WASHING TON: The highly-anticipated interim report of the Task Force on the Digital Economy (TFDE), slated for release in April, will state that countries are divided on whether special tax rules should be developed to address the digital economy, Chip Harter, Deputy Assistant Secretary (International Tax Affairs) at the US Department of the Treasury said February 15.
Speaking in Washington at a Tax Council Policy Institute conference held February 15–16, Harter discussed the US’s position on the taxation of the digital economy. He also maintained that recently enacted US international tax reform provisions do not violate international agreements.
Martin Kreienbaum, Director General of International Taxation for the German Federal Ministry of Finance and Chair of the OECD Committee on Fiscal Affairs (CFA), provided an overview of the OECD’s international taxation work plan. The TFDE, a subsidiary body of the CFA which includes non-OECD countries, is preparing an important interim report on the implications for taxation of digitalization, set to be delivered to G20 Finance Ministers at their April 2018 meeting.
According to Harter, though, consensus cannot be reached and the report is now being drafted to reflect that fact. The big sticking point in the negotiation is a fundamental disagreement between countries on whether a special tax regime should be created to address the digital economy, Harter said. The US does not believe there are sufficient unique aspects of digital businesses to warrant separate treatment.
Harter said that the world has changed since 2015, when the digital task force considered fixes to respond to action 1 of the OECD/G20 base erosion profit shifting (BEPS) plan.
He said that while the digital economy discussions were prompted, in large part, because of concerns about US digital companies’ business models that facilitated base erosion, US tax reform has now put those concerns to rest. Foreign subsidiaries of US companies now face US tax on their historic earnings at an 8 to 15 ½ percent rate and will be taxed on an ongoing basis at a 13 1/8 percent or higher rate, Harter observed.
Moreover, Harter said, permanent establishment (PE) issues are no longer a factor in the digital tax debate because the largest MNEs have shifted or are in the process of shifting to structures that use local low-risk distributors to report income on locally filed tax returns, relying on transfer pricing principles to determine how much profit to report.
As such, Harter said, the only remaining issues concern how much profit should be allocated to the jurisdiction where the customers are located.
Harter said there is no principled basis for arguing that a different amount of profit should be allocated to a low-risk distributor of digital services located in France as compared to a luxury goods manufacturer’s low-risk distributor located in the US.
In the absence of a principled distinction between those business models, the US does not believe it is appropriate to have a separate tax regime limited to digital business, Harter said. Harter added that the real problem may be a fundamental dissatisfaction in some countries about the level of profit allocated to countries where customers are located.
He said the US is open to discussing whether the PE or profit attribution standards should be revised but reiterated this should be done in a broader context, not as part of a special regime limited to digital companies premised on the fact that they are somehow inherently different.
Kreienbaum said that TFDE discussions about taxation of the digital economy have included analyzing the specific features in value chains that digital companies substitute for traditional elements in value chains. Such features include, for example, user participation, the provision of data, market presence, intangibles, and the ability to be present in a market without having physical presence or having an agent in a country, he reported.
Robert Stack, Managing Director, International Tax Group – Washington National Tax, Deloitte Tax LLP, said that those that advocate greater taxation of digital firms seem to believe that the market country should be given greater rights to tax multinationals. If market countries want to assert greater taxing rights in the digital space, then other countries might want to assert their taxing rights over MNEs even outside the digital space, Stack said.
According to Kreienbaum, though, that Stack’s argument is “completely misleading.” Kreienbaum said that he would not advocate greater taxation rights to market jurisdictions. This is not a residence versus source discussion, he said. Harter said that the TFDE interim report will include a chapter on short-term, temporary, measures to tax the digital economy, such as a digital excise tax, which would be used until countries reach agreement on a more permanent fix
He said the US delegation is keen to make certain that this chapter in no way reads like an endorsement of a short-term digital tax. The report discusses in detail why it is bad policy to adopt a short-term tax, which is important because the EU is also considering such a tax.