Taxation of the Digital Economy - latest from the OECD and EC

The Digital Economy poses particular difficulties for individual tax jurisdictions not least because digital businesses often do not have a physical presence in countries where they transact considerable amounts of their business. 

When the OECD was carrying out its Base Erosion Profit Shifting (BEPS) work its first Action was a review of the digital economy and the threats that it posed to tax systems. An early conclusion of the OECD work was that the digital economy did not merit a separate set of tax rules but it presented a major threat to the proper functioning and sustainability of tax regimes.

An OECD report was published on the Digital Economy in October 2015, at the end of the main two year period of work by OECD, but the OECD Digital Economy Task Force was kept in place and it is now due to publish a further interim report by April next year in time for the meeting of the G20 Finance Ministers.

OECD has just issued a “Request for Input” to be submitted by 13 October 2017 in advance of a public consultation meeting in California on 1 November 2017.

OECD has also published an Outline of the Interim Report for the G20 Finance Ministers’ meeting.

The European Commission has also been active in this area and at the same time as the OECD “Request for Input” it published a draft Communication on a Fair and Efficient Tax System in the EU for the Digital Single Market.

The Commission paper set out a number of new ways of doing, digital, business:

  • Online retailer model, whereby online platforms sell goods or connect buyers and sellers in return for a transaction or placement fee or a commission. Examples of businesses include Amazon, Zalando, Alibaba.
  • Social media model, whereby network owners rely on advertising revenues by delivering targeted marketing messages to consumers. Examples of businesses include Facebook, Xing, Qzone.
  • Subscription model, whereby platforms charge subscription fee for continued access to a digital services (e.g. music or videos). Examples of businesses include Netflix, Spotify, iQiyi.
  • Collaborative platform model, whereby digital platforms connect spare capacity and demand, use reputational currency mechanisms to underpin consumption, and enable individuals to share “access” to assets rather than own them outright. Platforms charge a fixed or variable fee on each transaction. Examples of businesses include Airbnb, Blablacar, Didi Chuxing.

Picking up on suggestions in the October 2015 OECD report the Commission paper considers whether any of the taxation models put forward in that paper could offer a short term solution to the problem of taxing the digital economy in a fair and efficient manner. These suggestions are:

  • Equalisation tax on turnover of digitalised companies - A tax on all untaxed or insufficiently taxed income generated from all internet-based business activities, including business-to-business and business-to-consumer, creditable against the corporate income tax or as a separate tax.
  • Withholding tax on digital transactions - A standalone gross-basis final withholding tax on certain payments made to non-resident providers of goods and services ordered online.
  • Levy on revenues generated from the provision of digital services or advertising activity – A separate levy could be applied to all transactions concluded remotely with in-country customers where a non-resident entity has a significant economic presence.