Tag Archives: OECD

7 Digital skills are not optional in today’s tech savvy world (UNCTAD)

unctadNegative stereotypes about women and girls studying science, technology, engineering and mathematics (STEM) subjects are among the impediments to an inclusive world where hi-tech solutions solve global problems, the 21st session of the UN Commission on Science and Technology for Development(CSTD), hosted by UNCTAD, heard at a meeting in Geneva on 15 May.

An all-woman panel discussed the theme of building digital competencies to benefit from existing and emerging technologies, with a special focus on gender and youth dimensions.

Recalling that women had played pivotal roles in the history of computing, Shirley Malcom, head of the directorate of education and human resources at the American Association for the Advancement of Science, said it was “refreshing” to see the CSTD focus on issues of gender and youth in its deliberations.

Meanwhile, Helena Dalli, Malta’s European affairs and equality minister, said female role models were an important factor in promoting more women to take up STEM subjects and pursue careers in science and technology.

Profound changes for all

Speaking in a video message, the meeting also heard from Geraldine Byrne Nason, chair of the United Nations Commission on the Status of Women, on the importance of coordination between intergovernmental bodies.

To help guide the conversation, UNCTAD prepared a background report, steered by Shamika N. Sirimanne, director of UNCTAD’s, division on technology and logistics, and head of the CSTD Secretariat.

Setting out the issues

The remarkable technological progress the world has seen recently is transforming the fabric of our lives. The profound changes – driven by the spread of new information and communications technologies (ICTs) – will affect everyone’s life and every country’s economy.

For example, sensor devices deployed all over the world are improving agricultural productivity and making it possible to map and control epidemic outbreaks. And digital platforms are creating new job opportunities.

But Big Data can unfortunately also be used to influence democratic processes – as the world witnessed in recent elections in the United States and Europe – and automation means that certain jobs will no longer be available for humans.

“Opaque algorithms can ‘bake-in’ bias and exclusion,” Ms. Malcom said.

Whether the effects of technological change will be more positive than negative depends on the getting the right skills into the right people’s hands.

Miriam Nicado García, rector of Cuba’s University of Informatics Sciences (UCI), explained how her university was a new venture, begun in 2002, that aimed to tackle this problem for her country. Software produced in Cuba for health, education, legal and tourism applications was being made available free to other countries, she said.

A skills mismatch

Estimates show that already by 2020 90% of new jobs will require ICT skills. Yet more than one-third of workers in developed countries that are members of the Organisation for Economic Co-operation and Development (OECD) currently lack the digital know-how needed. And over half the population in these economies have no digital skills at all – with female employees usually being less tech savvy than their male counterparts.

“The more we let the gender divide grow, the more economic disparities will grow,” Ms. Dalli said when explaining the proactive measures Malta had taken, as a small island nation with few resources, to promote women in STEM fields.

In fact, technology in the workplace can affect women and men differently. ICT service jobs are normally well paid, but the share of women in such positions remains very low, especially in developing countries.

A recent survey among 13 major developed and emerging economies showed that female workers tend to hold low-growth or declining occupations, such as sales and administrative jobs.

Although women are less represented in sectors threatened by automation, such as manufacturing and construction, the report prepared by UNCTAD ahead of the event says that since there are few women in STEM job families, they may not be well placed in the economy to benefit from the increasing demand for workers with tech skills.

Such a mismatch between what businesses need and what job-seekers offer will slow economic growth significantly. What’s worse, portions of the population could become unemployable. And with unemployment levels already high in many parts of the world, such a situation would be devastating, not just for the individuals but also for their families and communities.

Getting the right skills in the hands of the workforce will be even more important in developing countries, where billions of young people will enter the job market in the coming decades.

In Africa alone, about 11 million young people will enter the labour market every year for the next decade. If governments don’t help equip new job seekers with the right skills, they may have to deal with rising youth unemployment.

However, according to Sophia Bekele, founder & CEO of DotConnectAfrica Group, whose works helps African women run tech start-ups, developing countries may have a competitive advantage over older, more developed markets.

“The global South has best opportunity to leapfrog in the digital economy instead of reinventing the wheel,” she said.

Four levels of digital competency

According to the UNCTAD report, four different levels of digital skills are needed during the journey from adopting new devices to creating new technologies.

“The most fundamental skill sets for individuals and companies in the digital era are capabilities to adopt new technologies,” the report says, adding that “digital literacy for all is a basic requirement for every citizen to participate fully in the digital society.”

So every country, no matter the stage of economic development, needs to have in place basic digital education and training programmes for all its citizens.

For people, being “digital literate” means being able to use the basic functions of common devices, such as a computer. For a business, it means “knowledge about ICT installations in the existing business system,” the report says.

But more and more professions, even beyond the ICT sector, require the ability to adapt and creatively use available technologies. And it is when a countries workforce can modify existing technology or design new systems and devices technologies that real value is added to the economy.

“To maximize the benefits of new technology, countries and companies in developing countries need to have the digital skills to introduce modifications to new technologies,” the report says. This is because advanced technologies are often designed for contexts – both technical and social – that differ from the realities of many developing economies, and therefore must be adapted to the local context, the report adds.

Adding a gender dimension to the issue of context, Ms. Malcom said that very often, time itself was a scarce commodity for women that policies designed to help them must reflect.

A moving target

Technology’s impact, however, extends well beyond the labour market, and being tech savvy has increasingly become important for enjoying a good quality of life in what has become and increasing digital world.

“With increasing numbers of software and applications being used to accomplish everyday communicational and informational tasks, basic knowledge of ICTs is now essential for citizens to solve everyday problems, as well as to engage in community activities,” the report says.

Digital skills are a multifaceted moving target. According to the report, six major drivers influence what technical competencies people need:

“Increasing globalization, extreme longevity, workplace automation, fast diffusion of sensors and data processing power, ICT-enabled communication tools and media, and the unprecedented reorganization of work driven by new technologies and social media, which are massively increasing collaboration opportunities.”

But the other, more specific digital competencies required will likely depend on the country’s economic specialization and industrial development.

For example, the report says, “Countries where the manufacturing sector dominates economic growth will require talents, experts and a workforce with specialized skills in industrial robotics, automation and the Internet of Things.”

While the skills that workers need to use technology increases, so does the list of the complementary soft skills necessary to perform in the digital economy.

Human skills in a robot’s world

But digital skills are not enough to adapt to changing labour markets demands. Paradoxically, as work becomes more automated, the unique human skills that cannot be easily replaced by machines become ever more important.

So building and strengthening skills such as complex problem solving, critical thinking, and creativity, will be essential to create the flexibility required for the current and future demands for the workplace, the report says.

The need for human creativity and innovation helps explain why professions like engineering and science are less at threatened by digitalization and computerization, the report says. Likewise, occupations that involve sophisticated communication skills will also be in a better position in the digital era.

“For example, natural language processing algorithms can detect emotions underlying text, but are often inaccurate in comprehending sarcasm, humour or irony,” the report says.

Finally, even if computers and robots could perform every task, economies would still rely on people to come up with the new businesses ideas. That’s why the report calls on governments to equip people with the digital entrepreneurship skills.

source: http://unctad.org 

EU’s Taxation of the Digital Economy—Fair or Protectionist?

taxationThe EU Commission has published two proposals on the taxation of the digital economy and digital business models. Will the reform of corporate tax rules and the second measure of an interim tax lead to a fairer taxation of digital activities in the EU? Since the economic crisis of 2008-09, we live in a different world. Countries started to prioritize “taxation” in their financial agenda for sound public funding sources. Both developed and developing countries have increased the direct tax base on business profit. In this environment, important initiatives were developed by the G-20, and G-20 countries started amending their local laws and regulations. A recent example relates to the taxation of the digital economy. The OECD and EU agree that the current international taxation rules are insufficient because digitalization enables businesses operating with no physical presence.

Even though the OECD and EU agree that the current international taxation rules are outdated, their way of addressing it is different. The OECD does not conclude any recommendation because there is no consensus among the members. On the other hand, the European Commission approach digital companies differently by taking a short-term (interim) and long-term stance. While the EC’s short-term stance is 3 percent digital service tax focused on taxing advertising, digital platforms and sale of data, the EC’s long-term stance is based on “significant digital presence” focused on a broad range of digital services, i.e. the provision of films, music, software, or cloud computing.

However, “taxing digital businesses” needs a global policy consensus to be successful and eliminate double taxation. Otherwise, pre-BEPS “double non-taxation phenomenon” would result in double taxation.

Why is the Work of Tax Administrations Challenging in a Digital Economy?

Business models have changed in the digital economy. The following companies are an example of new business models being used:

* Airbnb does not possess any real estates;

* Alibaba does not carry inventory;

* Booking.com does not possess any hotels; and

* Twitter and Facebook do not produce content.

Airbnb and Booking.com provide intermediary services and Twitter and Facebook offer advertising services and acquire their revenues from these activities.

They operate without a physical entity (i.e. building, factory) based on the business models. Taxation rules based on a nexus of a business applied prior to the digital economy makes taxation difficult in the new economy.

According to public opinion, these companies do not pay a fair tax, which is proportional to their earnings, in order to provide for the state expenses. Because of this, governments have to take action in order to provide justice in their tax systems.

About 75 percent of EU citizens expect the EU to struggle against tax evasion. In a public opinion poll, 75 percent of the participants believe that the current international taxation rules allow companies operating under digital business models to benefit from specific taxation regimes and pay lower taxes.

What Types of Works are being Carried out Concerning the Taxation of the Digital Economy?

An international standard and cooperation of the countries are required in order to tax companies. The most important organization with respect to this is the OECD and the OECD’s initiatives are supported by G-20.

OECD Functions

Digital economy models complicate the place and ratio of payment of the corporate tax accrued over income. This is because it is very challenging to determine the extent of an income acquired from a certain country, which should be referred to such country, without a nexus.

Consequently, Action 1 of the OECD’s Base Erosion and Profit Shift (“BEPS”) Action Plan published a temporary report addressing the tax challenges of the digital economy (“temporary report”). However, the OECD does not propose a taxation method in this interim report. It determines what the alternatives may be and makes evaluations.

Finally, in the meeting held in Buenos Aires on March 19-20, it was declared that the Ministers of Finance of G-20 will publish an updated Temporary Report on Tax Challenges Arising from Digitalization and will work towards a consensus-based solution by 2020. The implementations of the countries in the short-term are determined in the report. However, the actual purpose of the OECD is declared as formation of the grounds for progress toward a long-term multilateral solution in the next stage.

Accordingly, many countries express that digital companies acquire high income in their own markets in the digital economy and that they are required to pay corporate taxes over these incomes. Consequently they are taking actions in order to collect tax. For example, Turkey collects 18 percent VAT over the digital services offered to the individuals by the companies residing abroad, which was brought into force as of January 2018.

The reason for the countries to make legal arrangements is that they want to collect tax over such earnings without any delay, although they do not have any taxable assets in their countries according to the current international taxation frame.

However, the common opinion in the U.S. is that the taxation right on the income is taxable in the U.S. since all the value added and the intellectual property rights are created in the U.S. This is based on an old adjudication in the U.S. related to the economy (SALT Alert, 2018-01: U.S. Supreme Court Grants Certiorari in South Dakota Case Seeking to Overturn Quill-http://src.bna.com/x6V).

In the Quill Corp. v. North Dakota case in the U.S. which is related to the distant sales, there is the Supreme Court’s decision dated 1992, stating that North Dakota does not have any authority to collect sales tax in the products delivered to North Dakota where the company does not have a physical presence.

However, the subject of “economic presence (nexus)” is again on the agenda and has been since 2016 but nowadays, the subject of “physical presence (workplace)” is being discussed and should be re-evaluated. The states enacted laws to implement the principle of economic nexus in order to apply the sales taxes against the Quill decision. In 2016, South Dakota included its own economic nexus principle in the law. With the law, the sellers, without any physical presence shall be taxpayers in South Dakota for the sales tax based on an economic nexus principle. The threshold for the tax payment obligation is determined as at least “performing 200 separate sales or sales with a total of US$100,000.”

With respect to the case litigated concerning this issue, the Courts of First Instance of South Dakota decided that the Court is bound by the Quill decision and decreed in favor of the claimants. While reaching this decision, the thesis of the state that the principle of the physical presence of Quill “was out of fashion under the light of the developments in the software and technologies,” which was the reasoning of the state Supreme Court, was rejected.

It was decreed that it was based on the reasoning of the Quill case. However, on September 14, 2017, the Supreme Court of South Dakota upheld the decision allowing South Dakota’s opposition to the Supreme Court of USA. The opposition is expected to be submitted in Spring 2018. The decision is expected to have a significant influence on taxation and the economy.

EU Functions

About one week after the publication of the Temporary Report, the EU made a press release on March 21. According to the EU bulletin, the current “international corporate tax rules do not comply with the realities of the global economy” and do not comprehend the business models which may acquire profit from digital services in a country where one is not physically present. The current taxation rules were not successful in defining the new methods of the digital economy for creation of the profit, and specifically, the role played by the users in creation of value for the digital companies. In the current system, there is disconnection or noncompliance between the place where the value is created and the tax is paid.

The EU’s digital taxation package key areas are as follows:

* For taxation of the digital economy, it enables member states to collect taxes from the earnings acquired in their own regions, even if a company does not have a physical presence. The new rules shall provide online entities to contribute to the public finance at the same level with the companies which are connected to traditional physical workplaces.

* This proposal includes a recommendation to the member states for modifying the Avoidance of Double Taxation Treaties with the third countries. Accordingly, same rules shall be applicable both for the EU member and EU non-member companies. The Commission also recommended to provide assistance to the member states in the determination discussions with respect to the application at the international level for the digital corporate tax updates.

* It recommends a temporary digital services tax until the new rules are created for the taxation of digital services.

In compliance with the new rules recommended by the EU, the member countries shall be able to collect taxes from the earnings produced in their own regions, even if such companies do not have any “physical presence/connection” there. These rules constitute a proposal which is expected to be permanent.

Details are as follows: If a company possesses any of the following criteria, then it shall be accepted to possess a “significant economic digital presence” in a Member State:

* Exceeding the threshold of an income of 7 million euros from the digital services in an accounting year, in a member state (for example, acquiring income from advertisement placement based on the user data);

* Having more than 100,000 user access to the digital services in a member state in an accounting year (for example, sharing economy and acquiring income from the services that provide access to the users on online markets); and

* Conclusion of more than 3000 business contracts between the company and the work users for the digital services in an accounting year (for example, acquiring income from providing broadcast stream to the subscribers).

With this reform recommendation of EU, a solution is provided for two of the main challenges encountered by the Member States when taxation of the digital activities is discussed:

* Firstly, “physical presence/connection” in a member state shall not be required any more in order to apply tax to the earnings of a company. A significant digital presence shall permit the member states to apply tax to the earnings acquired within the borders of its land.

* Secondly, the factors such as user data shall be taken into consideration in distribution of the earnings since these become more important gradually in formation of the company data and play a significant role.

The other proposal of the EU which is identified to be temporary is the new digital services tax (“DST”); and it shall take effect as of January 1, 2020 and shall be applied at a fixed rate of 3 percent over the gross income:

* The DST shall be applied to specific digital services including providing an advertisement area, presentation of market areas facilitating the direct transactions between the users and transmission of the user data collected, while offering digital content or payment services.

* The entities achieving certain thresholds cumulatively shall be subject to DST. DST shall be applied to the entities with annual global income over 750 million euros and annual revenue over 50 million euros in the EU originating from digital services. If this economic presence belongs to a consolidated group, then the mentioned thresholds shall be assessed on the group level.

* DST shall be in the member states where the users are. If the users are in different member states, then the proposal will also enable the calculation of the tax base to be referred to the member states depending on specific distribution keys.

* The Directive also provides cooperation between the member states in a single-time mechanism and provides the tax payers to have a single contact point in order to fulfill all the administrative obligations concerning the new tax.

As explained above, both OECD and EU agree that the current international taxation rules are insufficient concerning the taxation of digital economy. Despite this, OECD members were not able to develop a new and concrete taxation rule with respect to this issue at the international level. As a short-term solution, OECD member countries adopt the method of taxation which is applied over the sales mostly. It is expressed that the long-term solution is targeted to be achieved in the year 2020.

The EU proposed draft directives concerning this issue. One of these is tied to having “a significant economic digital presence.” And the other is DST at the rate of 3 percent, which is planned to be collected over the gross income starting from January 1, 2020. However, the application of these depends on being adopted by the parliaments of 28 countries.

If a tax at the rate of 3 percent is applied within the direction of the proposal of the EU Commission, this means the probability of acquiring an income of about 5 billion Euros annually for the member states. When applied to the EU, this single rate tax will be able to provide help for avoiding “tax exchange” and “tax distortion” in a single market. The tax of 3 percent will be applied only as a temporary measure until the corporate tax rules supporting digital economy take effect.

Are the Proposals “Fair or Protectionist”? Would the Other Countries take Counter-Measures?

Are the double taxation with the temporary tax of 3 percent and the international rules contradictory? With regards to BEPS Action Plan 1, it is observed that the governments prefer the alternative of “Reverse Charge VAT,” “withholding” or “balancing tax” as the authority concerning the taxation method with respect to the “digital economy.” Because of this, the method proposed by the EU does not constitute any contrariety to the third countries or the World Trade Organization rules and any double taxation agreement. This is because the OECD or UN member countries are yet to develop a common understanding of digital economy taxation principles. However, the proposal of the EU is parallel to the principle of “subjecting the profit to taxation where the value is created,” which emerges more apparently following BEPS and which is the basic principle agreed. As a conclusion, it is expected to remain to be in force until “final, permanent tax rules” are applied for the digital economy. The countries carried out arrangements for “VAT,” “withholding” or “balancing tax” as the authority concerning the taxation of the digital economy.

It is estimated that about 120 to 150 companies are covered within the scope of the European Commission’s proposal of 3 percent temporary tax, which means the probability of acquiring an income of about 5 billion euros annually for the member states. According to the European Commission’s Commission Staff Working Document (http://src.bna.com/xPv ) dated March 21, 2018, there is no reliable data regarding (see the European Commission’s Commission Staff Working Document, pp. 67-68, http://src.bna.com/xPw) the annual turnover of digital economy companies. But some two-thirds of turnover data is available by applying a revenue threshold of 750 million euros.

On the other hand, it is an issue of concern how the U.S. will react to the EU Commission proposals. This is because it is expected that 50 percent of the d 120 to 150 companies shall be the companies residing in the U.S. Since the U.S. discussed its concerns during the G-20 leaders meeting convened in Buenos Aires on March 19-20, 2018, it may decide to take counter-measures if EU countries adopt these proposals. However, if the arrangements brought by the U.S. tax reform are taken into consideration, we believe that such proposals of the EU are arrangements which are the subject of lesser discussions.

In response to the proposals of the EC, Business at OECD (BIAC) shared its opinion through a Media release (see The Business and Industry Advisory Committee, Media release, http://src.bna.com/xPx), dated March 21, 2018. BIAC warns against fragmentation in international taxation and calls for a broad consensus on a reliable tax framework for all companies. Unilateral action targeting certain businesses and deviating from established principles will reduce the potential for economic growth and job creation, particularly where these measures are based on the taxation of gross revenue rather than on profits. Additionally, the Chair of the BIAC Committee on Taxation and Fiscal Affairs, Will Morris, said:

“Business at OECD believes that the OECD/G20 Inclusive Framework is the most appropriate forum in which to advance tax policy addressing digital taxation. We strongly encourage the EC to work with the OECD/G20 Inclusive Framework to help develop global consensus through a broad multilateral process that includes business and all stakeholders.”

One of the main questions is whether these proposals, which require consensus shall be adopted or not by all the EU member states. Some member states expressed their concerns about DST. These concerns are, for example, DST possessing the characteristic of being an income tax since it is collected from proceeds. In other words, this is a tax collected from proceeds, not from net income and this tax shall be required to be paid even if the company is in loss. Moreover, DST shall not be considered as a tax paid abroad and this tax paid in a foreign country cannot be set off from the corporate tax calculated. However, it is understood that the probability that DST may be deducted as an expense may reduce double taxation risk at one point at a certain scale.

Planning Points

In today’s world, existing principles of international taxation is based on the “material permanent establishment” definition (Article 5/1 of the OECD Model Tax Convention). Therefore, the term “permanent establishment” means “a fixed place of business” through which the business of an enterprise is wholly or partly carried on, which is based on “a place of business,” “fixed” and “through which the business of the enterprise is carried on.” Therefore, an internet website does not constitute “tangible property in itself” and “not a permanent establishment in itself.”

In the post-BEPS world we live in the OECD recognizes “a shift in value creation” due to the digital economy. But there is no roadmap on how this should be reflected in tax policy.

In this environment, companies should identify potential foreign tax obligations (i.e. VAT or equalization tax) in cross-border sales of services and intangibles. In order to evaluate their existing indirect tax and direct tax status, companies can look at their existing structure as follows:

* Detailed functional analysis can give a first reflection with a focus on key assets and core activities;

* Where users and customers are located may constitute PE because data becomes a key resource to create value;

* Identify where real economic activities performed;

* Identify where countries at which sales are realized;

* Find out the person who is liable to comply with foreign VAT laws;

* Determine the definition of digital services;

* Find out what type of customer you have (“B2B” or “B2C”); and

* Be aware of the threshold for registration.

Finally, if the proposal is enacted, it will enter into force on January 1, 2020. Therefore, digital companies should be looking at their existing business models now.

Also, “taxing digital businesses” needs a global policy consensus. Otherwise, pre-BEPS “double non-taxation” phenomenon would result in “double taxation.”

source: https://biglawbusiness.com

OECD Interim Report – Tax Challenges Arising from Digitalisation

OECD - Ipes website_0More than 110 countries and jurisdictions have agreed to review two key concepts of the international tax system, responding to a mandate from the G20 Finance Ministers to work on the implications of digitalisation for taxation.

The members of the OECD/G20 Inclusive Framework on BEPS will work towards a consensus-based solution by 2020, as set out in their Interim Report on the Tax Challenges Arising from Digitalisation . The Interim Report will was presented by OECD Secretary-General Angel Gurría to the G20 Finance Ministers at their meeting on 19-20 March in Buenos Aires, Argentina.

Building on the 2015 BEPS Action 1 Report, the Interim Report includes an in-depth analysis of the changes to business models and value creation arising from digitalisation, and identifies characteristics that are frequently observed in certain highly digitalised business models. Describing the potential implications for the international tax rules, the Interim Report identifies the positions that different countries hold, which drive their approach to possible solutions. These approaches range from those countries that consider no action is needed, to those that consider there is a need for action that would take into account user contributions, through to others who consider that any changes should apply to the economy more broadly. The Interim Report lays the ground to move forward at the OECD towards a long-term multilateral solution in the next phase of work.

“The international community has taken an important step today towards resolving the tax challenges posed by the digitalisation of the economy,” said Mr Gurría. “We have underlined the complexity of the issues, and highlighted the importance of reaching international agreement, both for our economies and the future of the rules-based system. The OECD stands ready to accompany countries as they seek to build a common understanding of the issues related to the digital economy and taxation, as well as the long-term solutions.”

source: http://www.oecd.org/tax/tax-challenges-arising-from-digitalisation-interim-report-9789264293083-en.htm , OECD Tax Talks

UK – Corporate tax and the digital economy(position paper update)

The UK government embraces the changes brought about by digitalisation. From innovative goods to revolutionary business processes, the adoption and spread of digital technology have contributed to significant increases in productivity, economic growth and consumer choice. The government welcomes these positive trends and the important contribution made to the UK economy by its fast-growing digital tech sector, which employs more than 1.5 million people and accounted for £6.8 billion of investment in 2016, 50% higher than any other European country.
It’s for these reasons the government has set out a strategy for making the UK the best place to start and grow a digital business, and sees this as critical in ensuring the UK is a leader in emerging technologies and highly skilled jobs.
The speed and scale of the changes caused by digitalisation have naturally had implications for the UK tax system.
In some cases, there is scope to try and harness the benefits of technology to make the system more efficient for both taxpayers and tax administration. That’s why the government is releasing further publications at Spring Statement on using split payments to combat online VAT fraud and the role of platforms in encouraging compliance by their users.
Yet unsurprisingly, the scale of change brought about by digitalisation has also posed challenges for tax policy. Nowhere is that truer than for corporation tax, where the development of certain business models has challenged our understanding of how and where companies create value.
At Autumn Budget, the government set out its initial position on this issue. While it continues to support the principle underpinning the international corporate tax system – that the profits of a business should be taxed in the countries in which it creates value – it believes that this principle is being challenged by business models for which value creation is in part reliant on the engagement and participation of users. The government’s view is that the tax system has not kept pace with these changes and that action is needed.
The government has since benefitted from substantive feedback from a wide range of stakeholders, who have offered constructive challenge and insight into this issue. It is therefore publishing an updated position paper to reflect on some of the key questions that came out of that process, and provide an update on the government’s thinking. The updated paper sets out the government’s view that:

• the participation and engagement of users is an important aspect of value creation for certain digital business models, and is likely to be reflected through several channels, such as the provision of content or as a contribution to certain intangibles such as brand.
• the preferred and most sustainable solution to this challenge is reform of the international corporate tax framework to reflect the value of user participation. It is important that the members of the OECD’s Inclusive Framework make progress in developing multilateral solutions, and to assist this process the paper sets out some of the government’s initial considerations on what this could include.
• as set out at Autumn Budget, in the absence of such reform, there is a need to consider interim measures such as revenue-based taxes. The paper explores some of the important considerations regarding the scope and design of an interim measure, and the steps that could be taken to ensure that it is well-targeted and protects start-ups and growth companies. The government still thinks there are benefits to implementing an interim measure on a multilateral basis and it intends to work closely with the EU and international partners on this issue.
This paper does not look to set out the government’s final position on these issues. It instead sets out the government’s updated thinking, with a view to engaging further with businesses and other stakeholders to better understand and resolve some of the outstanding questions.
The government is nonetheless clear that there is a challenge that needs to be solved. The current misalignment between where digital businesses are taxed and where they create value threatens to undermine the fairness, sustainability and public acceptability of the corporate tax system.
The government hopes to find a multilateral solution to this challenge, and believes that the upcoming OECD report and G20 summit in Argentina will be important in setting out a programme of work for achieving that. The government thinks that this paper can help to inform that work, and help to achieve a coherent, proportionate and sustainable long-term solution.

The government’s position is summarised as follows:

  • the participation and engagement of users is an important aspect of value creation for certain digital business models;
  • the preferred and most sustainable solution is reform of the international corporate tax framework to reflect the value of user participation; and
  • in the absence of such reform, there is a need to consider interim measures such as revenue-based taxes.

source: https://www.gov.uk/government/consultations/corporate-tax-and-the-digital-economy-position-paper

Digital Tax Proposals Produce New Discord in the EU

taxThe European Union is preparing to debate the way corporate taxes are calculated and paid. In the coming months, the European Commission and large EU countries like Germany and France will present proposals to change regulations that currently allow companies, especially in the digital sector, to report their income and pay taxes in low-tax nations even if most of their earnings are generated in countries where taxes are higher. But many smaller member states, such as Ireland and Luxembourg, see this potential change as a threat to their economic models. A battle between large and small member states could result, creating further divisions in the European Union during a time in which the bloc is trying to introduce reforms in several areas.

The governments in Paris and Berlin are determined to stop what they see as unfair competition from smaller countries that offer tax deals to multinational corporations in the digital economy. Internet giants like Apple Inc., Facebook, Amazon and Google pay few taxes in the EU countries where most of their consumers are located because they have subsidiaries in low-tax EU members like Ireland and Luxembourg. France and Germany are working on proposals that would require companies in the digital sector to pay taxes where they generate money, rather than where they are legally registered. Italy and Spain support these proposals, which are expected to be introduced by June.

eu-corporate-tax-rates

Meanwhile, the European Commission is working on its own proposals to make internet companies pay higher taxes in the EU countries in which they operate. The commission is considering options such as a levy on revenue generated from the provision of digital services or advertising activity, or a withholding tax on digital transactions. Brussels will present its suggestions in late March. These proposals are part of a more ambitious plan, because the commission wants to introduce a single set of rules to calculate the taxable profits of all large companies operating in the European Union. In EU jargon, this is known as a Common Consolidated Corporate Tax Base. Its goal is to present multinational companies with a single EU system to compute their income, instead of the different national rules that exist today. According to the European Commission, this would reduce red tape in Europe while also eliminating the existing mismatches among national tax systems.

But not every country embraces these potential changes. Ireland has been particularly critical, because the proposed reforms threaten its economic model, which is based on offering tax incentives to multinational companies. Some countries in Northern and Central Europe also contend that the European Union does not have the right to interfere with their tax systems.

At this stage, none of the proposed plans implies the imposition of a common corporate tax rate, but Ireland and others like it are concerned that this could happen. Those tax rates vary among EU countries, from below 15 percent in Hungary, Bulgaria, Cyprus and Ireland, to above 30 percent in France and Belgium. Ireland and other low-tax countries fear that the proposed reforms would open the door for the European Union to try to establish a minimum corporate tax rate. This fear is not unfounded: France has said its supports such an idea.

Even if Ireland has the power to block EU initiatives on tax-related issues, the bloc’s heavyweights can find ways to pressure Dublin not exercise it.

The Battles to Come

Reforming the way digital companies are taxed will not be easy. Changes in EU tax rules must be approved unanimously, giving individual countries veto power. The European Commission has said it wants to change the voting mechanism for this issue, but doing so also requires unanimity.

Even if Ireland has the power to block EU initiatives on tax-related issues, the bloc’s heavyweights can find ways to pressure Dublin not exercise it. For example, the European Union supports Ireland’s position that the border between it and Northern Ireland must remain open after Brexit and is asking the United Kingdom to find a solution to the problem. But in exchange for its continuing support on the matter during the Brexit negotiations, the European Union could ask Ireland to drop its opposition to tax changes. This is probably one of the reasons why Dublin has sought to enlist other EU countries on its side in the tax fight.

Should the European Union fail to find unanimity on this issue, a smaller group of countries could decide to implement reforms without involving the entire bloc. This would be only a consolation prize for the likes of Germany and France, as the changes probably would not be sufficient to end what they perceive as unfair competition from the low-tax countries. As a result, pressure on those countries probably will continue regardless of the future of specific measures currently on the table.

A Digital Single Market?

The debate over the best way to tax digital companies is a natural consequence of the rapidly increasing importance of the sector. Only one digital company was listed among the top 20 companies in Europe by market capitalization in 2006. By 2017, nine were, led by the U.S. giants. According to a recent report by the European Commission, revenue of the top five e-commerce retailers operating in Europe grew by an annual average of 32 percent between 2008 and 2016. During the same period, the revenue of the entire retail sector in the European Union grew by a yearly average of 1 percent. The rapid change is forcing policymakers to undertake the complex process of adapting to the new environment. Increasing the complexity with internet-based companies is that unlike traditional businesses, it is hard to determine exactly where value is created and how profits should be taxed.

Ireland and others have argued that the issue should not be discussed at the EU level, but rather at the level of the Organization for Economic Cooperation and Development (OECD), a club of rich countries. Ireland and other low-tax nations argue that restricting the reforms to the European Union would reduce the bloc’s competitiveness and make it less attractive to foreign investors. They also argue that a change in taxation could lead to higher prices for consumers. While the European Commission supports the idea of discussing the issue at the OECD level, it has said it is willing to push ahead with a European solution in the likely case that a broader consensus cannot be found.

Ultimately, these disputes are the result of an attempt by Brussels and the largest EU countries to move the bloc toward a federal system. Just as the European Union created a single market for the movements of goods, services, capital and people, it is now trying to introduce a “digital single market” with uniform rules. For many EU member states, this push will threaten their national interests and economic models. For tech companies, the taxation issue is only the tip of the iceberg. In the coming years, disputes with the European Union over issues such as data policy and privacy regulations will also surface.

France and Germany will probably reach an agreement between themselves on the taxation issue in the coming months and, together with other big economies like Italy and Spain, pressure smaller EU members to accept their plans. But unanimity probably will be hard to find, and the bloc will have to decide whether to pressure the rebel members to comply, at the risk of deepening fragmentation in the bloc, or to simply leave the reforms to a smaller group of countries.

source: https://worldview.stratfor.com/