On 16 March 2018, the Interim Report on the Tax Challenges Arising from Digitalisation (Interim Report), prepared by the Task Force on the Digital Economy (TFDE), was released on to the OECD website. The Interim Report reviews the progress made in tackling the issues of double non-taxation, and aggressive tax planning, which motivated the 2013-2015 Base Erosion and Profit Shifting (BEPS) project to reform global tax rules. It surveys the increasing adoption, across countries, of unilateral measures to tax digitalised businesses. It sets out a new theoretical framework for analysing the value creation processes in digitalised business models, to underpin the revision of international tax rules. Most importantly, the report makes clear that while there is no current consensus among countries on how to revamp the international tax framework for the digital era, and no consensus on the use of interim measure turnover taxes, the Inclusive Framework on BEPS will seek to arrive at a new global consensus by 2020.
The 218 pages of the Interim Report are divided into eight chapters, the most important of which are Chapter 5, ‘Adapting the International Tax System to the Digitalisation of the Economy’, which sets out the alternative views of countries on the need for long-term restructuring of international tax rules, and Chapter 6, ‘Interim Measures to address the tax challenges arising from Digitalisation’, which sets out the conflicting positions of countries on the need for interim measure turnover taxes. Highlights of the report include the following:
The fact that the TFDE work thus far has been unable to arrive at a consensus, on either the need or justification for interim measures or the direction of the long-term solution, may mean that the international tax system is headed into a ‘period of turbulence’. The EU Commission is set to unveil their proposed interim measure turnover tax for EU countries in the coming week, joining India and Italy which have already implemented turnover taxes. India, Israel and Taiwan have adopted Virtual PE rules, with more countries also looking in this direction. Businesses operating cross-border may anticipate greatly heightened double tax risk and uncertainty.
The challenge for the Inclusive Framework on BEPS, supported by the TFDE and assisting OECD working parties, will be to reconcile the positions of the three groups of countries outlined above in the course of 2019 and 2020, and put forward expansion of and / or alteration to international tax principles and detailed rules which are robust into the future. It is noted that China is playing a pivotal role in the global quest for consensus on the tax issues facing the digital economy, tenaciously adhering to the principle of neutrality in the taxation of the traditional and digital economies, which is in line with the 1998 Ottawa principles.
The issues dealt with in TFDE Interim Report are highly complex and KPMG China will issue further, more detailed publications in the near future.