What will international tax become?
September 04, 2015
A couple of months ago I wrote about how the international tax system currently taxes digital, global business. I’ve talked a lot of about the issues – but what about the solutions? The OECD is putting its considerable resources behind the same conundrum with its Base Erosion and Profit Shifting (BEPS) project, so I’m not going to attempt to compete on the detail. But we can all speculate on the direction of travel, so here I go.
As I’ve said before, I don’t believe that ‘digital business’ is in any way separate from business in general, so I don’t believe that there’s any need to create a separate, specific tax regime. What we need to do instead is look at the underlying issues and tackle those, rather than try to write rules for each symptom of the problem.
In an ideal world of the future, we won’t have to worry about the role played by digital communications technology in business, but we will have a new agreement between states as to how profits should be shared between them. My feeling is that we won’t move away from a rules-based system that’s based on treaties between jurisdictions, but we might end up with an additional overlay of regional rules within trading blocs, such as the EU.
The emphasis will also shift from where you trade, to with whom you trade - we can already see this in some of the areas covered by BEPS. Transfer pricing, for example, is shifting away from an approach where the low-risk entities in a group are priced and the assumption is that the ‘entrepreneur’ is entitled to the residual profit, to a more holistic analysis. This raises the possibility that some of the profit made by a multinational comes from the co-operation between related parties.
One of the biggest debates will be around the taxation of intangibles, and to what extent intangibles (such as customer data) are generating profits. Given the new ways in which companies are generating income from intangibles, I’d expect many governments to look for imaginative new ways to tax profits generated by intangibles in the future.
The nirvana would be if we could move smoothly to a new regime that’s accepted by most (accepted by all is probably too much to ask). That’s not likely, though; a number of states, notably the UK with its diverted profits tax, have already taken unilateral measures ahead of BEPS and if that continues we may be in for a rocky ride in the short term. I hope, though, that once BEPS has run its course, the temptation for states to go it alone will be removed.
