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Articles:

Taxation of the Digital Economy - Rethinking the world tax system

03 November 2020

Highlights from a leading article by Ross Robertson, International Tax partner at BDO entitled The OECD and the ticking clock – what a delay in global agreement may mean, published in full by Bloomberg Tax on 3 November 2020

Executive Summary

The international tax framework was designed over 100 years ago, and evolution in business models (driven mostly by advancement in technologies) has led to a global debate around whether the current international tax framework is fit for purpose. There is a broad agreement that change is required to reflect the increasing ability of businesses to participate in the economy of a jurisdiction through remote means. The OECD is seeking to coordinate a multilateral consensus solution, via a proposed two pillar model. Meanwhile unilateral proposals by interested countries continue to proliferate.

On 12 October the OECD released draft blueprints for the technical aspects for both pillars of its proposed solution. The blueprints represent a huge volume of technical work and discussion, but many key aspects remain subject to political agreement, and questions remain as to when, and indeed if, the OECD’s proposals will be implemented.

Timing is important: the OECD’s timeline for reaching agreement on the proposals has been extended from the end of 2020 to mid-2021 at the earliest. This is indicative of the challenges in reaching political agreement on matters which would see a reallocation of global taxing rights between territories under Pillar 1, and a potential impact on jurisdictional tax sovereignty under Pillar 2.

This recent delay to the OECD timeline for global agreement increases the likelihood of the proliferation of unilateral measures and of possible shifts in tax authority behaviours. We expect to see this extension of the timeline and associated uncertainty increase the vigour and pace with which territories look to explore and implement new unilateral tax measures for the taxation of remote activities (e.g. Digital Services Taxes or DSTs). It is also likely to create the potential for increased tax controversy in the short term due to renewed arguments over the attribution of value in modern value chains.

Significant change for international businesses, whether driven by the OECD’s proposed two pillar model or imposed at a local and unilateral level, is inevitable and it will be important for businesses to get to grips now with what this change may mean for them both now and in the future. There are a number of actions businesses could be taking, for example providing feedback to the OECD on the blueprints by 14 December 2020 or modelling how the proposals could affect their global tax positions. BDO is undertaking further research on this topic. Register here if you would like to participate in this research.

As a number of territories have already enacted digital services taxes or similar measures whilst others are actively considering them, companies should be carefully monitoring these developments to understand the potential effects on their businesses. This is not just a question of compliance (although compliance is of course important). These new taxes can directly, and significantly, erode margin if they are not factored into the pricing for products or services supplied into a market. We strongly recommend that multinational business should build a specific review of the evolving tax landscape into their commercial pricing decision processes. BDO’s  Taxation of the Digital Economy Tool is designed to help navigate this emerging landscape.

Ultimately, no one can say with confidence when, how or even if, a comprehensive plan to address the taxation of the digital economy will be enacted. However, taking a “wait and see” approach is imprudent given the immediate consequences that are already emerging from the delay in the OECD’s timeline.

Read the full article here