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OECD Reports To G20 Leaders On Digital Tax Options

by Ulrika Lomas,, Brussels

22 March 2018

The OECD has published the tax report received by G20 finance ministers and central bank governors at its first meeting this year, on March 19-20, 2018, which focused in particular on new tax rules for the digital economy.

The G20 released the following message on tax issues in its communique following the meetings:

"We will continue our work for a globally fair and modern international tax system and welcome international cooperation and pro-growth tax policies. We remain committed to the implementation of the Base Erosion and Profit Shifting (BEPS) package and welcome progress to date. The impacts of the digitalization of the economy on the international tax system remain key outstanding issues. We welcome the OECD interim report analyzing the impact of the digitalisation of the economy on the international tax system. We are committed to work together to seek a consensus-based solution by 2020, with an update in 2019."

On virtual currencies, it said:

"We acknowledge that technological innovation, including that underlying crypto-assets, has the potential to improve the efficiency and inclusiveness of the financial system and the economy more broadly. Crypto-assets do, however, raise issues with respect to consumer and investor protection, market integrity, tax evasion, money laundering, and terrorist financing. Crypto-assets lack the key attributes of sovereign currencies. At some point they could have financial stability implications. We commit to implement the FATF standards as they apply to crypto-assets, look forward to the FATF review of those standards, and call on the FATF to advance global implementation. We call on international standard-setting bodies (SSBs) to continue their monitoring of crypto-assets and their risks, according to their mandates, and assess multilateral responses as needed."

The OECD's new report prepared for the G20 leaders discusses progress towards implementation of the BEPS minimum standards, on preventing treaty abuse, the introduction of country-by-country reporting rules, improved dispute resolution mechanisms, and on tackling harmful tax practices. It notes that 78 territories so far have ratified the BEPS multilateral instrument to rapidly amend existing double tax treaties to introduce provisions to tackle BEPS, and 72 territories will have been assessed under the peer review mechanisms concerning improving dispute resolution mechanisms by December 2019. It said 60 territories already have substantive CbC reporting regimes for the collection of information relevant to the enforcement of transfer pricing regimes.

In its update to G20 leaders on the digital economy, the OECD paper says:

"The challenges of the digitalisation of the economy were identified as one of the main focuses of the BEPS Action Plan leading to the 2015 BEPS Action 1 Report. In March 2017, the G20 Finance Ministers mandated the OECD, through the Inclusive Framework on BEPS, to deliver an interim report on the implications of digitalization for taxation by April 2018. This report, Tax Challenges Arising from Digitalisation – Interim Report 2018 (the Interim Report) has now been agreed by the more than 110 members of the Inclusive Framework."

"The Interim Report provides an in-depth analysis of the main features frequently observed in certain highly digitalized business models and value creation in the digitalized age, as well as the potential implications for the existing international tax framework. It describes the complexities of the issues involved, the positions that different countries have in regard to these features and their implications, and which drive their approach to possible solutions. These different approaches towards a long term solution range from those countries that consider no action is needed, to those that consider there is a need for action that would take into account user contributions, through to others who consider that any changes should apply to the economy more broadly.

"[Inclusive Framework] members agreed to undertake a coherent and concurrent review of the "nexus" and "profit allocation" rules - fundamental concepts relating to the allocation of taxing rights between jurisdictions and the determination of the relevant share of the multinational enterprise's profits that will be subject to taxation in a given jurisdiction. They will work towards a consensus-based solution, noting that at present, there are divergent views on how the issue should be approached. It was agreed that the Inclusive Framework would carry out this work with the goal of producing a final report in 2020, with an update to the G20 in 2019. The Inclusive Framework's Task Force on the Digital Economy will meet next in July 2018."

"In addition, the Interim Report discusses interim measures that some countries have indicated they would implement, believing that there is a strong imperative to act quickly. In particular, the Interim Report considers an interim measure in the form of an excise tax on the supply of certain e-services within their jurisdiction that would apply to the gross consideration paid for the supply of such e-services."

"There is no consensus on the need for, or merits of, interim measures, with a number of countries opposed to such measures on the basis that they will give rise to risks and adverse consequences. The Interim Report describes, however, the framework of design considerations, identified by countries in favor of introducing interim measures, which should be taken into account when considering introducing such measures."

This referenced excise tax was announced on March 21 by the EU in its digital tax plans, as a stop-gap measure proposed to be introduced ahead of a global or EU-level solution to the tax challenges of the digital economy, centered on new digital permanent establishment rules.

The OECD report continues:

"The Interim Report also takes stock of progress made in the implementation of the BEPS package, which is curtailing opportunities for double non-taxation. Country-level implementation of the wide-ranging BEPS package is already having an impact, with evidence emerging that some multinationals have already changed their tax arrangements to better align with their business operations."

"Finally, the Interim Report identifies new areas of work that will be undertaken without delay. Given the availability of big data, international cooperation among tax administrations should be enhanced, in particular, as regards the information on the users of online platforms as part of the gig and sharing economies, to ensure taxes are paid when they are due. The Forum on Tax Administration, working with the Inclusive Framework, will develop practical tools and cooperation in the area of tax administration and will also examine the tax consequences of new technologies (e.g., crypto-currencies and blockchain distributed ledger technology)."

"An update on this work will be provided in 2019, as the Inclusive Framework works towards a consensus-based solution by 2020."

The OECD's earlier Interim Report was short on definitive proposals. However, in the new report to the G20, the OECD fleshed out the possible design features of a future digital tax framework, stating: "Developing, agreeing and implementing a global, consensus-based solution will take time, and, in some countries, there are pressing calls for governments to take more immediate action to address the tax challenges arising from digitalisation. There is no consensus on the need for, or the merit of, interim measures with some countries opposing them. The risks and adverse consequences that these countries believe would arise as a result of such measures include negative impacts on investment, innovation and growth, the possibility of over-taxation, distortive impacts on production, and increasing the economic incidence of tax on consumers and businesses, and increased compliance and administration costs."

"The countries considering interim measures recognize these challenges, but consider there is a fiscal and political imperative to act, pending a global solution which may take time to develop, agree, and implement. They take the view that there is a sound conceptual basis for an interim measure, that value is being generated within their jurisdiction that would otherwise go untaxed challenging the fairness, sustainability, and public acceptability of the system. They think the challenges need to be weighed against the policy challenges of not acting in the interim and consider that at least some of the possible adverse consequences can be mitigated through the design of the measure."

"The [Interim Report] therefore reflects the framework of design considerations, identified by countries in favor of introducing interim measures, which should be taken into account when considering introducing such measures. This framework takes into account some constraints, including that any such measures should be in compliance with existing international obligations, temporary, targeted and balanced, minimize over-taxation, as well as [be] designed to limit the compliance costs and not to inhibit innovation. The Interim Report considers an interim measure in the form of an excise tax on the supply of certain e-services within their jurisdiction that would apply to the gross consideration paid for the supply of such e-services."

TAGS: compliance | Finance | tax | investment | business | value added tax (VAT) | corporation tax | enforcement | multinationals | transfer pricing | tax rates | G20 | tax reform | standards | services | Europe | Economy | Tax | BEPS

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