International tax talks and country actions rendering digital tax discussion moot

OECD countries and stakeholders gathered in Paris on March 13-14, 2019 for a “public consultation on the tax challenges of digitalization.”  The countries at that meeting reaffirmed their commitment to finding a long-term solution to the digital tax question by 2020. In this context, it is worthwhile making two points. First, the OECD itself uses the term “tax challenges of digitalization” because it wants to get away from the idea that the international tax conversation is just about digital services or “highly digitalized business models.”

It is a much broader question affecting companies in all sectors. Second, the OECD came out with a recommendation in 2015, which posited that the right way to tax digital services was to extend the VAT to cover them. A number of countries are implementing this approach.

The question of digital taxation is complicated fundamentally because we are really reconceiving how the international tax system should work for all companies. After all, why should there even be a conversation about digital taxation?  Presumably the goal is not to discourage digitalization per se such as excise taxes on tobacco and alcohol are designed to do. If not, then what would justify a sector-specific tax?

The UK and the EU consider that the digital economy has created a new source of value – “active user participation” – that entitles the countries where users reside to a share of any above-normal profits of digital companies. But it is not clear that user engagement with digital platforms is qualitatively different from their use of other media in a tax relevant way.

There is also no way to distinguish between users that provide value and users that do not, which makes the concept of user participation fundamentally flawed as a tax concept. As the OECD said in 2015, since the entire economy is digitalizing, it would be difficult, if not impossible, to ring-fence the digital economy for tax purposes. In this context, it is worthwhile recalling that in 2014, the EU’s panel of experts argued against creating a special tax regime for digital companies. See below.

“First: there should not be a special tax regime for digital companies. Rather the general rules should be applied or adapted so that “digital” companies are treated in the same way as others.”

Countries are reportedly reverting to the idea that international tax reform should, as originally envisaged when the OECD tax reform process started, involve all sectors of the economy. As countries prepare for the G20 June 28-29, 2019 Fukuoka, Japan summit where digital taxation will be discussed, it is again important for countries to strive for consensus, which is not impossible to achieve. This is possible, at least in part because U.S. thinking about taxation of intangibles – especially minimum taxation – has shifted in a way which arguably makes it possible to strike a deal.

Copyright © 2019 IDG Communications, Inc.

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