BEPS – Adapting to a changing digital economy

The BEPS Digital Economy Report provides a good summary of how the international tax system developed and why the digital economy causes tensions. It deals with the concern that the international tax rules cannot cope with the new types of businesses which are being created in response to the internet and, in particular, the mobile internet. The final version of the paper endorsed the view that we don’t need new digital taxes, but we do need an international tax system fit for the digital age. To notice changes since the draft, you need to look at the other actions such as the permanent establishment, transfer pricing and controlled foreign company (CFC) papers, where the analyses of the digital group have been picked up.  The bottom line is that it’s now going to be easier to create a taxable presence, with associated profits, in other territories.

In relation to VAT, the conclusion is that VAT in the destination territory should apply. However, this leaves a collection and enforcement issue unresolved and this is currently work in progress.

The big surprise in the final report is that, while it does not propose specific digital taxes, it does appear to condone unilateral measures by countries. These are in the areas of a digital nexus (taxable presence), a digital withholding tax or an equalisation levy. Although this is caveated with the need to comply with existing treaty obligations, I’m really concerned that unilateral measures will bring complexity and double taxation. So what are the issues to which will affect business? Firstly, the changes coming from the other actions will affect all businesses and the consequences of these will become clearer over time. There are also two digital economy areas to watch out for: 1) unilateral measures which can potentially affect any business that interacts remotely with customers; and 2) new rules to enforce collection of VAT on digital sales. Looking to the future, there will be follow up work on the digital economy and a further report in 2020 which will conclude on whether more changes are needed.

John Steveni | Communications Tax Leader
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