OECD addresses the tax challenges arising from digitalisation of the economy

In the latest update from its BEPS project the Organisation for Economic Co-operation and Development (OECD) has released details of the work planned over the next two years seeking a resolution to the tax challenges arising from the digitalisation of the economy.

These tax challenges tend to arise from three key factors that are prevalent in more highly digitalised businesses which the current international tax framework is not always capable of dealing with:

1. Scale without mass

Businesses can be heavily involved in the economic life of a country without any significant physical presence.

2. Reliance on intangibles

Use of IP assets like software and algorithms supporting their business and websites are central to the business model.

3. Data, user participation and interaction with IP

The important role that user participation plays in terms of creating content and data that forms a key element of the business model.

Organised around two pillars, the OECD’s programme of work aims to deliver, by the end of 2020, a long-term solution to the tax challenges posed by the digital economy.

Taxing rights

The first pillar will look at how taxing rights are allocated and determine where tax should be paid and on what basis. This will include determining what portion of profits could or should be taxed in the jurisdictions where users are located.

The options being considered include significant departures from the established arm’s length standard and a fundamental extension to the PE concept as it is currently recognised.

Removing the incentive to shift profits

The second pillar of work is designed to remove the incentive to shift profits for tax purposes by creating new taxing rights (effectively a minimum level of tax) that allow jurisdictions to tax profits where the other jurisdiction with taxing rights applies a low effective rate of tax.

The road map will be presented to G20 Finance Ministers for political endorsement during their 8-9 June meeting in Japan. If endorsed the timeline calls for the outline architecture being agreed in January 2020 with the solution being delivered in 2020.

Who is affected?

The project isn’t only about wholly digital businesses but rather recognises that the whole economy is increasingly becoming digitalised, so this announcement is pertinent to all businesses trading internationally.

If your business model and future plans include the following features this project and its outputs are going to be vital in understanding how the international tax system could change in the near future:

  • Sales or other economic presence in jurisdictions where you do not have a significant physical presence.
  • Utilises software or algorithms?
  • Relies on data gathered from your users?
  • Utilises content created by users?

If you would like to discuss how the changing international tax landscape will affect your business, please get in touch with a member of our Corporate Tax or International Tax teams.