1. DISCUSSION INPUT: ASPECTS OF FAIR AND SUSTAINABLE TAXATION
Tibor Hanappi, Centre for Tax Policy and Administration, OECD
FairTax Stakeholder Event
Brussels, 19 February 2019

2. Tax Challenges arising from Digitalisation
Cross-jurisdictional scale without mass
Ability to remotely develop and interact with a global customer base
Facilitates relocation of production processes & centralisation of functions
HDBs often highly involved in economic life of a jurisdiction with little/no physical presence
Complex reality
Three key factors prevalent in certain highly digitalised businesses (HDBs)
Reliance on intangible assets, including IP
Data available on growing importance of investment in intangibles
Intangible assets crucial value driver of HDBs
Conclusions:
TFDE identified 3 factors commonly observed in HDBs, and relevant for tax purposes
[…]
Caveats:
complexity + non-exclusivity
No agreement on nature/scale of last factor
Data, user participation and their synergies with IP
Data value cycle (e.g. collection, storage, analysis) becomes a key aspect of HDBs
Users increasingly involved in value creation process of some HDBs
Not always exclusive
or specific to HDBs

3. Tax Challenges arising from Digitalisation
Characteristics frequently observed in HDBs and their interaction with international tax rules – potential implications?
Impact on the distribution of taxing rights
e.g., increasing share of profits from cross-border activities not taxed in market jurisdiction?
Cross-jurisdictional scale without mass
Mobility of key profit allocation factors, and difficulty to determine ownership/management
e.g., increasing share of profits can easily be shifted around within an MNE group with limited changes in functions?
Reliance on
intangible assets
New element of Interim Report:
Explores further the potential implications of the salient features of HDB for the tax system
Description:
Feature/evolution – fact/problem – potential tax implication
[…]
Data and
user participation
Potential new source/material contribution to value creation not captured by the current tax framework
e.g., ability of business that exploits data and user-generated content to have little/no physical presence in jurisdiction of users?

4. Task Force on the Digital Economy (TFDE)
IF & TFDE
More than 113 jurisdictions working together on an equal footing
Initial Mandate
(September 2013)
New Mandate
(January 2017)
Subsidiary Body of the CFA
Subsidiary Body of the Inclusive Framework on BEPS (IF)
Work mandated by the Action Plan on BEPS (Action 1)
Follow-up work mandated by BEPS Action 1 Report
Set the Scene (process/substance)
Beginning:
BEPS project
Action 1
TFDE: ad-hoc group created for specific purpose, report to CFA
Action 1 Report (2015): conclusion is unfinished work
New Phase of work:
IF on BEPS, new mandate
Timeline: Interim Report (end of 2018, advanced to April by G20 FM), Final Report (2020)
BEPS Action 1 Report delivered in October 2015
Interim Report delivered in March 2018
Final Report by end 2020

5. Different Country Perspectives
Broad spectrum of divergent countries’ views, that can generally be described as falling within three groups
Failure to take into consideration user-generated value in certain HDBs create misalignments between where profits are taxed and where value is created
This does not undermine the principles of the existing international tax framework
Only targeted changes needed
Digitalisation and globalisation pose challenges to the effectiveness of some basic concepts underlying the existing international tax framework (e.g. transfer pricing, PE definition)
These challenges are not exclusive or specific to highly digitalised business models
BEPS measures have largely addressed double non-taxation, and more time is required to assess their full impact
Generally satisfied with the existing tax system and do not currently see the need for any further reform
Another new element:
While no agreement on whether and to what extent the features of HDB require changes to international tax rules (nexus/profit allocation).
Description/clarification of the different country positions, and classification in 3 relevant categories
Description of each group
[…]
First Group
Second Group
Third Group

6. Review of the Key Concepts
Commitment of the members of the IF to… 1
Undertake a coherent and concurrent review of the profit allocation and nexus rules 2
Work towards a consensus-based solution by 2020
(with an update to be provided in 2019)
Last but not least:
Strong commitment to work together in IF towards a consensus-based solution in 2020 (save the multilateral tax framework)
By undertaking a concurrent review of profit allocation and nexus rules
Next steps (how to get there?)
[…]
Taking forward this commitment will require to…
WP1
Refine the analysis of value creation in HDBs
Test the feasibility of technical solutions
Clarify the parameters of such revision
WP6
TFDE

7. What happened since the Interim Report?
Intensive TFDE work since April 2018
Focus on developing consensus-based solutions
Country proposals
GLOBE
User participation
Marketing intangibles
Significant Economic Presence

8. Allocation of taxing rights Comprehensive work on 2 pillars
Proposed Way Forward
BEPS issues
Allocation of taxing rights
Comprehensive work on 2 pillars
« Without Prejudice » Basis
Release of a Policy Note by the Inclusive Framework on 29 January 2019

9. Key Challenges: Summary
Digital
Interim measures for taxation of e-services
Long-term challenges of nexus and profit attribution
Leveraging opportunities for improved compliance
New challenges such as crypto- currencies
Tax Policy
Technically complex
Divergent positions
Global engagement
Tax Administration

10. Pursue technical analysis Develop detailed work programme
Next Steps
Pursue technical analysis
Public consultation
(March 2019)
Develop detailed work programme
G20 update
(June 2019)

11. Giorgia.Maffini@oecd.org || www.oecd.org/tax
Contact details
Tibor Hanappi
Tax Policy and Statistics Division Centre for Tax Policy and Administration
2, rue André Pascal Paris Cedex 16 Tel: – Fax:
  ||

12. Categories of Relevant Measures
Alternative PE thresholds
Withholding Taxes
Turnover Taxes
Specific regimes for large MNEs
Digital presence-type of PEs (e.g. Israel, India, Slovakia)
Virtual Service PE (e.g. Saudi Arabia)
Broader royalty definitions (e.g. Philippines, Malaysia, UK)
Technical service fees (e.g. UN Model Tax Convention)
Online advertising (e.g. Thailand)
Sectoral taxes, such as for advertisement (e.g. Hungary) or audio-visual content (e.g. France)
Levy on Digital Transactions (Italy)
Equalisation Levy (e.g. India)
Diverted Profits Tax (e.g. UK and Australia)
Base-Erosion and Anti-abuse Tax (e.g. US)