Tax challenges of the digital economy

Address the tax challenges of the digital economy

Identify the main difficulties that the digital economy poses for the application of existing international tax rules and develop detailed options to address these difficulties, taking a holistic approach and considering both direct and indirect taxation. Issues to be examined include, but are not limited to, the ability of a company to have a significant digital presence in the economy of another country without being liable to taxation due to the lack of nexus under current international rules, the attribution of value created from the generation of marketable location-relevant data through the use of digital products and services, the characterisation of income derived from new business models, the application of related source rules, and how to ensure the effective collection of VAT/GST with respect to the cross-border supply of digital goods and services. Such work will require a thorough analysis of the various business models in this sector.

The discussion draft released by the OECD confirms the view that tax measures designed exclusively for the digital economy are likely to prove problematic, primarily because of the difficulties in identifying a specific “digital” sector. Rather, the potential use of modern information and communications technology by all businesses seems to raise “digital” tax issues. Nonetheless, the OECD clearly believes that the perceived weaknesses in the territorial tax system and the international tax rules as a whole as require change in the tax rules in order to cope with modern business practices.

The OECD’s Task Force on the Digital Economy was established in September 2013 under Action Plan item 1 of the Base Erosion and Profit Shifting (BEPS) project. Its remit was to consider the taxation issues arising from digital business and to identify potential measures to remedy any shortcomings, considering both direct and indirect tax options. Widespread concern with the question of whether the existing international tax rules have kept pace with the emergence of new business models enabled by the rapid development of information and communication technology was a key driver behind the BEPS Action on the Digital Economy.

The relatively lengthy discussion draft underlines the difficulties of identifying ready solutions to the tax challenges of digital business. Nonetheless, by reference to the discussion draft’s own terms, it will be important for any potential solutions to satisfy the neutrality principle. As the discussion draft states, “ring-fencing the digital economy as a separate sector and applying tax rules on that basis would be neither appropriate nor feasible.” Inevitably, this will be a challenge to the extent that any solutions are designed for digital business alone. This suggests the OECD might seek to address the tax challenges of the digital economy largely through the other BEPS workstreams. A revised version of this report is likely to cross-reference how proposals potentially affecting broader types of business could have an impact on the digital economy.

OECD - a discussion draft on the Tax Challenges of the Digital Economy