In its new study, the OECD Secretary General examines cryptocurrency and its tax consequences in the two part Report to G20 Finance Ministers & Central Bank Governors. Part I reports on the activities and achievements of the OECD’s tax agenda, and reviews significant achievements while looking ahead at necessary further progress, with focus on the Inclusive Framework on BEPS. Part II is comprised of a Progress Report to the G20 by the Global Forum on Transparency and Exchange of Information for Tax Purposes.
In the opening paragraphs the OECD announces declares that “the era of bank secrecy is over”:
“The tax principles underpinning the global financial system have moved from opacity and incongruity to transparency and coherence; from countries working on their own to enforce a patchwork of rules towards a model of co- ordinated efficiency. The era of bank secrecy is over. A new standard of automatic exchange of information has been agreed by over 100 jurisdictions. The Base Erosion and Profit Shifting (BEPS) Project has set the tone for international tax rules that are fair and ensure that tax is paid where value is created. New rules and changing standards have led to a vital discussion on tax certainty so that we take into account their impact on investment and innovation.”
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The OECD identifies,
“The key challenge for the coming years is to nurture this new institutional framework and to leverage its full potential by maintaining the multilateral dynamic that has been the driver of its considerable achievements. In spite of past successes there are emerging tensions which may damage the unprecedented level of co-operation and, however difficult these emerging topics may be, it is more important than ever that G20 countries work together for their own benefit and for the benefit of the world.”
According to the report, in March 2017, the G20 Finance Ministers mandated the OECD, through the Inclusive Framework on BEPS, to deliver an interim report on the implications of digitalization for taxation by April 2018. This report, Tax Challenges Arising from Digitalisation – Interim Report 2018 (the Interim Report) has now been agreed by the more than 110 members of the Inclusive Framework. Members agreed to undertake a coherent and concurrent review of the “nexus” and “profit allocation” rules – fundamental concepts relating to the allocation of taxing rights between jurisdictions and the determination of the relevant share of the multinational enterprise’s profits that will be subject to taxation in a given jurisdiction.
Proceeding to digitalization, business models and value creation in the report,
“A robust understanding of how digitalization is changing the way businesses operate and how they create value is fundamental to ensuring that the tax system responds to these challenges. In particular, looking at new and changing business models in the context of digitalisation, the report describes the main features of digital markets and how these shape value creation. The Interim Report also identifies three characteristics that are frequently observed in certain highly digitalised business models: scale without mass, heavy reliance on intangible assets, and the role of data and user participation, including network effects. It was noted, however, that countries have different views on whether, and to what extent, these features represent a contribution to value creation by the enterprise.”
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Further, the OECD observed,
“Implementation of the BEPS measures is well underway in most countries. This is having an impact. As mentioned, over 3 billion euros in the EU alone has been collected as a result of the implementation of the new International VAT/GST Guidelines. On the corporate income tax front, significant recent reforms have been passed to implement the BEPS package. For instance several EU directives have been enacted. One measure of the US tax reform in particular (known as GILTI) is likely to raise the overall effective tax rate of US MNEs on their offshore income above a single digit.
“Also, a significant number of multinational enterprises (MNEs) have taken pro-active measures to realign their tax arrangements with their real economic activity, either by reconsidering their transfer pricing positions or by relocating and on-shoring valuable assets, such as intangibles. With the exchange of Country-by-Country reports beginning in 2018 for the 2016 tax year, further evidence of the impact of the BEPS measures is anticipated in the coming years.
“In recent years, we have also seen the introduction by some countries of a range of uncoordinated and unilateral measures, which appear to reflect a discontent among some countries with the outcomes produced by certain aspects of the current international tax system.”
The report acknowledges the dynamic nature of digital transformation and the need to monitor how these changes may impact value creation with respect to broader tax challenges of digitalization:
“Members of the Inclusive Framework have different views on the question of whether, and to what extent, the features identified as being frequently observed in certain highly digitalised business models should result in changes to the international tax rules. In particular, with respect to data and user participation, there are different views on whether, and to what extent, they should be considered as contributing to a firm’s value creation, and therefore, what impact they may have on the international tax rules.
“The different perspectives on these issues among the 113 members of the Inclusive Framework can generally be described as falling into three groups. The first group considers that the reliance on data and user participation may lead to misalignments between the location in which profits are taxed and the location in which value is created. However, the view of this group of countries is that these challenges are confined to certain business models and they do not believe that these factors undermine the principles underpinning the existing international tax framework. Consequently, they do not see the case for wide-ranging change.
“A second group of countries take the view that the ongoing digital transformation of the economy, and more generally trends associated with globalisation, present challenges to the continued effectiveness of the existing international tax framework for business profits. Importantly, for this group of countries, these challenges are not exclusive or specific to highly digitalised business models.
“Finally, there is a third group of countries that consider that the BEPS package has largely addressed the concerns of double non-taxation, although these countries also highlight that it is still too early to fully assess the impact of all the BEPS measures. These countries are generally satisfied with the existing tax system and do not currently see the need for any significant reform of the international tax rules.”
Furthermore,
“Acknowledging these divergences, members agreed to undertake a coherent and concurrent review of the “nexus” and “profit allocation” rules – two fundamental concepts relating to how taxing rights are allocated between jurisdictions and how profits are allocated to the different activities carried out by multinational enterprises, and seek a consensus-based solution. While it is a challenging objective, the Inclusive Framework will work towards a consensus-based solution by 2020.”
In the report, interim measures have also been added to address the tax challenges arising from digitalization:
“Developing, agreeing and implementing a global, consensus-based solution will take time, and, in some countries, there are pressing calls for governments to take more immediate action to address the tax challenges arising from digitalization. There is no consensus on the need for, or the merit of, interim measures with some countries opposing them. The risks and adverse consequences that these countries believe would arise as a result of such measures include negative impacts on investment, innovation and growth, the possibility of over-taxation, distortive impacts on production and increasing the economic incidence of tax on consumers and businesses, and increased compliance and administration costs. The countries considering interim measures recognise these challenges, but consider there is a fiscal and political imperative to act, pending a global solution which may take time to develop, agree and implement. They take the view that there is a sound conceptual basis for an interim measure, that value is being generated within their jurisdiction that would otherwise go untaxed challenging the fairness, sustainability and public acceptability of the system. They think the challenges need to be weighed against the policy challenges of not acting in the interim and consider that at least some of the possible adverse consequences can be mitigated through the design of the measure.”
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As for next steps, the report suggests,
“The interim report is a key milestone to developing a durable, long-term solution to the tax challenges posed by the digitalisation of the economy. To accomplish this, further work will need to be carried out on the analysis of the value contribution of certain characteristics of highly digitalised business models as well as digitalisation more broadly. To inform that debate, technical solutions would also be explored to test the feasibility of different options with respect to the profit allocation and nexus rules. This process will include gathering input from a broader group of stakeholders including business, civil society and academia. An update on this work will be provided in 2019, as members work towards a consensus-based solution by 2020.”
To review the full report, please click here.