On November 29, 2018, Bloomberg Tax and KPMG hosted a conference in Washington, D.C., covering international tax developments, among other topics. The following panelists discussed digital tax developments, including corporate taxpayer concerns with certain multilateral and unilateral proposals:
- David Bradbury, Head of the Tax Policy and Statistics Division, Centre for Tax Policy and Administration, OECD
- Liz Chien, Vice President, Global Tax, Ripple Labs
- Timothy McDonald, Vice President-Finance & Accounting, Global Taxes, The Procter & Gamble Company
- James Ross, Partner, McDermott Will & Emery, LLP
- Carol Doran Klein, VP and International Tax Counsel, United States Council for International Business (USCIB) (Moderator)
Editor’s Note: a member of the BEPS Global Currents team attended the luncheon.
Background
Mr. Bradbury started the discussion by providing background information on the OECD BEPS Action 1 final report, and recent multilateral work on digital taxes. The OECD Inclusive Framework has been leading the multilateral discussions over the past year, but it has been challenging to reach consensus on necessary tax measures, with over 100 countries involved in the negotiations. The Action 1 final report found that the digital economy cannot be ring fenced, which continues to be the view of the Inclusive Framework in its ongoing digital tax negotiations.
Mr. Bradbury said that a significant number of countries, including the U.S., originally believed that little work would occur in the Action 1 space, but that has changed over the past year, culminating in the OECD’s 2018 interim report on digital tax developments, released in March 2018. The 2018 interim report says that the Inclusive Framework has found that the following features exist in highly digitalized businesses: (1) cross-jurisdictional scale without mass; (2) reliance on intangible assets; (3) data and user participation. Many countries agree that the first two features can apply outside the digital context as well. Bradbury added that the upcoming Japanese G20 Presidency is keen to get an update from the OECD in 2019 on the Inclusive Framework negotiations.
Bradbury said that while the BEPS project was concerned with “plugging double non-taxation holes in the current international tax framework, current Inclusive Framework negotiations are tackling profit allocation issues.” Recent multilateral digital tax discussions by the Inclusive Framework have revolved around three options: (1) focus on data and user participation (favored by the U.K.); (2) broader approach to allocation of taxing rights (favored by the U.S.), including taking market jurisdictions into account; and (3) global anti-base erosion mechanisms, such as the U.S. GILTI rules, which are not specific to highly digitalized business models (favored by Germany and France).
An audience member asked about the possibility of the profit split transfer pricing method as a global approach to address challenges of the digital economy. Mr. Bradbury said that this issue requires additional discussions, and that he cannot discuss at this time. Mr. McDonald said that the formulary apportionment system of U.S. states has been imperfect in application, but is tolerable for taxpayers due to single-digit tax rates. However, use of formulary apportionment can lead to double taxation when applied by countries with double-digital tax rates.
Unilateral Developments
Mr. Ross discussed the digital services tax proposals announced by the U.K. on November 7, 2018 (the “U.K. DST”). He said that the U.K. DST focuses on data and user participation, which would allow the U.K. to generate tax revenues, without surrendering the tax base to capital exporting countries. In contrast, the European Commission (EC) significant digital presence proposed directive of March 2018 would be broader in application than the U.K. DST proposal.
The U.K. DST would apply to social media platforms, provision of search engines, and provision of an online marketplace. Mr. Ross said that the U.K. DST represents a hybrid turnover-tax approach.
It is very likely that EU member states will implement unilateral digital tax measures, which Italy and Spain are doing, according to Mr. Ross.
Ms. Chein said that the digital tax focus so far has been on customers and users, because they cannot be moved, unlike servers, which can be moved by taxpayers. Taxpayers are looking for digital rules that are administrable, and do not cause double taxation. She added that a possible solution, if multilateral consensus cannot be reached, is application of safe harbors, to which Mr. McDonald agreed is a good starting point. Digital companies are starting to resemble traditional businesses (i.e., Amazon’s purchase of Whole Foods; Google making handsets and computers). Facebook ads are effective, because they have extensive data about their users, but most companies do not have such quality of data, according to Ms. Chein.
Trade Issues
Mr. McDonald said that VAT can be border adjusted under WTO rules, as a consumption tax approach. In contrast, an income tax cannot be border adjusted, which was the issue with the border adjustment tax proposed in the 2016 U.S. House Republican blueprint for tax reform.
He added that P&G cut back on digital advertising, since the company was being charged by others based on user clicks in each country, which can be manipulated. From P&G’s experience, most user clicks on digital ads are mis-clicks, since the user does not generally spend much time reviewing the digital ad.
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