taxation of digital economy: does it require a …•this presentation is a brief summary of the...
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Dublin (Ireland), 19 September 2014
Taxation of digital economy: does it require a fundamental change of approach?
Pere M. Pons
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Disclaimer
• This presentation is a brief summary of the article “Taxation of digital
taxation: does it require a fundamental change of approach?”, dated 25 June 2014.
• The views expressed in the article and this presentation are those of the author and not necessarily those of Uría Menéndez or other members of the firm.
• The contents of this document are of general nature and must not be considered as legal or tax advice.
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Introduction: the digital era
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The world is changing: new players
0 100 200 300 400 500 600
Berkshire H
Microsoft
Exxon Mobile
AppleDigital companiesTraditional companies
Market capitalization as of 5 Sept. 2014: - 3 out of the 5 biggest companies in value are digital businesses - 10 out of the 40 biggest
* Figures in billions of USD; source Google Finance and La Vanguardia 8 Sept. 2014
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The world is changing: new businesses
* % over total income (Apple); source La Vanguardia 8 Sept. 2014
0
2
4
6
8
10
2003 2011 2012 2013
i-tunesi-podsoftware
Notable increase of streaming business, and decline of former sources of income
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The world is changing: global reach
• Traditional business international presence
• Facebook global reach, shown through user interconnection
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Digitalization of the economy
• Implementation & adoption of ICT in business models. • Rise of new businesses and products (search engines, social
networking, cloud services, etc.).
Advantages Comments
Fosters international trade
Need for a level playing field
Reduces costs Increases efficiency and competition
Contributes to the wealth of countries
+10% of mobile penetration = +1.2% GDP* +10% of digitalization = +0.75% GDP per capita*
Makes business “movable”
Creates opportunities for newcomers, but does it exacerbate BEPS risk?
* Source GSM Association and EU experts group report
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Features of the digital economy
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Relevant features
Reliance on intangibles (movable assets)
Flexibility (location of resources
and functions)
Decrease in the need for personnel
Massive use of data (mostly from clients)
Use of networks effects (contributions from
users)
Multi-sided business models
Tendency towards oligopoly
Volatility (low barriers, rapidly
evolving)
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Ring-fencing the digital economy
• Tax rules have not kept pace with the effects of ICT on economy. • ICT’s market penetration is unequal around the globe.
• Would it be fair to tax digital companies differently? No. We need to ensure an even playing field.
Argument Comments
Historical: tax rules were established before digital era and did not anticipate ICT’s impact on economy
Telephone, fax, radio, TV, mail-order catalogues, marketing consultancy were also game changers and did not require changes to laws
Social and geographical: ICT is more entrenched in developed countries
Low costs and barriers allow for opportunities everywhere
Digital vs. non-digital companies, “brick & mortar” vs. digitalized
Other industries also rely on intangibles All businesses try to analyze client data Labour, capital and innovation remain key
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Policy considerations for tax reform
• Need to incentivize or disincentivize activities. • ICT creates knowledge and wealth, but OECD seems to be
focused on potential concerns:
Argument Comments
Digital business models tend to oligopoly (despite volatility of markets)
Restriction of competition is dealt with by antitrust law. This is typical of any business
Digital companies profit from data and work provided by others (user content)
Not all companies are profitable. Data does not create value, its treatment does
Digital companies can easily achieve BEPS structures and results
Any company in any sector can do the same Separate tax regs. would make no sense
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Addressing the challenges of BEPS
• In view of OECD and others:
• EU experts embrace OECD position and focus on VAT issues • Limited reference to administrative & enforcement issues
Issue Proposed measure
Double non-taxation and stateless income Refuse tax treaty benefits + create nexus (PE)
Improper use of transfer pricing Ensure tax where value is created
Nexus and PE are artificially avoided Review of concepts, functions and risks
Treaty shopping and deferral Reinforcing CFC rules
VAT on remote supplies Avoid distortion of the local market
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A personal view on the matter
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General comments
• There seems to be a new mainstream: double non-taxation or
“stateless income” is unacceptable under tax treaties.
• It is impossible to isolate the digital economy for tax purposes.
• Fundamental changes to the international tax rules are unnecessary. The BEPS risk in the digital economy does not derive from existing rules, but on how they are applied and enforced.
• The tax authorities are the ones that did not keep up with changes in the economy.
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Detailed analysis
• Reduction of income in local jurisdiction:
Potential measures Analysis and opinion
General PE for digital businesses Unjustified barriers to e-trade
Server as PE or nexus It is a fundamental asset, but not a core activity
Gathering of data as PE or nexus It does not create value, it is the basis only
Review of dependent agent as PE or nexus This is not specific to digital business
TP based on apportionment system Discussion on parameters and similar risks
Review of substance and risk distribution GAAR can be used for this
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Detailed analysis
• Stateless income and double non-taxation:
Which is the issue? Analysis and opinion
Rules date back to the 1920’s Created to foster international investment and trade
ICT represents notable changes The only changes are: (i) that companies are becoming global; and (ii) that politically double non-taxation is not accepted
Low effective tax rate Most likely due to tax benefits to attract foreign entities and its employees.
Lack of “substance” and abuse of transfer pricing rules
Tax administration and enforcement issues
Need for cash (government) Short term strategy. Zero-sum game. Tension with source countries
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My conclusions and proposals
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A new way to administer and enforce the law
• Digital businesses have no substantial specialities compared to other businesses.
• The tax authority needs to reinvent itself to properly manage the administration and supervision of the system.
• New ideas in this area should be analyzed (based on cost efficiency and effectiveness). Suggestions could include: 1. New authorities and resources to achieve global reach; 2. Requiring that FIN48 (ASC 740) is generally applicable and does not take into
account tax enforcement probability, and that a copy of the accounting audit report must be sent to the foreign authorities concerned;
3. Establishing clear safe harbors and exceptions to specific payments; 4. Making deductibility of payments subject to specific reporting of information.
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Future developments
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New OECD documents
• On 16 September 2014 the OECD released new documents and
views on the BEPS project;
• At the moment of preparing this presentation the documents are not yet available.
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Q & A
Pere M. Pons
Spanish attorney - Abogado*
URÍA MENÉNDEZ
New York
Tel: +1 212 593 4241
e-mail: [email protected]
* Admitted to practice in Spain only
The information in this presentation is of a general nature, is not intended to address the circumstances of any particular individual or entity and therefore does not constitute advice from Uría Menéndez.
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