On March 16, 2018, the OECD Tax Talks discussed its release of the Tax Challenges Arising from Digitalisation – Interim Report 2018. See BEPS Action 1. This report is a consensus-based document, which will be reported to the G20. According to the report, countries in favor of introducing interim measures understand that the measures should be compliant with a country’s international obligations; temporary; targeted; minimize over-taxation; minimize impact on start-ups, business creation, and small businesses; and minimize cost and complexity.
Some countries have introduced unilateral measures to combat BEPS, and these measures may be relevant to taxing digital businesses. A significant number of countries have announced their intention to modify domestic and/or treaty permanent establishment (PE) thresholds to account for a “digital” or “online” presence. See BEPS Action 7. Jurisdictions have also asserted taxing rights for the source jurisdiction even when the non-resident enterprise has no physical presence in that jurisdiction. Certain countries (i.e., Australia, U.K.) have introduced specific regimes targeted at large MNEs, such as the diverted profits tax (DPT). In addition, the U.S. recently introduced the base erosion and anti-abuse tax (BEAT).
The following reflects the impact that the BEPS recommendations have had on tax planning and structuring considerations of MNE groups:
- IP holding companies using preferential tax regimes (IP regimes) – tax benefits from IP regimes can only be granted to the extent that R&D expenditure has been undertaken primarily by the taxpayer or in the tax jurisdiction granting the benefits. This is referred to as the “nexus” approach.
- Treaty shopping – It is now more difficult to establish conduit companies and/or special purpose holding companies in low-tax jurisdictions.
- Cash boxes – Cash-rich entities in low-tax jurisdictions that provide funding to develop valuable intangibles, but do not control the risks associated with their investment, cannot receive higher than a risk-free return on funds under revised transfer pricing rules.
- “Trade structures” based on remote sales – It is increasingly difficult for digitalized business to remotely supply online products and/or services into a market without creating a dependent agent PE in that jurisdiction, where the sales force of a local subsidiary habitually plays the principal role leading to the conclusion of sales, and the contracts are routinely concluded without material modification by the overseas supplier. A local subsidiary does not need to formally conclude contracts to create a dependent agent PE. In addition, the remote sale of physical goods through online platforms can create a fixed place of business PE.
While the European Commission is in favor of short-term measures to tax the digital economy, the U.S. Treasury Secretary Steven T. Mnuchin issued the following statement regarding the OECD’s report on taxation of the digital economy:
“The U.S. firmly opposes proposals by any country to single out digital companies. Some of these companies are among the greatest contributors to U.S. job creation and economic growth. Imposing new and redundant tax burdens would inhibit growth and ultimately harm workers and consumers. I fully support international cooperation to address broader tax challenges arising from the modern economy and to put the international tax system on a more sustainable footing.”
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