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Digital Take Center Stage...

Kitty Miv, Editor
06 December, 2019

Turning away, once more, from the pre-election chaos ensuing in the United Kingdom (just under ten days before some degree of sanity, or least certainty, can hopefully be resumed!), and digital taxes are the order of the...um...day this week, starting with an examination of the OECD's progress in this area.

As part of its follow-up work on tackling tax base erosion and profit shifting, the OECD has released its proposals for a rethink to international tax rules to enable countries to capture more tax from companies operating in the digital sphere.

The OECD's digital tax work is divided into two pillars. Under the first pillar, the proposals would bring about a huge shake-up to the current rules that allocate how taxing rights are divided out among territories, and bring more digital activities within the charge to tax.

Under the pillar two proposals, the OECD has set out rules that would ensure that multinational companies cannot use structures to pay little or no tax on their worldwide earnings. The proposal would subject their income to at least a minimum level of tax, wherever that may be.

The proposals under pillar one would overhaul international tax rules to allow market economies to capture tax from digital businesses regardless of whether they have physical operations in a territory. In particular the changes will have broad implications for very large "consumer-facing" businesses that engage their users through the internet.

Currently, a non-resident company is taxable in a jurisdiction on its business profits only if it has a permanent establishment there. That means having some form of physical presence. Digitalization has strained the applicability of this rule, the OECD said, as companies can increasingly do business with customers in a jurisdiction without having a physical presence there. The proposals are intended to fix these shortcomings.

The OECD has proposed changes to current "nexus rules", which determine the connection a business has with a given jurisdiction, and the rules that govern how much profit should be allocated to the business conducted there. Specifically, the proposal put forward by the OECD would tie tax liability more to activities in a market economy, while looking also at a group's marketing activities and digital engagement activities elsewhere.

According to the OECD, its proposal – the "Unified Approach" – would retain the current rules based on the arm's length principle in cases where they are widely regarded as working as intended, but would introduce formula-based solutions in situations where tensions have increased – notably because of the digitalization of the economy.

Releasing the proposals, the OECD explained that: "In a digital age, the allocation of taxing rights can no longer be exclusively circumscribed by reference to physical presence. The current rules dating back to the 1920s are no longer sufficient to ensure a fair allocation of taxing rights in an increasingly globalized world."

"It is also true that a number of the proposals that have already been made to address highly digitalized businesses fail to capture significant parts of the digitalized economy (such as digital services and certain high-tech businesses)."

"The Secretariat's proposal is designed to address the tax challenges of the digitalization of the economy and to grant new taxing rights to the countries where users of highly digitalized business models are located. However, the approach also recognizes that the transfer pricing and profit allocation issues at stake are of broader relevance."

Under pillar two of its digital tax work, the OECD has proposed two sets of interlocking rules, designed to give jurisdictions a remedy in cases where income is subject to no or very low taxation. This work under pillar two considers a proposal that income should be subject to at least a minimum tax rate.

This work is intended to mitigate the use of low-tax territories by multinationals to avoid much of their income being subject to tax in higher tax states, typically achieved by locating intangibles in a low-tax territory and saddling entities in high-tax territories with debt to create deductible interest expenses.

The OECD's "Global Anti-Base Erosion" or "GloBE" proposal is designed to give jurisdictions a remedy in cases where income is subject to no or only very low taxation. This would involve the introduction of a new effective tax rate test, which would also enable stakeholders to better determine in a harmonized way how much tax multinationals pay internationally.

The OECD stated recently that: "Like Pillar One, the GloBE proposal under Pillar Two represents a substantial change to the international tax architecture. This Pillar seeks to comprehensively address remaining BEPS challenges by ensuring that the profits of internationally operating businesses are subject to a minimum rate of tax."

"A minimum tax rate on all income reduces the incentive for taxpayers to engage in profit shifting and establishes a floor for tax competition among jurisdictions. In doing so, the GloBE proposal is intended to address the remaining BEPS challenges linked to the digitalization of the economy, but it goes even further and addresses these challenges more broadly," the body explained.

That minimum level of tax has yet to be agreed upon, and the OECD is currently in the initial stages of its work, developing its proposals with input from governments and business organizations and seeking to secure their support.

In late November, the US IRS announced that the Foreign Account Tax Compliance Act (FATCA) International Data Exchange Service (IDES) would be opening for testing in December.

FATCA, which was enacted by the US Congress in 2010 and took effect on July 1, 2014, is intended to ensure that the IRS obtains information on financial accounts held at foreign financial institutions (FFIs) by US persons. Failure by an FFI to disclose information on their US clients will result in a requirement to withhold 30 percent tax on payments of US-sourced income.

US persons are also required to report, depending on the value, their foreign financial accounts and foreign assets.

The FATCA IDES is an electronic delivery point where financial institutions and host country tax authorities can securely transmit and exchange FATCA data with the United States. The data is in a standard XML schema format.

According to the IRS, the portal will be open for taxpayers to use on a voluntary basis from Monday, December 16, 2019, at 8:00 AM EST to Friday, January 24, 2020, at 5:00 PM EST.

Then in Denmark, moving on to value added tax, and the avoidance of avoidance in that area, it was announced that businesses in certain sectors will be required to use electronic sales registers, the Danish Tax Ministry announced on November 28, 2019.

Approximately 12,500 businesses will be required to use digital sales registration systems, the ministry said. These include cafes, taverns, discos, pizzerias, barbecue bars, ice cream parlors, grocers including 24-hour kiosks, and restaurants.

It is expected that the registration systems with the required standards will be available from mid-2021. Those taxpayers required to acquire these new systems must do so by January 1, 2024.

The Danish authorities explained that the data obtained from the new sales registers will be more consistent and of a higher quality than is available at present, allowing the tax authorities to more easily detect errors and fraud.

Until next week!

About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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