The United Nations published a paper on tax consequences of the digitalized economy, which gives an overview on possible issues for developing countries. It is a preparatory work for the Fifteenth Session of the Committee of Experts on International Cooperation in Tax Matters held in Geneva during October 17 to 20, 2017.
Challenges Identified by the Paper
Digitalization of traditional brick and mortar economy has been penetrating globally, in particular in emerging markets like South America, Africa, and the UN appeals to authorities in these countries to adapt their approaches on taxation based on the following considerations:
- Nexus: it refers to the connection based on which a state may exercise its taxing right. The traditional nexus refers a substantially physical presence, which can be avoided easily in digital context. Thus, a new “threshold” to reflect substantial interaction with the economy of a country needs to be exploited.
- Permanent Establishment: for the purpose of the bilateral tax treaty, a PE is necessary for allocating business income. Similar to nexus, the traditional PE-determination rules become futile in digital economy context. This is recognized by the European Commission of Finance ministers (ECOFIN), who put up the solution of “Virtual PE”.
- Anti-deferral Regimes: instead of exempted worldwide income, a number of countries are applying the “repatriating rule” on the recognition of certain foreign-source income. However, these rules have been the means of perceived pervasive abuse that lead to tax base erosion. Thus, anti-deferral measures should be taken to tackle shifting income to foreign subsidiaries in low or no tax jurisdictions, such as controlled foreign corporation (“CFC”) rules.
- Transfer Pricing: multinationals nowadays are operating globally and inter-connectedly. Accordingly, its value chain has been changed fundamentally, among which the key value is contributed by digitalized intangibles. This brings significant needs for such internal transfer pricing methodologies.
Other ancillary issues, such as the popularization of the e-wallet and cloud computing, the administration of data and protection of data privacy, are also discussed in the paper to provide countries with a reference on digital taxation.
Other Subjects of the Session
Alongside digital economy taxation, there are other topics in the agenda to be discussed during the session, including software royalties, mutual agreement procedures, and procedural issues.