- Action 1 is aimed at addressing BEPS issues in the digital economy (DE). The DE presents some key features that may exacerbate BEPS concerns mobility (intangibles, users and business functions), reliance on data, network effects, multi-sided business models, monopoly, and volatility. The final report on the DE (Final Report) asserts that DE business models facilitate the artificial shifting of income, avoidance of direct tax nexus and the avoidance of VAT. The Final Report concludes that work under the other BEPS Actions addresses many of the DE BEPS concerns, but also sets out additional measures countries may consider. The report states that the Task Force on the Digital Economy (TFDE) will continue its work by monitoring new DE business models and the effectiveness of BEPS measures with the objective of issuing a report on its work by 2020.
- The Final Report expects that adoption of the permanent establishment (OECD Model Treaty Article 5) modification of Action 7 should effectively address many of the concerns with respect to direct tax nexus.
- Revised transfer pricing guidance (Actions 8-10) makes it clear that legal ownership alone does not justify the right to intangibles profits – limiting the current mobility of DE profits. The TP guidelines will allocate profits to group members performing important functions, contributing important assets and controlling significant risks.
- Subjecting DE profits to CFC taxation pursuant to the recommendation of Action 3 (Strengthening CFC Rules) is also expected to be an important factor in eliminating stateless DE income and the incentives for tax-motivated operating structures.
- Guidelines 2 (destination-based taxation of cross-border supplies) and 4 (multi-location business customers) of the OECD’s International VAT/GST Guidelines should effectively address concerns of tax avoidance by VAT-exempt business customers. B2C VAT avoidance should also be addressed by adopting destination-based taxing rights that require DE suppliers to collect and remit VAT. The Final Report recommends adoption of simplified registration regimes to minimize compliance burdens, while also suggesting that countries may limit the recovery of input VAT under these simplified regimes. The report states that WP9 will develop implementation packages for these recommendations.
- The report concludes that data is often a ‘primary input’ for value creation in the DE. Nevertheless, significant uncertainty remains as to how to deal with data in the DE – should collecting data cause taxable nexus? If so, how should profits from the use of data be attributed to that nexus? And how should data-related income be characterized?
- The Final Report further develops alternative options addressed in its 2014 work – significant economic presence nexus, withholding taxes on digital transactions and an ‘equalization levy’. These measures could only be imposed through domestic legislation and are not recommended as an international standard. However, the report states that countries may wish to impose these measures to address DE BEPS concerns that those countries believe are not adequately addressed by the OECD’s recommendations or as a ‘stop-gap’ measure until the OECD’s recommendations are fully implemented.
- Significant economic presence – Nexus would be established where a non-resident has a significant economic presence evidenced by factors such as revenue from remote transactions, local domain names, localized websites, local currency payment options, number of active users in a country, online contracting and data collection.
- Withholding tax on digital transactions – WHT on digital income from goods or services ordered online. The tax could be a final tax or serve as a back-up measure to enforce net-basis taxation.
- Equalization levy – A tax to equalize the tax burden on remote and domestic suppliers of similar goods and services (similar to insurance excise taxes imposed upon foreign insurers).
- The Final Report states that the character of many forms of DE income, including cloud computing, is not addressed in the existing commentary to the OECD Model Treaty (royalties, technical services, or business profits). WP1 has a mandate to clarify the characterization of such income under current tax treaty rules. WP1’s work is to be completed with full participation of Associate member countries in the BEPS process.
The Final Report confirms that the OECD’s BEPS recommendations should only find a tax nexus where a foreign enterprise has a physical presence. However, this hoped-for outcome is significantly tempered by the TFDE’s tacit approval for countries to go their own way by adopting economic nexus standards or other new DE taxes, such as DE withholding tax or equalization levies. This development is particularly troubling because it presents a pathway for potentially significant double taxation of DE profits. The risk of double taxation could be fuelled by inconsistent views of how value is created within DE business models and the imposition of ‘new’ DE taxes and levies that are non-creditable in the resident or home-country jurisdiction. Evidencing the divergent views of members of the TFDE, the Final Report notes that the challenges of the DE raise important policy questions of how taxing rights of DE income should be allocated amongst resident and source countries. It is doubtful that these policy issues will subside throughout the TFDE’s ongoing work and may well drive future changes in the way DE income is taxed.
Impact of Action 1 for the Netherlands
It is not expected that the recommendations on Action 1 will lead to adjustments in Netherlands tax law. This does not mean that the digital economy does not affect the Netherlands. The Netherlands believes that BEPS issues resulting from the digital economy will be adequately tackled by the other BEPS Actions, especially Action 7 (artificially avoiding PE status) and Actions 8-10 (transfer pricing). More specifically, it seems very unlikely that the Netherlands would seek to introduce any of the suggested nexus-based taxes.