Taxation & the digital economy – current developments & tax administration

1. Taxation & the digital economy – current developments & tax administration

2. AGENDA • Indirect Taxation • The boundary between digital & physical business • Level playing fields • Foreign suppliers • Direct Taxation • Unfinished business after BEPS? • Options for fundamental reform • Anti-avoidance measures • Implications for Tax Administration Presentation Title

3. Indirect Tax & the digital economy

4. Indirect tax & the digital economy • Two main aspects: online retail of physical goods and the provisions of entirely digital goods and services (applications, gaming, streaming services etc.) • Online retail poses challenges in terms of: • Collection of VAT/GST where the retailer is not located in your country but existing processes generally can cope where transaction results in sale of physical goods; • Main issue is policy design of customs and excises as they apply to low value goods; • The advent of cross-border online retailers is causing countries to revisit policy on these thresholds (i.e. remove them- e.g. Australia and EU) • Supply of digital goods and services by foreign suppliers poses a different challenge to indirect tax policy and collection.

5. Cross-border sales of digital products • The application of VAT and sales tax to these types of transaction was identified as an area of concern during the BEPS project • The growth in the value of international trade in services and intangibles that has resulted from the expansion of the digital economy has heightened that concern • Neutrality is a key principle and means that foreign suppliers should not be advantaged or disadvantaged compared to domestic suppliers – and principle applies equally to online retailing and supply of digital products and services (ensuring a level playing field between onshore and offshore suppliers & between digital and traditional businesses) • The “destination principle” enshrined in the International VAT/GST guidelines reflects the design of VAT as a tax on final consumption

6. Presentation Title Collecting indirect tax from foreign suppliers • Important to avoid excessive compliance costs • The taxation of cross-border business to consumer digital transactions is a particular challenge – no border controls and asking consumers to pay a reverse charge is not realistic • To address that challenge a simplified registration and compliance regime for foreign suppliers is recommended – the foreign supplier accounts for the tax to the country in which the customer has their usual residence • Practical guidance on implementation that complements the guidelines is available – an online process is envisaged • To address online retail, countries are exploring options to require retailer/platform to account for indirect tax and revisiting policy on low value imports

7. Country responses – an overview • OECD reports that over 50 jurisdictions, including the overwhelming majority of OECD and G20 countries, have adopted or are contemplating rules for the VAT treatment of B2C supplies of services and intangibles by foreign suppliers in accordance with the OECD International VAT/GST Guidelines.  • The simplified registration and reporting process envisaged in the Guidelines has been implemented in practice – EU and Australia leading examples. • EU is extending its regime to encompass online retailers of physical goods and will make digital platforms account for the tax and OECD has published guidance on the role platforms can play in the collection of VAT/GST • (OECD analysis shows that two-thirds of all cross-border e-commerce sales of goods are made via online marketplaces) • Other countries adopting the approach recommended in the guidelines include: Albania, Andorra, Argentina, Australia, Bahamas, Belarus, China, Colombia, Ghana, Iceland, India, Indonesia, Japan, Kenya, Korea, Mexico, Malaysia, New Zealand, Norway, Russia, Saudi Arabia, Serbia, Singapore, South Africa, Switzerland, Tanzania, Thailand and Turkey.

8. Presentation Title Direct tax & the digital economy

9. Digital economy post beps – unfinished business • Artificial avoidance of PE status addressed • Recognition of profits for tax purposes more closely aligned with the location of the underlying economic activity giving rise to those profits • Broadly, profits will be allocated to the group companies actually performing key functions, economically managing and controlling risk (as distinct from having just legal responsibility) and contributing assets but this is technically challenging and risks remain • It not possible to make a clear distinction between the digital and non-digital economy.

10. The case for going further • In addition to ongoing risk of base erosion, the issue of scale without mass remains: digital behemoths can have a significant presence in an economy, without there being any physical presence - possibly not even a server. • Some countries feel that the conclusions of Action 1 failed to take account of ways in which value is created in the digital economy: “user-created value”: • User participation is an important value driver for certain types of digital businesses, and one that deserves recognition in the rules for allocating taxing rights and taxable profits between countries • (UK Position Paper)

11. Timeline • November 2015 Original BEPS package delivered • June 2016 Inclusive Framework on BEPS (IF) and it mandates the Task Force on the Digital Economy (TFDE) to continue working on open issues with a view to reaching consensus on long-term solutions by 2020 • December 2017 US Tax Reform • March 2018 TFDE delivers interim report requested (meanwhile several countries have introduced, or indicated that they will introduce “interim measures”) • January 2019 IF published a policy note outlining options for reform made up of 2 pillars • February 2019 IF Published more detailed document for public consultation • March 2019 WBG comments on IF proposals, IMF publishes a policy paper on Corporate Taxation in the Global Economy, IF holds public consultation meeting • June 2019 G20 Summit in Osaka • January 2020 Outline of new architecture to be agreed • November 2020 G20 Summit Riyadh

12. Policy background • Opportunities for aggressive tax planning remain, despite the BEPS package MNEs can still endow lowly-taxed entities with sufficient “substance” to justify very high profits • A globally consistent approach is needed to reduce the risk of tax competition (the “race to the bottom”), and the uncertainty for business that can result from disjointed approaches. • The growth of digital businesses is placing additional pressure on the existing international tax consensus. • Take up of existing BEPS measures is patchy. Tax administrations with limited resources find that the BEPS measures have added a layer of complexity to rules that are already challenging technically. They need rules that are straightforward to apply, including more mechanical and formulaic approaches. • Achieving consensus on some of the options currently on the table may be hard. But that does not mean there is no way forward.

13. Presentation Title Options under consideration – radical reform • Inclusive Framework Pillar One • User Value proposal concentrates on a specific subset of consumers, being the users of specific highly digital businesses. A portion of residual profits would be treated as created by users and allocated to the jurisdictions in which the users are located according to an allocation key, possibly based on revenues, even if the business has no physical presence there. • Marketing intangibles proposal has a broader impact as it embraces the whole market of consumers- applies to all businesses but also allocates a share of residual profit, this time net of trade intangibles income –again no physical presence needed • Significant Economic Presence is a third option (similar in concept to a “virtual PE) - could be simpler but a lot depends on how profits are allocated to the “presence” • Under all three, necessary to agree profits subject to new taxing right, allocation method, basis of “nexus” and implementation (dispute resolution and avoiding double taxation). • Other Options • Residual profit allocation via Formulary Apportionment - Coupled with more extensive use of safe harbors and other prescriptive methods for determining the returns on routine activities could be a major simplification. Safe harbors could also simplify aspects of the earlier proposals too. • Destination Based Cash Flow Tax (DBCFT)

14. Presentation Title Options under consideration –anti-avoidance • Income inclusion rule: This would operate in a similar way to existing controlled foreign company rules. The jurisdiction in which the ultimate parent of an MNE is resident would subject to tax the profits of foreign subsidiaries and permanent establishments that are subject to a low effective rate of tax in their jurisdiction of residence, or establishment. • Tax on base eroding payments: Targets payments to related parties that give rise to a high risk of base erosion (such as interest, or royalties) and that are not subject to a minimum effective rate of taxation. • Diverted profits rule: This measure targets the profits of entities subject to low effective rates of taxation that lack substance. It is designed to be largely mechanical in its operation.

15. SUMMARY OF OPTIONS Presentation Title

16. Implications for tax administration

17. Indirect tax administration • Requiring foreign suppliers of goods and services to account for tax will require a new online portal through which they can register and report and pay VAT • Foreign online retailers collecting and paying over VAT will need easy to access guidance on their obligations • It will still be necessary to establish a compliance regime to ensure compliance, including by those foreign suppliers that are not inclined to register to pay VAT on sales to your consumers • The detection of non-compliance will require extensive use of third-party information • Foreign suppliers may not have a physical presence here but their interactions with customers who are located here will leave a financial and electronic trail • Digital marketplaces and platforms are themselves useful sources of information about providers of goods and services, both domestic and foreign based

18. direct tax administration • Assess the current exposure to the risk of artificial avoidance of PE status (and feed into discussion of any changes needed to domestic law definition and treaty policy, including the MLI) • Implications of other BEPS measures, including Action 8-10 (revised TP rules) for TP activity • Direction of travel suggests that holistic and global view of MNEs and their value chains will be increasingly important and that requires access to data • Anti-avoidance: further measures are in the pipeline Presentation Title

19. Presentation Title Thankyou for your attention