OECD Working on ‘Concrete’ Road Map for Digital Economy

Trust Bloomberg Tax's Premier International Tax offering for the news and guidance to navigate the complex tax treaty networks and business regulations.

By Isabel Gottlieb

The OECD will “establish a clear sense of direction” for its policy on the taxation of the digitized economy in its April report to the Group of 20 finance ministers, an official said on Dec. 15.

The report will provide a “concrete roadmap for future work,” said David Bradbury, the head of OECD’s Tax Policy and Statistics Division of the Centre for Tax Policy and Administration.

Bradbury said the April report will include sections on:

  •  business models;
  •  tax policy developments looking at implementation of the Action Plan on Base Erosion and Profit Shifting, as well as measures already taken by countries;
  •  the direction of its path forward on long-term solutions;
  •  the pros and cons of interim measures and how they can be implemented to minimize harm;
  •  tax administration; and
  •  next steps.

Digital Economy Task Force

The group writing the report, the Task Force on the Digital Economy, was formed at the start of the OECD’s BEPS project and initially addressed questions about digital taxation in an October 2015 final report on BEPS Action 1. But global concerns about this issue have only grown since then, and many countries are either considering instituting taxes targeting digital companies, such as diverted profit taxes or equalization levies, or have already done so.

The U.K. in 2015 instituted a 25 percent diverted profits tax—which imposes a penalty on profits diverted offshore through related entities.

India in 2016 enacted a levy on the advertising revenue of foreign e-commerce businesses in 2016.

Australia in July introduced its own 40 percent diverted profit levy.

And on Dec. 5, European Union finance ministers approved an equalization tax proposal on internet companies, intended to be a stopgap measure as they wait for a long-term equalization tax for EU member states, which is expected to be proposed in March.

Areas of Focus

The OECD’s task force has had a “very big focus on public consultation,” Bradbury said, most recently holding a public consultation in November that elicited 53 written submissions from businesses, NGOs, law and accounting groups, and academics.

The group will focus its work on several key areas in response to the public input, Bradbury said.

First, it will clarify whether it is addressing questions about base erosion and profit sharing or broader tax challenges—a question that was raised in the BEPS Action 1 report and continues to be raised, Bradbury said.

Second, the group will do “empirical” work on the business models emerging in the digital economy, particularly on questions about value creation, a request raised “almost universally” in the public submissions, Bradbury said.

Third, the group will focus on BEPS implementation and how multinationals are responding, including looking at how value-added taxes are “raising real revenue and at the same time showing countries how to effectively tax cross-border digital suppliers, and that has been an important part of the Action 1 work,” he said.

The OECD official said the group will also consider the potential for conflicts on how VAT is implemented, and has already released guidance to help countries implement VAT.

The group was also shown evidence of businesses restructuring or responding to BEPS measures, including Facebook Inc.’s announcement earlier this week that it was moving to a local taxation model, Bradbury said. “As we start to see the evidence come in, there is a growing sense that as companies reflect upon the impact of BEPS they are responding.”

Finally, the group is considering both long-term solutions—in which respondents said “it was very important to avoid ring-fencing the digital economy, which is difficult to do since the entire economy is becoming increasingly digitalized,” Bradbury said—as well as interim or short-term measures, with particular focus on the potential for distortions and double taxation.

April G-20 Meeting

The April 19-20 meeting of G-20 finance ministers is the “key deadline” for the group, which has been working since last January on the project, Bradbury said. In preparation for the April deadline, the task force will meet in January and March 2018.

Digitization is “the flavor of the day that everyone’s talking about,” and will be high on the list of priorities when the G-20 meets in Argentina in April, Pascal Saint-Amans, director of the Center for Tax Policy and Administration at the OECD, said during the same webcast.

To contact the reporter on this story: Isabel Gottlieb in Washington at igottlieb@bloombergtax.com

To contact the editor responsible for this story: Kevin A. Bell at kbell@bloombergtax.com

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

Request International Tax