What do the OECD proposals around the taxation of digitalisation mean for businesses and the tax system as a whole? Amal Larhlid, PwC’s Global Fiscal Policy Advisory Leader discusses with Dave Murray and Phil Greenfield, Global Tax Policy Advisers.
Hello and welcome to this PwC Talking Tax podcast. I am Amal Larhlid, PwC’s global fiscal policy advisory leader and I will be hosting this podcast today, and we are going to be talking about the taxation of digitalisation.
We have seen a lot of news in the last year or so about countries implementing unilateral digital services taxes or DSTs, on the revenues of the world’s largest digital platforms, and threats of tariffs from the US in response. Then last week, the secretariat of the Organisation for Economic Co-operation and Development, OECD, released the proposal to fundamentally rearrange the international corporate tax framework to deal with the challenges posed to it from the digitalisation of the economy.
This has been described as the biggest change to the international tax framework since it was formalised in the 1920s.
I am delighted to be joined by Dave Murray and Phil Greenfield, who both work on our global tax policy team, to discuss what this is all about and what it means in practice for businesses.
I will start with you, Dave, to help us set the scene. What’s the problem that needs to be fixed?
Hi Amal, and actually there is a range of challenges that need to be fixed, certainly a range of challenges that have arisen as a result of digitalisation and the digitalisation of the economy. Sitting in the UK, we certainly see a lot of media focus on the amount of corporate tax that very large digital platforms pay in the UK, but the story, I think, is much bigger than that.
Our current corporate tax rules are built around attributing profits to the locations where businesses undertake physical activities, where the people are, where the assets are, and obviously in the modern world, those different parts of the value chain might not be located in the same place where the customers are.
Phil, if you are seeing same from other countries?
Yeah, for some countries it is much about remote selling, foreign businesses being able to generate significant sales from their citizens and competing with local businesses, without having a significant physical presence there. That’s something that just simply couldn’t be done 20 years ago.
Another thing that’s changed in the last 20 years is the increasing contribution of the value of intellectual property on the balance sheets of large businesses, and increasingly, I think, we are probably seeing that one of the concerns that some countries have, is the increasing centralisation of returns for what are quite movable, intangible assets, and that’s causing some policy concerns for other countries.
Okay, so not just concerns with large online platforms.
So, Phil, how does the UK recent announcements on DST intersect with these issues?
The UK’s Digital Service Tax, DST, acknowledged the value that certain digital business models derive from their participation and engagement with an active UK user base. It is stated to be an interim measure, pending an appropriate global agreement in the OECD-led project. But the draft DST law just commits the UK Treasury to review it before the end of 2025. So ultimately, maybe, a question with these things, of whether the global consensus is considered suitable by the UK and other countries.
I think that’s right. There are other countries, there is one other country very close to the UK that’s already implemented a DST. There are many others around Europe, in particular, that are thinking about it. They are all slightly different. They are all trying to target what they perceive as the user contribution to the value chain, but they are scoped slightly differently.
Whether what the OECD can agree to try and bring everyone together, will satisfy all countries, I think remains to be seen. But certainly implementation of these unilateral measures is putting a lot of pressure on the OECD to get agreement on something.
Okay, thank you both.
It doesn’t sound like the UK action addresses all of the concerns you listed. What did the OECD release last week?
Currently, we look at transactions and allocate profits between physical entities in line with what pricing they would be if they operated independently or at arm’s length. The OECD’s proposal for countries to consider, looks at using a different system for large, more consumer facing businesses, where digital interaction is significant, either through the data acquired or otherwise.
An allocation would first be made of a portion of global accounting profits of high margin groups, or possibly a high margin line of business within a group, to where consumers or users are located, so that’s regardless of any physical presence. There is a lot of parameters in there for the countries to actually decide on in terms of what’s large, etc, high margins, but the good news with tax payers is that there is a potential there for more certainty through better dispute resolution mechanisms and beyond any initial apportionment, a simplified profit allocation for some of the more routine activities.
Thank you Phil. I think the obvious question that I have in my mind now is that, what businesses do we expect to be impacted by these proposals, and what do they mean by consumer facing businesses? Dave, maybe, you could help respond to that.
Yeah, I think, that’s a really good question Amal, certainly something that the business community who are following this are really discussing. What does consumer facing business mean? There is not a huge amount of detail in the proposal itself. It is kept at a very high level. It does say, should apply to businesses that can project themselves into the daily lives of consumers and interact with their consumer base without a traditional physical presence in the market.
But I think there are some clues in the paper that suggest this is not just focusing on what we might traditionally consider to be consumer businesses, it’s a little bit broader than that, and I think a much broader range of businesses or business activities could be included. The first reference is a very clear reference, suggesting that users of online platforms, who view online adverts might be seen as consumers themselves, for the purposes of looking at the whole value chain.
Phil, did you pick anything up?
I think there is another suggestion there Dave that we may need to look through third party distributors.
Yeah, and I think there is another point around that. How do you deal with embedded products then, when you’ve got a complicated supply chain, which is ultimately ending up at a consumer, but lots of business to business transactions along the way, where do you draw the line? I think that’s going to be the biggest question they are going to have to try and draw during the coming months.
Interesting, so what does that really mean for businesses?
Well, if you ask me, a higher compliance burden. Certainly, there is going to be more filings that you might have to make. There is some scope for discussion about how that works. There is going to be less controversy in some areas certainly, but I think there is scope for new controversy in others, so bit of a trade-off there. Ultimately there is going to be less control over where tax is paid. That may, for some groups, at least lead to higher effective tax rates overall.
Thank you Phil.
With my next question, I would probably put you on the spot Dave, what’s the likelihood of the 130+ countries around the OECD’s table agreeing on this proposal?
Well, if you are going to put me on a trouble spot, I am going to make some caveats. The first thing to note is that this is an OECD secretariat proposal. They are trying to creatively weave together the wishes of all the different countries involved. There were some specific proposals on the table already from different countries that were quite different. They are trying to weave all those together into something that everyone can agree to, and what we’ve come up with at this stage is not endorsed by any individual country or by all the countries around the table. It is really something for those countries to consider whether they can agree to.
Additionally, there are more proposals to come out later on in the year that will complement these proposals around effective minimum tax rates, making sure that all businesses pay minimum levels of tax on all the profits they make, wherever they make it in the world, and the two will really need to be agreed side by side as part of one bigger package.
All that said, there is a lot of uncertainty around what will and what can be agreed, but there is a clear political momentum behind this. The G20 have committed to agreeing something in January 2020. Several individual large countries have also publicly come out and said that they want to agree something in January 2020. This is the only proposal on the table at the moment that really seeks to unify the other options out there.
I think the consultation might result in a few changes around the edges, but the core bases, and all of the uncertainty with it, will probably be the basis for an agreement at political level in January.
Thank you, Dave. What happens after that and how long will we have to wait until we see this fully implemented? Maybe, Phil?
Just looking at the timeline, I am referring to what Dave said about the other part of the solution coming later this year. We probably will get that early November and then another public meeting consultation in December. Then, as Dave was saying, that political agreement in 2020, that countries are happy to go further with the proposals. So, those that would then be nuanced during the rest of the year, but culminating, they will certainly be aiming for an agreement by the end of the year.
But that still leaves treaties which will need to be changed to accommodate the new taxing rights and allocation rules, that can take time obviously, and we are not quite sure how long, could be through some sort of new convention, or multilateral instrument. But ultimately there may be an impact sooner because of the positions that are being taken by tax administrations, they know at that point what is going to come, so they are going to start potentially following those procedures.
Thank you. So, what should businesses be doing to prepare for these changes, any final thoughts?
Well I do think businesses should be modelling the impact. We certainly have been doing that kind of work with a number of our clients. Even if you agree that deep and detailed agreement is likely to be reached, the compliance burden is going to increase, and I think groups really need to gear up to that.
I would agree with everything Phil said, and I would add that another thing that businesses should be doing, and other stakeholders as well, is engaging in this debate. Obviously, we have a consultation right now, there will be more consultation next year. As Phil said, this is going to take some time to bring in, and what we don’t want is to be sitting here in a few years’ time, having agreed this has gone through all of this trouble, changed the law in all the countries around the world, and have not solved the problem that policy makers want to solve. So it is really important that everybody with any value they can add to this debate, to feed in to the process at any stage over the next year.
Thank you very much Dave and Phil, this was really fascinating. I think we are running out of time, but certainly a lot of food for thought.
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