and controversial topic among tax administrations. While the BEPS project aimed to address many of those concerns, Saint-Amans conceded the project had not produced a complete agreement.
After the panel, Saint-Amans told Bloomberg BNA that he hopes the OECD can help provide some measure of agreement as countries consider unilateral actions to tax online sales—but he wasn’t optimistic.
“Will there be any sort of agreement on an interim solution? I don’t think so, because there’s a big divide between the U.S., the Europeans, and Japan,” he said.
The 2018 report is being developed by the OECD Task Force on the Digital Economy, and follows a G-20 communique, issued July 8, which emphasized the “tax challenges raised by digitalisation of the economy.”
During the panel, Saint-Amans admitted that the work of the BEPS on Action Item 1, which dealt with the digital economy, hadn’t produced a strong consensus.
“Action 1 was conclusive, but not that well conclusive as regards the corporate income tax,” he said. “And we can see there is no stability here.”
The Action 1 BEPS report laid out new principles for collecting general service and value-added taxes, including a rule stating that difficult-to-pinpoint transactions should be taxed at the normal location of the consumer.
But on stickier corporate income tax issues related to online transactions, the OECD neglected to write specific rules, claiming that it was impossible to separate the digital economy from commerce in general.
A separate BEPS report on Action 7 rewrote the rules for defining a permanent establishment. The report targets structures that allow companies to do business in a country without triggering taxation. But the report stopped short of declaring that digital activity alone could create a taxable presence for income.
Akhilesh Ranjan, principle chief commissioner of income tax at India’s Ministry of Finance who spoke on the IFA panel, said he supports revising the permanent establishment and digital economy rules, blasting the current regime as failing to recognize reality in today’s business environment.
“The current tax rules, we believe, are not prepared to take into account the role the market plays in this,” Ranjan said. “Market conditions do create value, and this value is not captured by standard methods of transfer pricing.”
Ranjan said in the context of digital services, “there is a distinct element of value creation or addition which is created by the market itself, and that is something which must be compensated and remunerated.”
Ranjan also criticized the OECD’s rules on attributing profit to a permanent establishment, which rely on using transfer pricing principles to tax the branch as if it was a distinct subsidiary.
“An attribution scheme which is only based on a functions, assets and risks analysis is heavily lopsided for the supply side, and not considering demand-side factors, which also create value,” he said.
Ranjan said India’s recently enacted equalization levy, which imposes a withholding tax on outbound payments for advertising when there isn’t a permanent establishment, was “sort of an interim” measure until the OECD develops stronger rules on these issues.
“We really strongly believe that the world must realize that we have to consider the challenges posed by the digital economy, whether or not it’s a BEPS risk in the technical sense of the term,” he said.
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