The document, Addressing the Tax Challenges of the Digital Economy, Action 1: 2014 Deliverables (the Digital Economy Report or Report), largely follows the discussion draft on the digital economy released by the OECD on March 24, 2014 (the Discussion Draft).
Overview
Similar to the Discussion Draft, the Report does not recommend any specific measures to address the digital economy.
In doing so, the Report continues to acknowledge that special rules designed exclusively for the digital economy would prove unworkable.
At the same time, the Report identifies key features of the “new” business models in the digital economy that may be considered to exacerbate BEPS risk as well as broader direct and indirect tax challenges raised by the digital economy. The Report concludes that these BEPS risks and tax challenges should be taken into account and addressed through the other focus areas of the BEPS project.
In addition to the material contained in the Discussion Draft, the Report includes a new chapter discussing the fundamental principles of taxation and reconsiders some of proposed approaches for addressing the tax challenges of the digital economy. It also includes a new Annex setting forth typical tax planning structures in integrated business models.
Specifically, the Report: (i) reiterates that PE exemptions for preparatory and auxiliary activities should not be available for core activities; (ii) discusses how to deal with tax-planning by businesses engaged in value-added tax exempt activities; (iii) addresses the importance of data and its impact on transfer pricing; and (iv) identifies the need to adapt controlled foreign company (CFC) rules.
As the recommendations on the other action items are finalized, the OECD will evaluate how the outcomes affect these identified issues and will complete an evaluation of the options to address them.
This work will be concluded by December 2015 and a supplementary report reflecting the outcomes of the work will be finalized at that time.
Reflecting the clear interdependence among the various elements of the BEPS Action Plan, the OECD’s work on the taxation issues within the digital economy will continue into 2015.
However, given the temperate global economic recovery and the desire by certain jurisdictions to take immediate action to increase tax revenue, the issuance of the Report and the ongoing discussion of digital economy tax issues may accelerate the unilateral action seen thus far.
As the OECD continues its work, there will likely be country by country change over the coming years in this area.
Implications
While there still remain certain areas of disagreement among stakeholders (e.g., import of data in driving value for tax purposes), the Report shows there is consensus that more work should be done in a variety of areas, including addressing PE issues in the digital economy and consumption taxes on business-to-consumer transactions. In light of the interaction among all the focus areas in the BEPS Action Plan, the OECD’s work on the taxation issues within the digital economy will continue into 2015 and perhaps beyond.
However, countries are already taking action with respect the tax treatment of activity in the digital economy.
