COMMENTS RECEIVED ON
PUBLIC DISCUSSION DRAFT

BEPS ACTION 1:
ADDRESS THE TAXCHALLENGES OF THE
DIGITAL ECONOMY
16 April 2014

Summary/Action
This note contains D compilation of WKHcomments received ZLWKUHVSHFWWR the public discussion drafton BEPS Action 1 (Address the Tax Challenges of the Digital Economy).
An invitation for comments was published on the OECD Website on 24 March 2014, with a deadlineof 14 April 2014.

TABLE OF CONTENTS
A3F
AFME - BBA
AmCham EU
Association of British Insurers (ABI)
Austrian Federal Economic Chamber
Banana Fric
Banking and Finance Company Working Group on BEPS
BEPS Monitoring Group (BMG)
BIAC
BOKU
British Sky Broadcasting Group PLC (BSKYB)
BUSINESSEUROPE
Christina Trenta
CBI
Chartered institute of taxation (CIOT)
Confédération fiscale européenne (CFE
Confederation of Indian Industry
Confederation of Swedish Enterprise
Consultative Committee of Accountancy Bodies-Ireland (CCAB-I)
Crowe Horwath
Deloitte LLP
Digital Economy Group
Djelloul Omari
ETNO-GSMA
European Business Initiative on Taxation (EBIT)
European Tax Circle
Fédération Française des Télécoms
Federation of German Industries
Finfacts
Harris Consulting & Tax Ltd
Ibec
ICAEW
Informa plc
Insurance Company Working Group on BEPS
InterContinental Hotels GroupInternational Alliance for Principled Taxation
International Bar Association (IBA)International Underwriting Association of London (IUA)
Irish Tax InstituteJapan Association of New Economy (JANE)
Japan Machinery Center for Trade and Investment (JMC)
Keidanren
King & Wood Mallesons
KPMG

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24
28
34
43
81
83
91
99
110
112
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122
132
140
146
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162
188
192
198
201
204
206
209
223
228
236
241
248
252
255
272
284
287
292
310
317
320
324

Liberty Global.
Macfarlanes LLP
Meridian Global Services
Patrick Breslin
PwC
Reed Elsevier
Revenue Department of Thailand
SAP
Swiss Bankers Association
Thomas Kipka
TAJ
Tax Executives Institute Inc
TechAmerica Europe (TAE)The Dutch Association of Tax Advisors (NOB)
United States Council for International Business (USCIB)
VNO-NCW

337
341
346
351
356
366
374
376
392
398
403
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411
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457

Centre for Tax Policy and AdministrationOECD
2 rue André Pascal
75775 Paris Cedex 16

14 April 2014

Via e-mail CTP.BEPS@oecd.org
Dear Sirs,
On 24 March 2014, the OECD Center for Tax Policy released a Discussion Draft on Action 1 (Tax Challengesof the Digital Economy) of the BEPS Action Plan, for interested parties to provide written comments.
A3F is pleased to respond to the OECD's request for comments on this discussion draft.
A3F backgroundA3F (French Women Tax Experts Association - Association Française des Femmes Fiscalistes) was founded in
2005. A3F is a French-based network of professional women from diverse horizons representing most
players of the French and international tax system (experienced tax executives and expert tax advisors froma wide range of French and foreign companies and law firms, University professors, etc). The ever changing
and rapidly evolving corporate and individual tax policies in France and around the world are a major
concern for businesses. A3F provides its members with opportunities to exchange ideas and best practices,and to contribute to the shaping of tax policy through participation in public debates. A3F currently counts
115 members (of which two thirds are business representatives), all with a recognized work experience.
The president of A3F is Ms Eva Memran, Tax Director for a large French MNC. Ms Memran can be reachedat +33 6 77 76 90 76 or evamemran@gmail.com.
Conclusion
A3F appreciates this opportunity to provide its views on OECD Discussion Draft on Action 1 Tax Challengesof the Digital Economy of the BEPS Action Plan, (outlined in the following pages). These comments wereprepared by an ad-hoc A3F working group chaired by Ms Odile Courjon (Tax Lawyer, VAT specialist) and Ms
Laurence Delorme (Tax Lawyer, Transfer Pricing specialist). We will welcome an opportunity to participate
in the subsequent public consultations and related discussions.
Respectfully submitted,
For Association Française des Femmes Fiscalistes

Odile Courjon

Laurence Delorme

ocourjon@taj.fr+33 1 40 88 29 98

laurence.delorme@transferpricing-avocat.com+33 1 45 61 19 04

Association loi de 1901, siège social : 14 rue Yvart, 75015 Paris
5

14 April 2014

2

OECD DISCUSSION DRAFT ("DD") 24 MARCH 2014
ON ACTION 1 (TAX CHALLENGES OF THE DIGITAL ECONOMY) OF THE BEPS ACTION PLAN

1.

KEY MESSAGES•A3F fully supports the work done by OECD to address the tax challenges of the digital economy
under Action 1 of the OECD. A3F main concern is that the evolution of Information andCommunication Technology, although contributing to the rapid development of digital
economy, may also cause some unfair competition between key players of the digital economy
and others (be it with regard to collection of VAT from end-consummer or with regard to
payment of corporate income tax on business profits).

•

Definition of the digital economy: it could be necessary to have a broad definition of the digital
economy in the DD: lots of businesses do confuse e-commerce and digital economy, and the digital
economy itself also has evolved.
Although this is mentioned here and there in the DD report, we believe, it is of critical importance thatconcepts be defined. As an example:-

Under OECD definitions, e-commerce covers “the sale and purchase of goods and services,conducted over computer networks […]” (cf Para 61 of the DD).
Under EU standards for VAT/customs purposes, the e-commerce rules only cover B to C supplies oftelecom, broadcasting and electronic services (from non-EU vendors, and also from EU vendors asfrom January 1, 2015). But B to C sales of goods remain regulated by the distance selling rules when
made within the EU or by the low value import scheme, which are all rules resulting from the single
market of 1993.

We understand that the DD report covers both goods and services, potentially both in B to B and B to C
transactions (and also eventually C to C transactions), but always in a dematerialized order processing
and through an internet transaction.
For the sake of clarity and understanding, we believe this is should be outlined in a clearer way
because we see lots of confusion around those concepts.

•

Work on corporate tax aspects of the digital economy cannot be treated in isolation of work on CFC
rules. BEPS Action 3 "Strengthen CFC rules" aims at providing some "recommendations regarding thedesign of domestic [CFC] rules" which are due by September 2015. Fixing well-known holes in specificcountry's local CFC regulations would resolve the perceived issue with international tax and digital
economy much better than adding new measures specific to the digital economy, at the risk ofincreasing uncertainty and risk of double taxation for businesses.

6

14 April 20143•

We are not in favor of introducing new characterization of income specific to digital economy
for the purpose of withholding income tax in the source country. Independently of the
difficulty in setting a proper and precise definition of such income, it would in practicetranslate into tax being withheld by the source country on a basis equal to consumer sales by aforeign MNE in such source country - such basis would have no bearing with that share ofbusiness profits possibly attributable under Treaty to the source country (contrary to interestor royalties). The corresponding tax withheld at source (irrespective of total business profits
generated by MNE) would therefore most likey be hard to credit in the residence country,
leading to double taxation for businesses. Article 5 of OECD Model Convention (and relatedcommentaries) could be reviewed and updated in order to take into account the evolution of
the economy and business models of MNEs, especially (but not only) with regard to the impactof the digital economy, as analysed in the DD. We also recommend reviewing the list of
exceptions to Permanent Establishment in particular, so as to avoid/limit cases where asubstantial share of an MNE's activity is carried out in a foreign country through direct(internet) sales to customers, but with no reported tax presence (e.g. no subsidiary or branch)in the said foreign country The PE definition could possibly be reviewed by introducing somemateriality threshold based on the level of business of an MNE in a foreign country in which it
has no reported corporate tax presence (subsidiary or branch). As an example, if more than x%of consolidated sales of an MNE headquartered in country A is realized in a foreign country B,
and subject to meeting other criteria as per (revised) Article 5 of the OECD Model Convention,
the MNE headquartered in country A could be deemed to have a permanent establishment incountry B, . This would form the starting point of the analysis, based on facts (e.g. actual
substance of functions, assets and risks located in country B), as to whether such MNE
effectively operates a PE subject to corporate tax in country B (based on Article 5 of OECD MC),and if so, which amount of business profits should be attributed to such PE.

•

As to VAT, the n°1 issue lies with the location of a non-resident vendor (or supplier) in a B to C
transaction. Failure for the non-resident vendors to VAT register creates harmful an unintended
competition to bona fide taxpayers. We believe that the OECD should have a firm political commitment
for a “civic tax attitude” by all digital players: this is a quest in favor of a fair tax concept.

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14 April 20144

2 - COMMENTS ON SPECIFIC ISSUES AND QUESTIONS HIGHLIGHTED IN DD
Whether it is possible to ring-fence the digital economy from the rest of the economy, and if
not, whether specific types of digital transactions could be identified and addressed throughspecific rules;•

We believe that is not appropriate trying to ring-fence the digital economy from the rest of theeconomy for the purpose of defining specific corporate income tax rules, nor should specifictypes of digital transactions be identified and addressed through specific corporate tax rules. It
is however necessary to review and update Article 5 (and related commentaries) of the OECD
Model Convention.
The initial digital players, which are all mainly US multinationals with a very specific businessmodel (made extremely effective through favorable US CFC rules allowing them to retain
untaxed foreign profits in low-tax jurisdictions without being subject to US tax)Now share thedigital model with the traditional economy which is now converting itself to digital processing
and offerings.

•

Specific types of digital transactions (or forms of payment by the end-consumer) could possibly
be identified and addressed through specific rules when they create specific issues withcollection of indirect tax from the end-consumer and offer possibilities of unfair competition
for non-resident Vendors (see below).

The key features of the digital economy identified by the Task Force and whether there areother key features that should be taken into account;
We believe the identification of opportunities for BEPS in the digital economy (para 119 et sq) has mainly
focused on the traditional GAFA scenarios. For other players, it has relied on a simplistic scenario of a nonresident company interacting with customers in a remote country (cf Para 123). Although this direct B to C
transaction is a given, it is far from true to represent the actual digital world.
In practice, the digital economy entails complex structures with many intermediaries: very often, a content
owner, a data provider, an integrator, and App-store, a mobile operator, a bank collecting the cash, a webportal operator, just to name a few.
The DD report currently addresses none of these scenarios where intermediaries are involved. We believe
the DD report should address the case of these intermediaries and should determine to what extent they
are deemed to intervene in the digital transaction. Because failing to do that, any non-resident vendor
could easily “hide behind” one of those intermediaries which would hold the BEPS actions ineffective but
also which would cause harmful and unfair competition to other bona fide players in the local market.
The EU has set forth presumptions to help operators determine which entity is deemed engaged in thedigital transaction vis-à-vis the end-customer (B to C) or not. This piece of work has not been reflected in8

14 April 2014

5

the OECD DD report. We believe it should be taken into consideration. Indeed, this is a matter of legal
security for the businesses to understand what entity is deemed engaged in the B to C digital transaction
and thus becomes liable to all the BEPS consequences (direct and indirect tax).

The examples of new business models in the digital economy and whether (and if so which)other business models should be considered;
We wish to draw your attention on the fact that it is quite urgent to deal with non-resident Vendors(suppliers) which fail to register (for VAT purposes) in the country of their customers’ residence.
Particularly, we believe that this results from:(i)yet legal but unfair practices which create harmful competition to bona fide traders;(ii)

the increase of fraud schemes, both on import VAT and customs duties : indeed, many operators
create an activity, develop sales and then disappear after a few months and then recreate the sameactivity under a new name or brand. This raises the issue of registration thresholds, should they bevery high or instead very low

The ability of the measures developed in the course of the BEPS Project and the current work
on VAT/GST to address BEPS concerns in the digital economy;
In our view, the main opportunity for BEPS with respect to VAT lies with the location of a non-resident
Vendor (or supplier) in a B to C transaction: as a particular illustration in the EU, which has implemented adeclaring platform for B to C transactions for non-EU vendors, it appears that only very few of the existing
non-EU suppliers have effectively registered on this platform and declared their VAT accordingly on sales to
EU consumers (less than 1000 non-EU companies in the world have spontaneously registered on the EU
portal). This is “THE” major concern of BEPS in a VAT environment.
Of course, the main ones (GAFA and others) have registered further to previous OECD reports, the politicalpressure and their marketing image. But many others, less big, less equipped, less organized, but also lessdiligent fail to register. These small ones of today may be the big players of tomorrow!
Failure to register by the non-resident suppliers invalidates the VAT collection mechanism and creates
harmful and unintended VAT competition.
Only the OECD can address that issue because of its eminence and its International role. Regional platforms(like the EU one) can only provide technical rules and business friendly tools. But they have no impediment
to force non-resident vendors to register otherwise than voluntarily.
Therefore, we strongly believe that the OECD should voice out very loud this political commitment: it is amatter of “civic tax attitude”: we could call it as participating to a “fair tax concept”. We believe only OECD
can and should take this on-board.
914 April 20146

In our view, this issue should be presented as the N°1 source of Digital BEPS with respect to VAT, whichshould be addressed under the BEPs action plan as it creates unfair competition in addition to loss of tax
revenues for governments.
Paragraphs 136 and 170 address BEPS VAT issues for the exempt sector: but this is a sectorial businessissue. In our view, this is NOT the N°1 issue for the Digital economy in a BEPS environment: this is rather
an “abuse of law” scheme on some B to B practices implemented by some banks. This is already dealt withby the OECD B to B VAT/GST Guidelines. Moreover, the described scheme is quite old, has circulated a lot
in a non-digital business transactions environment: it is not specific to digital business although it can be
accelerated in a digital business context. Therefore, this should not come as the first opportunity for Digital
BEPS in the VAT area.
Most of the MNEs tend to be 100 % VAT payers so that VAT is not their major tax concern: rather, transfer
pricing and corporate tax basis and liability are their concern with regard to their international operations.
VAT is due along the recharged invoices: VAT cascades down the value chain of services, with no final
impact for businesses (other than cash). This issue, although important comes after the non-resident
vendor issue described above.

Whether other measures should be developed during the course of the work on other aspectsof the BEPS Action Plan to address BEPS concerns in the digital economy and if so which ones;
VAT measures
Distance selling should be included in paragraphs 220 and 221 pretty much as the low value imports
scheme (just like also in sub paragraph 189); indeed, it may happen that some countries have set a customs
Union or have no customs due because of free trade agreements in place where goods are basically nolonger subject to customs duties. Still the VAT/GST scenarios need be addressed as a result of the “on-line
shopping” habits from consumers in a cross-border transaction. Most of the import value scheme
addresses the customers as being the importer of records, rather than the supplier. Thus, it is importantthat the distance selling is also mentioned together with the import of low value goods.
Any facilitation set up for the import of low value goods should also apply to distance selling with the same
VAT territory.
The existence of VAT number, the access to centralized electronic clearances, or access to electronic
platforms (for direct or indirect tax) should not create Virtual Permanent establishment issues.
Corporate Income Tax
Regarding corporate income tax, the key issue is effectiveness of CFC rules preventing accumulation by
MNEs of foreign business profits never subject to tax. This is not specific to digital economy,
although the major players (GAFAM - which are all US corporations) have focused the debate on
digital economy over the recent years. But as the whole traditional economy is now converting
itself to digital processing and offerings, the BEPS issue with regard to corporate income tax ismore global.
Setting-up a special corporate income tax for digital economy only is not a good option, since itwould generate the risk of double taxation for business.
10

14 April 20147

The broader tax challenges raised by the digital economy which have been identified by the
Task Force and how these challenges should be addressed, taking into account both direct andindirect taxation;
On paragraph 224, OECD should propose specific enforcement agreements and dispute resolution
mechanisms (bilateral or multilateral) to cover also VAT. Those could be clauses to be included in existingtax treaties or in newly negotiated ones. Businesses often suffer from the double taxation on VAT,
resulting from mismatches of qualification by the authorities or from diverging interpretations by theauthorities. Indeed the likelihood that "Virtual PE" (if retained further to BEPS actions, or if assessed by tax
authorities) will end up with VAT collection reassessments is quite high.

The options to address these broader tax challenges discussed by the Task Force andsummarized in the discussion draft;
The draft report suggests various options to fight against the VAT and customs harmful competition from
non-resident vendors/suppliers. We believe this is a good ultimate goal.

But amongst the various options proposed, the creation of a digital withholding tax (VAT) by
intermediaries in charge of digital payments (para 218, Creation of a withholding tax on digitaltransactions), seems the most suitable solution, due to its simplicity.
Please note however that the EU has not chosen that route as banks are explicitly considered NOT
as an intermediary engaged in a digital transaction (and therefore never liable for VAT on it).
The potential cost of compliance arising from the options proposed to address the tax
challenges of the digital economy and suggestions for more cost efficient alternatives;
It is quite critical that any proposed compliance tool be on electronic format, secured and businessfriendly, including for small and medium sized business organizations.
Whether the Ottawa taxation framework principles identified above are an appropriate
framework for analysing options to address the tax challenges, and whether and how theyshould be supplemented
Yes.

11

Finance for Europe
St Michael's House
1 George Yard
London EC3V 9DH
Telephone: 44 (0)20 7743 9300
Email: info@afme.eu
Website: www.afme.eu

British Bankers’ Association
Pinners Hall105-108 Old Broad Street
London EC2N1EX
T +44(0)20 7216 8800
F +44(0)20 7216 8811
E info@bba.org.uk
W www.bba.org.uk

14 April 2014
By email to: CTP.BEPS@oecd.org
Dear Sir,
Discussion draft on addressing the tax challenges of the digital economy
AFME1 and the BBA2 welcome the opportunity to respond to the OECD’s discussion
draft entitled “BEPS Action 1: Address the tax challenges of the digital economy”
published on 24 March 2014 (the discussion draft). We wish to make clear that while
AFME and the BBA have separate and distinct memberships, for the purposes of theOECD discussion draft, both organisations have decided to submit a single, combined
response since our respective members share some concerns with the OECD’s proposals
in the discussion draft.
We welcome that the OECD is consulting with business on its proposals. We believe that
this approach is to the benefit of both policymakers and business and helps to avoid any
unintended consequences arising from the OECD’s initial proposals. We believe that it isalso valuable for the OECD to take account of the views of business on the practicalaspects of operating the intended policy.
Given the relatively short time available it has been hard to consider all aspects of the
discussion draft and we are therefore providing a few comments on the most important
The Association for Financial Markets in Europe (AFME) represents a broad range of European and global participants in thewholesale financial markets. Its members comprise pan-EU and global banks as well as key regional banks and other financial
institutions. AFME advocates stable, competitive and sustainable European financial markets, which support economic growth andbenefit society.
1

The British Bankers’ Association (BBA) is the leading association for the UK banking and financial services sector, speaking for
180 banking members, headquartered in 50 jurisdictions and operating in over 180 territories worldwide jurisdictions, on the fullrange of UK or international banking issues. Collectively providing the full range of services, our member banks make up theworld's largest international banking centre.
2

12

issues of concern to us. We may write to you again with further comments once we have
had a chance to consider the proposals in greater detail.
General comments
We welcome the statement that there should not be a separate tax regime for the digital
economy and the recognition that businesses are generally part of both the digital and“more traditional” economies. While this is equally true for the banking and financial
sector, it should be noted that the regulatory environment for the provision of services
applies regardless of how the service is delivered.
We note that the discussion draft appears to consider aspects of the international tax
system which were not previously understood to be within the scope of Action 1 of theOECD’s Action Plan on BEPS (the Action Plan). We would observe that any
recommendations under Action 1 of the Action Plan should not prejudice discussions
still to take place within the BEPS framework and we would urge the OECD to ensure
co-ordination between the different work streams.
Digital services are a significant source of economic activity across all economies andwe would urge the OECD to ensure that any recommendations to the resolve some of
the tax challenges for the digital economy do not disproportionately limit the potential
for future growth.
Permanent Establishment
Paragraphs 211 to 217 of the discussion draft propose a new nexus for theestablishment of a permanent establishment (PE) based on there being a “significant
digital presence” for an enterprise engaged in “fully dematerialised digital activity”. We
do not think that it is appropriate for there to be a different threshold for theestablishment of a PE for goods and services sold digitally rather than by any othermethod. We note the extensive legal and regulatory environment which already governs
the activities which may be undertaken by banks and financial institutions in any
jurisdiction and where activities are taxed. We do not believe that this should be alteredby an additional rule relating specifically to cross-border digital supplies.
We note that when a supplier registers for VAT/GST purposes in the country of
consumption and does not hold any human or technical resources in that country, the
VAT/GST registration serves a collection purpose only and should not constitute a PE in
the country. Whether an establishment is seen as a provider or recipient for VAT
purposes will be governed by implementing regulations. We urge that this be madeclear and that the obligation to account for VAT is not seen to amount to the creation of
a PE for other purposes.

213Digital transactions
Paragraph 218 of the discussion draft suggests the creation of a withholding tax ondigital transactions. Furthermore, paragraph 218 suggests that since international
payments for digital economy transactions are generally made using credit cards orelectronic payments an option to be considered would be to require withholding by thefinancial institutions involved with those payments. We are concerned that such a
proposal would be impractical for financial institutions as they will not be able toanalyse easily which payments are for digital supplies. Such a proposal is of particularconcern for the financial services sector which already has already invested heavily tomeet the onerous information reporting obligations imposed by FATCA, and will needto do so again to fulfil its obligations under the OECD model Common ReportingStandard.
Supply of digital services
In relation to the concerns set out at paragraphs 137 to 139 of the discussion draft
regarding remote digital supplies to exempt businesses, we note that the concerns are
not specific to supplies of digital services. For example, whilst paragraph 138 refers to
the acquisition of data processing services by an exempt business, we note that thesame concern would arise from the supply of any cross-border service, digital orotherwise. Furthermore, we note that the concerns set out in paragraphs 137 to 139 are
not the result of supplies to exempt businesses, but rather they arise from the lack of a
uniform international tax collection mechanism.
Paragraph 136 of the discussion draft states that “to the extent that guidelines 2 and 4of the OECD’s “Guidelines on place of taxation for B2B supplies of services andintangibles” are not implemented, under certain conditions opportunities for tax
planning by businesses and corresponding BEPS concerns for governments in relation
to VAT may arise with respect to (i) remote digital supplies to exempt businesses and(ii) remote digital supplies acquired by multi-location enterprises that are engaged in
exempt activities.” We note that the work of WP9 on the International VAT/GST
Guidelines is already addressing some of these issues and we recommend thatgovernments should be encouraged to implement the proposed recommendations set
out in guidelines 2 and 4 of the OECD's "Guidelines on the place of taxation for B2B
supplies of services and intangibles" rather than seeking alternative solutions.
Multi-location enterprise
In relation to the tax avoidance concerns set out in paragraphs 140 to 142 of the
discussion draft regarding remote digital supplies to a multi-location enterprise (MLE),
we note that the recharge method is a straightforward method – for both taxpayers andtax authorities - for ensuring the taxation of supplies in the place of consumption. We
3
14

would encourage the OECD to develop further its work on the use of the recharge
method. We would also point out that it is unlikely that the main factor for a
multinational bank – or indeed any MLE – structuring its cross-border business is the
avoidance of VAT – as is suggested in paragraph 142 of the discussion draft.
We note that paragraph 140 of the discussion draft refers to an MLE which has
establishments in different jurisdictions. We believe – and we should be grateful if any
recommendations would make clear - that the intention is to refer only to branches –rather than subsidiaries - of MLEs.
VAT administration
With respect to the collection of VAT in the digital economy, the discussion draft – inparagraphs 190 to 201 - focuses on the exemption for imports of low-value goods andon remote digital services supplied B2C. In this context it is clear that the key questionis how to ensure compliance, particularly by non-resident businesses, in a way that iseasy and efficient for government and business so that the ends (revenue collected)
justify the means (cost of collection). We note that two points are critical to resolving
this question: (i) the implementation at a global level of consistent place of taxation
rules, and, (ii) simplified VAT registration and payment procedures in all countries,
together with flexible proxies for identifying customer location. Again, we note that
WP9 on the International VAT/GST Guidelines addresses a number of these issues,
focusing on the destination principle whereby tax is levied in the place of consumption
via means of the reverse charge mechanism (B2B) or via a local supplier registration(B2C). We think that it would also make sense for the OECD to examine and explore
good practices which already exist in some jurisdictions. For example, the EU approach(both B2B and B2C) in respect of the forthcoming 2015 VAT changes on electronic,
broadcasting and telecom services might serve as a useful framework for consideration.
We would be happy to discuss any of the above in greater detail with the OECD andwould be pleased to contribute further as the OECD’s work develops.
Yours faithfully,

Richard Middleton
Managing Director Tax and Accounting Policy
AFME

4
15

Sarah Wulff-Cochrane
Director Tax Policy
BBA

AmCham EU’s response to theOECD’s discussion draft on the Tax
Challenges of the Digital Economyof the BEPS Action Plan
Executive summary
This document highlights the views of the American Chamber of Commerce(AmCham EU) on taxation of the digital economy and provides a response to theOECD’s discussion draft on Tax Challenges of the Digital Economy of the BEPS
Action Plan. Last year, the G20 countries and the European Commission asked theOECD to tackle base erosion and profit sharing (BEPS). In July 2013, the OECDpublished its Action Plan on Base Erosion and Profit Shifting. The Action Plan
identified 15 actions to address BEPS in a comprehensive manner and sets deadlines toimplement these actions. Action 1 refers to tax challenges of the digital economy.
AmCham EU appreciates the opportunity to provide input to the public consultationand in this paper outlines the key issues it believes the OECD should consider in
discussions on taxation of the digital economy. The response builds on the earlier
AmCham EU’s position on tax challenges of the digital economy.
***

AmCham EU speaks for American companies committed to Europe on trade,investment and competitiveness issues. It aims to ensure a growth-orientated businessand investment climate in Europe. AmCham EU facilitates the resolution oftransatlantic issues that impact business and plays a role in creating better
understanding of EU and US positions on business matters. Aggregate US investment
in Europe totalled €2 trillion in 2013 and directly supports more than 4.3 million jobs
in Europe.

American Chamber of Commerce to the European Union (AmCham EU)
Avenue des Arts 53, B-1000 Brussels, Belgium
Register ID: 5265780509-97
Tel: +32 (0)2 513 68 92 | www.amchameu.eu
Secretariat Point of Contact: David Hastings; dha@amchameu.eu; +32 (0)2 289 10 36
16

AmCham EU’s response to BEPS - Tax Challenges of the Digital Economy

14 April 2014
General observations
The OECD is the best venue for discussions about international tax policy
Against the backdrop of debates on taxation policy in some EU Member States and the work of the EU
Expert Group on Taxation of the Digital Economy, the need for a multilateral approach to changes ininternational tax-policy makes the OECD the best venue for coordinated discussions about taxation for
multinational companies.
The OECD has a long track record as an effective venue for multilateral tax coordination, both in thedevelopment of its Model Tax Convention and in its more recent work targeting tax havens. The
OECD’s work in this area is crucial to maintaining tax equilibrium both among OECD members andnon-OECD countries that closely follow OECD developments. A proposal that might raise taxes in
one country or region could give rise to unexpected and contentious shifts in other states' corporate tax
revenue and also create concerns about double taxation. The goal of multilateral tax coordination is
not to see one country gain revenue at the expense of another, but rather to ensure a consistent rulesbased approach to taxation, creating certainty for companies operating across borders and predictablerevenue streams for government budgets.
AmCham EU commends the efforts of the OECD to ensure a coordinated and coherent global
approach to the taxation of multinational companies.
Broadly defined, all businesses in the global economy are digital in one way or another, so any
sectoral approach to digital taxation would affect companies across the board
BEPS Action 1 addresses the tax challenges of the digital economy. But what defines the digital
economy? What are the criteria that determine if a company is considered ‘digital’? Are all companies
that adopt new technologies like the Internet, sophisticated software tools and data-driven businessmethods actually digital companies?
The OECD has found that digital technologies are enmeshed in all aspects of the economy, with firms
across all sectors using the Internet, data analysis and other new technologies to redefine traditional
business methods (see ‘Measuring the Internet Economy: A Contribution to the Research Agenda,’
2013).
A closer look at specific sectors shows how pervasive digital tools have become, blurring the lines
between different parts of the economy. The music, film and publishing industries, for example, havemigrated to digital production and distribution methods. Newspapers transmit articles on the Internet,
derive an increasing share of revenue from online advertising and use web-specific tools and formats
to attract readers. Financial firms, including banks and insurers, use network technologies as the
backbone of their businesses and to which the appropriate regulatory environment still applies. Credit
card transactions, car insurance quotes and the trading of shares are conducted online or via
sophisticated technology platforms. The pharmaceutical and medical sectors are also digital, using
data analysis and advanced robots to create new chemical compounds, modelling their efficacy long
before drug trials begin. Hospital networks store and share patient data electronically and use data
analysis in areas such as tracking equipment and facilities to drive better patient care. The industrial
sector also uses digital tools to gather and analyse data in order to improve the utilisation and

17

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AmCham EU’s response to BEPS - Tax Challenges of the Digital Economy

efficiency of equipment and manufacturing processes.
Even the parts of the economy that might seem unlikely to be described as ‘digital’ have beentransformed by new network technologies. Mining, manufacturing and agriculture have become digitalindustries, using networked trading platforms to buy and sell commodities and finished goods in a
global marketplace. Energy companies can now monitor and maintain their generators remotely in realtime. Even the automotive sector has incorporated advanced technologies like global-positioning
devices, Internet radio and computers that analyse and regulate performance and aid maintenance.
These are not just add-on features. Car companies that have been in business for over a century are
currently developing vehicles that can drive themselves, using sophisticated software, data analysis
and real-time communication tools. These ‘computers on wheels’ show how new technologies are
deeply integrated in all aspects of our economy.
There is an international consensus that the wider economy has transformed into a digital economy,
adopting new technologies, new communication tools and new ways of analysing and employing data
to create innovative business models and better business methods. As it becomes less and less possible
to distinguish the digital economy from the larger economy, any sectoral approach to digital taxation
would in fact affect companies across the board.
Specific observations
AmCham EU commends the OECD for proposing a principle of non-discrimination between
economies, thereby acknowledging that the digital economy cannot be separated from the broader
economy and that the BEPS concerns that arise in the digital economy must be addressed throughoverall BEPS Action Plan.
However, AmCham EU believes that some options proposed by the OECD draft report raise concernsthat could hurt the economy itself or reflect a fundamental misunderstanding of the digitalised
economy. These include:●

A proposal that would identify a new taxable nexus based on ‘significant digital presence,’
which is based on the incorrect assumption that some businesses are conducted wholly
digitally. This runs contrary to one of the principal conclusions of the draft position, whichstates that the whole economy incorporates digital methods. Companies in all sectors still needpeople, assets and functions that will create some tax presence in many jurisdictions. In
addition, such a narrow proposal would require a change in the attribution rules for companies
across all the sectors of the economy.

●

A concept of imposing a taxable nexus based on the concept of a ‘virtual permanentestablishment’ could in fact cause double-taxation for all digitalised firms - as a firm
would have, for the same activity, a permanent establishment and a virtual one located inanother country. This could in turn raise conflicts of law between the current definition of
permanent establishment and this new virtual one, and not satisfy some of the principles of the
Ottawa Framework (such as efficiency, certainty and simplicity).

●

A proposal of introducing a new withholding tax on digital transactions collected by financial
institutions involved in those payments stands in contrast to the conclusion of the report thatthe digital economy cannot be ring fenced.

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AmCham EU’s response to BEPS - Tax Challenges of the Digital Economy●

The consumption tax challenges identified by the OECD must be addressed without
introducing additional complexity or burdens on taxpayers.
In most consumption tax systems, businesses, as the collectors of Value Added Tax (VAT),
are a key partner for governments. In light of this role, AmCham EU believes that the lack ofan easy and efficient collection mechanism in B2C transactions leads to a distortion ofcompetition for businesses and consumption tax shortfall for governments. AmCham EU
shares the view of the OECD that the introduction of a simplified registration regime (such as
the EU’s mini one-stop-shop framework), accompanied by registration thresholds, is probably
the most viable option today as it would lead to taxation in the country of consumption while
trying to mitigate the burden on businesses. This would require parallel work and continuous
development of an international VAT/GST framework to ensure certainty and consistency inthe VAT treatment of digital transactions, in particular uniform application of ‘place oftaxation’ rules.
Finally, it is important to keep in mind that when a registration is required for businesses toparticipate in the collection of consumption taxes, such registration does not, by itself
constitute permanent establishment in the country in which the consumption tax is due.
Increasingly, the requirement to register for foreign VAT registrations is being used to derive
corporate tax; in addition to the fact that it does not cohere with the international corporate
income tax framework, such requirements create the potential for discrimination and could, if
continued, undermine the efficient collection of consumption taxes.

●

Proposals on taxation of data or the use of data to determine a taxable nexus that would
stifle innovation and negatively affect the whole economy.
Some proposals on the taxation of the digital economy have focused on the value of data andhave considered whether a ‘data tax’ would be desirable. Recent proposals assume that raw
data has an intrinsic value while ignoring the longstanding use of customer data, for instance,in traditional industries.
The examples cited in the previous sections demonstrate the wide range of scenarios in whichdata is transferred across borders. None of the examples suggest that data has an intrinsic
value – rather the value is created when data is transformed into information, knowledge andaction; not where data is collected. Even if it were accepted that raw data has a value in and of
itself, it is clear that this value cannot be determined with reference to the number of bits thatstoring or transmitting the data consumes – some raw data sources may be very large in size,
but of very little value, whereas other data sources may be very smaller in size, but ofsignificant value. Indeed, using software, the same data could be compressed into a smaller
number of bits without diminishing its value. Equally, firms may not be able to, or simply may
not benefit from, the possession of such data, so that no income is generated by it.
Consequently, a ‘data tax’ would be inequitable and be highly subjective, undermining thefaith in and relative predictability of the tax system.
Further, as can also be seen from the examples above, the use of data to build new businesses(such as app development) and drive efficiency (e.g. the industrial internet and smart meters)
is pervasive and a tax on data would raise the cost of a critical business input and impede dataflows, potentially slowing the pace of innovation and data-supported commerce. This would
have a negative effect on the wider economy and SMEs, not just a few multinational

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AmCham EU’s response to BEPS - Tax Challenges of the Digital Economy

companies.
Against this backdrop, data localisation is not a way to address the taxation of intangible
assets or to create a taxable nexus or virtual permanent establishment. The location in whichdata is stored is not relevant to the economic activity that occurs as a result of that data. We
would reiterate that economic value is located where intangibles are created and developed,
not performed. In addition, using location as the key criterion could have the unintended
consequence of generating a wave of forced data localisation.
AmCham EU is concerned that proposals to erect national barriers or ring fence data flows(which have been discussed as potential means to implement a data tax) would create barriers
to crossborder commerce. Such a tax would stifle innovation and negatively affect economic
activity across the board. Similarly, the use of data to determine a taxable nexus would be bothproblematic and illogical. There is no clear connection between the value of data and its
location. Additionally, the effective forced localisation of firm's data will have unintended
consequences, particularly for small businesses that lack the scale to adapt.

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Page 5 of 5

ABI RESPONSE: OECD PUBLIC DISCUSSION DRAFT BEPS ACTION POINT 1 : TAX
CHALLENGES OF THE DIGITAL ECONOMY (“DISCUSSION DRAFT”)
The UK Insurance Industry
The UK insurance industry is the third largest in the world and the largest in Europe. It is a vital partof the UK economy, managing investments amounting to 26% of the UK’s total net worth andcontributing £10.4 billion in taxes to the Government. Employing over 290,000 people in the UK
alone, the insurance industry is also one of this country’s major exporters, with 28% of its net
premium income coming from overseas business.
Insurance helps individuals and businesses protect themselves against the everyday risks they face,enabling people to own homes, travel overseas, provide for a financially secure future and run
businesses. Insurance underpins a healthy and prosperous society, enabling businesses andindividuals to thrive, safe in the knowledge that problems can be handled and risks carefully
managed. Every day, our members pay out £147 million in benefits to pensioners and long-term
savers as well as £60 million in general insurance claims.
The ABI
The Association of British Insurers (ABI) is the voice of insurance, representing the general insurance,
protection, investment and long-term savings industry. It was formed in 1985 to represent thewhole of the industry and today has over 300 members, accounting for some 90% of premiums in
the UK.
The ABI’s role is to:•

Be the voice of the UK insurance industry, leading debate and speaking up for insurers.

•

Represent the UK insurance industry to government, regulators and policy makers in the UK,
EU and internationally, driving effective public policy and regulation.

•

Advocate high standards of customer service within the industry and provide useful
information to the public about insurance.

•

Promote the benefits of insurance to the government, regulators, policy makers and the
public.

ABI response to the Discussion Draft
1. The ABI supports the aims of the OECD BEPS Action Plan to address weaknesses in theinternational tax environment. Our comments reflect our desire to ensure that any measures
are workable, well targeted, and proportionate in the context of the efficiency of commercial
insurance operations. In the spirit of working constructively with the OECD and member
governments, we offer information and suggestions as to how proposals could be improved tohelp achieve objectives whilst at the same time avoiding inadvertent consequences impacting on
the normal conduct of insurance business models.

21

2. As the Discussion Draft acknowledges in paragraph 54, digital technology has “….become
embedded in and central to the business models of firms operating across the economy”. The
extent to which digital technology is used varies depending on the business sector and evenvaries within sectors. For example, business of some insurers is placed through platforms, whilst
the business models of other insurers do not include platform services. In view of this the ABI
fully agrees with the decision reached by the Task Force on the Digital Economy (“the Task
Force”) that ring-fencing the digital economy as a separate sector and applying tax rules on thatbasis would be neither appropriate nor feasible (referred to in paragraph 205 of the Discussion
Draft).
3. The ABI believe that the tax challenges of the digital economy should be taken into account in
the development of the other measures envisaged in the BEPS Action Plan. If this is done thosemeasures should substantially address the BEPS concerns that arise in the digital economy. So,
whilst the ABI can understand the desire of the Task Force to consider possible options now, we
do not believe decisions on the options should be made until work on the other relevant BEPS
actions, referred to in Section V, is completed. It is only where it is clear that the measures
identified under other BEPS actions do not address the challenges raised by the digital economy
that the potential options to address them, which are described in section VII of the Discussion
Draft, should be considered. Otherwise, it is likely there will be unnecessary complication which
may have inadvertent negative impact on business.
4. An example of where unnecessary complications could arise for insurance groups, which may
result in an inadvertent negative impact, is the interaction of the work being undertaken on
permanent establishment as part of Working Party 1 and the options being considered by the
Task Force. As such any consideration of permanent establishment should look holistically at theissues for all businesses without being constrained by the options being considered by the Task
Force.
5. The ABI agrees that the Ottawa taxation framework principles of neutrality, efficiency, certainty
and simplicity, effectiveness and fairness, and flexibility continue to be an appropriate
framework for evaluating the potential options.
ABI
14 April 201422

Financial, Fiscal and Trade Policy Department
Veronika Rauner-Andrae
Wiedner Hauptstrasse 63
A-1045 Vienna, AUSTRIA
T 0043 5 90 900-4173 | F 0043 5-90 900-114173
E fhp@wko.at
W http://wko.at/fp

Organisation for Economic Co-operation
and Development

E-Mail: CTP.BEPS@oecd.org

Vienna, 14 April 2014

COMMENTS ON BEPS ACTION 1:
ADDRESS THE TAX CHALLENGES OF THE DIGITAL ECONOMY

It is a big challenge for the Austrian economy that e-commerce sales of global acting international groups
increase worldwide. Even in Austria the market share of Internet trading companies increases visibly.
Because of the use of tax loopholes and the non- or very moderate taxation in low-tax countries or tax
havens there is on the one hand the problem that the Austrian tax authority is confronted with the missingof tax base of such companies and on the other hand it causes distortion within the Austrian market anddistortion of competition. The Austrian advertisers, domestic media, advertising executives and the wholemarket of trading companies are affected thereof.
The Austrian Federal Economic Chamber asks for consideration of its opinion.

23http://bananafric.com

By email: CTP.BEPS@oecd.org

14 April 2014

Dear Sir, Dear Madam,Comments on the Discussion Draft on BEPS Action 1: Address the tax challenges of thedigital economy

We welcome the opportunity to give some comments on the taxation of the digital
economy. Determine an appropriate set of rules to tax digital economy is crucial tomaintain balanced allocation of taxing rights at worldwide level.
Because traditional economy is evolving into digital economy, ring-fencing the digital
economy is not an option. In addition, we strongly object to any tax on data’s collection
or data’s use. Citizens are more mobile than ever and should never be considered asresources of their respective States, the use of which (e.g. use of their personal data’s)
should be remunerated.
Taxing the digital economy requires the combination of (i) existing tax rules, (ii) current
OECD work to tackle BEPS (e.g. on treaty abuse) and (iii) new taxes. We recommend thefollowing:
1. tax websites’ bandwidth use;
2. tax commissions, including e-marketing fees at source and adapt double tax
treaties accordingly. If required, a new definition of e-service could be includedin the model tax convention 1;
3. require VAT to be paid in the country of consumption2; and4. support digital economy with strong tax incentives 3.

1

This proposal is already mentioned in the Discussion Draft on BEPS Action 1. See §218.
We did not analyze thoroughly indirect tax aspects. A lot of efforts are already being done a.o. at European
level on this matter.

2

3

Fair and efficient tax system does not imply high taxes.
124Additional comments on tax websites’ bandwidth use
This option is often subject to high criticism though it is definitely worth discussing.
Some could argue that it is contrary to the US Internet Tax Freedom Act 4 but it all
depends on how you consider such a tax. It is merely a supplementary way to levy
corporate income tax on enterprises with web presence.
These are our thoughts / recommendations on bandwidth tax:•

It is easy to implement. ISP’s can provide the information about bandwidth use totax authorities in order to collect tax (compare this role to the role of financial
institutions e.g. in collecting withholding tax on financial income).

•

The tax should only apply as from a certain annual threshold of bandwidth used inorder to avoid administrative nightmare.

•States should grant a corporate income tax credit to enterprises to the extent they
pay bandwidth tax. This would maintain equality between digital enterprises andtraditional enterprises, leveling the playing field a little. Such a tax credit system
would boost the competiveness in the digital sector. It would also encourage Tech
giants to increase their physical presence in their actual markets to use 100% of thetax credit.

•

Determine the tax based on each enterprise’s turnover or another financial ratio
would be ideal but seems unrealistic, absent harmonized accounting GAAP. Our
recommendation would be to start with a fixed tax calculated based on the quantityof octets used by the website. There should be some progressivity e.g. applying
different tax levels depending on the enterprise size or the turnover.

•

The tax should be paid per installment with a compensation adjustment at year end
based on effective use of bandwidth.

•

Coordinate the efforts at OECD / European level with respect to data’s collection
and control.

•

Have some exemptions available for non-profit websites.

New Business Models in a digital economy
We believe the combined application of bandwidth tax, corporate income tax andwithholding tax will ensure fair taxation of the new business models identified in the
Discussion Draft namely: e-commerce, app stores, online advertising, cloud computing,payment services, high frequency trading and participative network platform.

4

The 1998 Internet Tax Freedom Act was signed into law as title XI of Public Law 105-277 on
October 21, 1998.
225

In addition, we developed our own classification with 4 different business models:participative content, delivery of content based goods, delivery of tangible goods andintermediation. Note that one enterprise can combine multiples business models.
•Participative content (e.g. Facebook, Twitter)
The main income stream for these enterprises is the e-marketing. The use of theservices is free for the final consumer.

•

Delivery of content based goods (Google Play, AppStore, etc.)
The consumer buys digital/intangible content for a physical device (music, movie,
book, app) at a specific price.

•

Delivery of tangible goods (Amazon)
The consumer buys tangible goods which are physically delivered to an address. The
difference with a traditional purchase is that the vendor can be located anywhere in
the world.

•Intermediation (Booking, Google, SkyScanner)
The enterprise is an intermediary or a search engine. Its main purpose is to facilitate
consumers’ access to information. In this category, a distinction is necessary
between enterprises receiving commissions or fees such as Booking.com andenterprises rendering the service for free while targeting on other sources of income
such as e-marketing (Google).

No matter the category, e-marketing is usually an important source of income.
We classified the 100 top websites (Alexa ranking 5) according to these categories.

5. Tentative, most relevant sites only. January 2014’s list; source: http://www.alexa.com/topsites. The sites
in the top sites lists are ordered by their 1 month Alexa traffic rank. The 1 month rank is calculated using a
combination of average daily visitors and page views over the past month. The site with the highest
combination of visitors and page views is ranked #1.
3
26

No matter how you look at it, the application of a withholding tax on commissions ande-marketing income together with tax on bandwidth use is an appropriate answer to thetax challenges of the digital economy. These tools combined with current internationaltax rules will help make sure that “digitally active” MNE’s pay their fair share of tax. It is
important however to keep in mind that this notion of fairness is open to criticism andhighly dependent on time, location and perspective. Therefore, we highly recommend
relying on other Ottawa Taxation Framework principles to further analyze options to tax
the digital economy, namely: efficiency, simplicity, neutrality and flexibility.

We appreciate this opportunity to provide comments to the OECD on the discussion
draft and we hope our thoughts will be useful. We would be happy to discuss any of theabove in greater detail (redaction@bananafric.com).

Yours faithfully,

Caroline Dooms
Founder & Writer
Banana Fric

About Banana Fric
Banana Fric is an independent website on international tax challenges. Its founder
believes in simple, low and efficient taxation and uses this website to share ideas andthoughts on current tax debates. In addition, the author offers specialized services in tax
writing, translation and research. More information is available at the following
webpage: http://bananafric.com/tax-writing-research/.

427

14 April 2014
Tax Challenges of the Digital Economy
Comments by the Banking and Finance Company Working Group on BEPS

1. Introduction and Summary of Comments
These comments are being submitted to the OECD by the Banking and Finance
Company Working Group on Base Erosion and Profit Shifting (BEPS), which consists ofbanks and finance companies conducting international business, in response to theOECD’s Public Discussion Draft, BEPS Action 1: Address the Tax Challenges of theDigital Economy (March 24, 2014).
Our comments on the Discussion Draft may be summarized as follows:•

We believe that it is important for the OECD to refrain from making any
recommendations that are specific to the digital economy until all stakeholders
can evaluate, at a future time, the effectiveness of the recommended measuresdeveloped in the course of the BEPS Project, as well as recommendations
stemming from work currently being done on VAT/GST.

•

Recommendations in the digital economy area should focus on businesspractices that raise the kinds of concerns that inspired the BEPS Action Plan—
the use of artificial measures to transfer profits to affiliates based in low-tax
jurisdictions in amounts that are disproportionate to the real contribution of thoseaffiliates to a global business, and the ability to conduct very profitable activities
with customers in high-tax jurisdictions without creating a physical presence inthose jurisdictions.

•

If those recommendations are targeted appropriately, they should have limited
application to regulated financial services businesses, because our digital
activities are either predominantly local (such as consumer online banking andsimilar businesses involving retail customers) or involve the realization of profits
in business units located in high-taxed jurisdictions (such as electronic trading or
credit card issuing).

•

We are concerned about the potential option of a new, alternative type of
permanent establishment based on a “significant digital presence” in ajurisdiction. Such a change would be a radical departure from longstanding
128

principles of international taxation, and we believe if pursued it must be done in a
way that fully considers the theoretical and practical challenges, does not
disproportionately impact financial services businesses, and is confined to theabusive situations that are within the scope of the BEPS Action Plan.
•

We are also very concerned about the suggestion that a potential option is torequire financial institutions to withhold a final tax from payments made to foreign
e-commerce providers. Such a requirement would impose an unreasonableburden on the affected financial institutions, due to the practical difficulties in
implementing such a proposal.

•

We agree that there may be cases in which a consumption tax would represent
an appropriate means of dealing with digital sales by foreign sellers, or at least
would be preferable to income tax options that would involve the abandonment oftraditional nexus standards. However, a consumption tax would not be an
appropriate or practical option in the financial services context. For example, thepractical difficulty of identifying and accounting separately for the services
component of interest on a bank deposit is widely recognized. As noted above, it
is important to wait for recommendations in this regard that will result fromexisting work being done in this area.

•

All of the potential measures discussed in Section V of the Discussion Draft(“Tackling BEPS in the Digital Economy”) would create a greater need for
improvements in dispute resolution procedures. This highlights the importance of
Action 14 of the OECD’s Action Plan on BEPS (“Make dispute resolution
mechanisms more effective”).

2. Need for future evaluation of the effectiveness of anti-BEPS measures
The Discussion Draft acknowledges that the tax issues related to the sale of digitized
products and services by nonresident sellers are not essentially different from the tax
issues arising from sales of physical goods and other transactions between nonresident
providers and consumers located in a jurisdiction where the provider has no physicalpresence. Advances in information and communication technology have simply madedirect interactions between providers and consumers in different jurisdictions more
efficient, while enabling the delivery of a variety of products and services in digitized
form through telecommunications. From an income tax perspective, therefore, thedigital economy does not appear to raise new issues. Rather, it has raised the stakes
regarding BEPS and the various elements of the existing international tax regime that
permit BEPS to occur.
229

As suggested in Section V, paragraph 146, of the Discussion Draft, the overall aim of
the BEPS Action Plan is to “ensure that, once the different measures are implemented
in a coordinated manner, taxation is more aligned with where economic activities takeplace.” Indeed, all of Section V is devoted to a discussion of “how the work on theimplementation of the BEPS Action Plan, as well as the work on consumption taxes, is
expected to address” the BEPS concerns that are enlarged by key features of the digital
economy such as mobility of functions, assets and people. The discussion covers
measures designed to restore taxation in market jurisdictions, measures aimed at
restoring taxation in both market and ultimate parent jurisdictions, measures that will
restore taxation in the jurisdiction of the ultimate parent, and measures to address
BEPS in the consumption tax area.
In paragraph 208 of the Discussion Draft, it is noted, appropriately, that “it is expectedthat as described in Section V, the development of the measures envisaged in the
BEPS Action Plan will effectively address the BEPS concerns that arise in the digital
economy”. Given this expectation, it seems clear that the OECD should not, at thisstage, make any recommendations pursuant to Action 1, which relates only to the digital
economy. Instead, all stakeholders should have the opportunity to evaluate theeffectiveness of the measures implemented as a result of the BEPS project before any
decision is made to develop recommendations that are specific to the digital economy.
Digital transactions in the financial services industry
The vast majority of online business conducted by financial services companies does
not implicate the concerns raised in the Discussion Draft, such as the creation ofstateless income and the shifting of profits to low-tax jurisdictions.
For example, for retail banks, a significant proportion of customers now conduct
consumer banking activities online. However, in virtually every case the accountrelationship is associated with a regulated entity (a branch or subsidiary) that is locatedin the customer’s home country. Income derived from the conduct of a retail banking
business is subject to taxation in the countries where the customers are based, without
regard to whether those transactions are effected online or face to face. The advent of
the digital economy has not enabled banks to situate retail banking businesses awayfrom their customers, or to do business with customers in high-tax jurisdictions remotelyfrom a low-taxed hub; for regulatory reasons, it never will.
For different reasons, the advent of the digital economy hasn’t resulted in fundamental
changes in the manner in which wholesale and institutional banking businesses are
conducted, and has not created planning opportunities of the kind that the BEPS Action
Plan is intended to address. For example, the globalization of the financial markets, in
combination with advances in computer technology and communications infrastructure,330

has led to the development of electronic trading that is intended to facilitate effective
hedging, capture price differentials and enhance liquidity. Trades are effected
automatically through the use of servers and internally-created algorithms that generatemarket prices. To effect trades efficiently, the technology infrastructure is typicallylocated in close proximity to the principal financial centers around the world where themajority of trades occur, such as New York, London and Tokyo. Income derived fromthose activities is attributable to factors including the staff who developed thealgorithms; risk managers who oversee the positions; the regulated entities that effectthe transactions; and the technological infrastructure. The OECD has previously
identified these activities as “key entrepreneurial risk-taking” (“KERT”) functions, usedby the financial services industry for capital attribution and transfer pricing analysis.
Those activities are situated exclusively or almost exclusively in high-tax jurisdictions.
There is no need for BEPS Action 1 to deal with technological advances that merely
facilitate the efficient conduct of business in high-tax jurisdictions, and don’t create
opportunities for base erosion or profit shifting.
Similar to wholesale and institutional banks, credit card companies may lack apermanent establishment in countries where card holders and merchants are located.
Historically, such “destination market” business has been conducted from outside thecard holders’ and merchants’ country via phone, mail and limited use of local
independent contractors, and it has been done for reasons unrelated to the tax
avoidance concerns targeted by the BEPS Action Plan. To begin taxing destination
market credit card business in countries where the customers are located merely
because companies choose, for sound business reasons, to take advantage of
emerging digital technology would be outside the scope of the BEPS Action Plan.
3. “Significant digital presence”
The Discussion Draft discusses, as a potential option, an alternative standard of taxable
nexus, namely that an enterprise engaged in “fully dematerialized digital activities”
would be deemed to have a permanent establishment in a jurisdiction for tax purposes if
the enterprise had a “significant digital presence” in the jurisdiction.
Examples given in the Discussion Draft of what might give rise to such a presence
include:••The existence of a significant number of contracts for digital goods orservices that were remotely signed between the enterprise and customers
resident in the jurisdiction;
Widespread consumption of digital goods or services of the enterprisewithin the jurisdiction;

4
31

•
•
•

Substantial payments by customers resident in the jurisdiction for digital
goods or services delivered as part of the enterprise’s core business;
The performance of secondary functions such as marketing andconsulting in the jurisdiction by a branch of the enterprise; andThe enterprise’s use of personal data, obtained by systematic monitoringof internet users in the jurisdiction, to do a substantial amount of business.

Financial services such as the destination market credit card business described above
could easily fall into the category of dematerialized digital activities that maintain asignificant digital presence in the jurisdiction where the customer is located. There is,however, no discernible principle of tax policy to subject such enterprises to taxation ina jurisdiction where it has no employees, agents, or tangible assets while at the sametime apparently continuing to exclude from taxation enterprises that sell physicalproducts into the jurisdiction without a physical presence there. In addition, it would
most likely be very difficult to administer as a practical matter, both for taxpayers
required to comply with it and for tax administrators attempting to audit it.
Expanding the concept of nexus in this manner would be a radical departure fromlongstanding principles of international taxation found in treaties and the internal tax
laws of most countries, and we believe if pursued it must be done in a way that fully
considers the numerous challenges from both a theoretical and practical perspective,
does not disproportionately impact financial services businesses, and is confined to theabusive situations that are within the scope of the BEPS Action Plan.
4. Final withholding tax on outbound payments for digital goods or services
The potential option of imposing a final withholding tax on payments to a foreign ecommerce provider is similarly flawed. A foreign seller of physical goods to purchasers
resident in a country where the seller has no physical presence or dependent agent is
not taxed by way of withholding on the purchaser’s payments. The Discussion Draft
does not make a case for imposing a withholding tax on outbound payments for digitalproducts or services.
Moreover, we emphatically reject the suggestion made in the Discussion Draft thatwithholding tax should be payable by financial institutions involved in the making ofoutbound payments for digital goods or services. A financial institution providing
payment services cannot be expected to determine whether a payment made under acontract to which the financial institution is not a party is being made for a digitized
product or a physical product. A compliance requirement of this nature would beunreasonable and impractical.

532

5. Consumption tax options
Given that established tax policy principles allow a foreign seller of physical goods tomake an unlimited number of sales, free of income tax, to residents of a jurisdiction
where the seller has no physical presence or dependent agent, it appears that for someindustries, a consumption tax, rather than income tax, may be the appropriate area for
the OECD to focus on in developing potential options for addressing tax challenges
posed by the digital economy. We would note, however, that this would not represent
an effective or practical option in the financial services context, in light of theextraordinary and widely recognized difficulty of disaggregating the services componentof conventional financial transactions.
We understand that work is ongoing within the OECD and elsewhere with regard to
improving the administration of consumption taxes on cross-border transactions. We
suggest that it would be appropriate to await the results of that work and evaluate any
relevant recommendations that may be made before proceeding to formulate specificoptions under Action 1 of the BEPS Action Plan.
6. Importance of dispute resolution improvement
Section V of the Discussion Draft (“Tackling BEPS in the Digital Economy”) discusses
various measures that may be recommended under several of the action items in theOECD’s Action Plan on BEPS. We note that the recommendations will increase theimportance of improvements to existing dispute resolution procedures regarding double
taxation. In this regard, we urge the OECD to devote at least as much time and effort tomaking recommendations under Action 14 of the BEPS Action Plan (Make dispute
resolution mechanisms more effective) as under other action items.

633

BEPS MONITORING GROUP
Address the Tax Challenges of the Digital Economy
This response is submitted by the BEPS Monitoring Group (BMG). The BMG is a group of
specialists on various aspects of international tax, set up by a number of civil society
organizations which research and campaign for tax justice including the Global Alliance for Tax
Justice, Tax Justice Network, Christian Aid, Action Aid, Oxfam, Tax Research UK. This
response has not been approved in advance by these organisations, which do not necessarily
accept every detail or specific point made here, but they support the work of the BMG andendorse its general perspectives.
This response has been prepared by Erika Dayle Siu and Sol Picciotto, with comments and input
from Jeffery Kadet, Attiya Waris and other members of the Group.
We welcome the opportunity to comment on the Discussion Draft (DD) on Addressing the Tax
Challenges of the Digital Economy published by the OECD on 24th March 2014, under Action 1of the BEPS Action Plan.
Our comments will address the questions on p.7 of the DD.
1. Whether it is possible to ring-fence the digital economy from the rest of the economy,
and if not, whether specific types of digital transactions could be identified and addressed
through specific rules.
We agree with the evidence and analysis in the DD, that digital technologies are a feature ofmany if not all sectors of the economy. Hence, we would go further than the conclusion in para.
59 that it would be difficult or impossible to ring-fence the DE as a separate sector, or to apply
distinct rules to digital transactions. We agree with the stronger conclusion in para. 205 that`ring-fencing the digital economy as a separate sector and applying tax rules on that basis would
be neither appropriate nor feasible’. Indeed, we consider that it is more appropriate to refer to the`digitalised economy’. We believe that segregating specific types of digital transactions, socalled ‘fully dematerialized digital activities’ as introduced in para. 212, constitutes ring-fencing
and thus, is neither appropriate nor feasible.
In addition, applying different rules to such transactions would violate the principle of Neutralityof the Ottawa Taxation Framework, because businesses which engage only in digital transactions
often compete with other businesses in the digitalised economy which are less than fullydematerialized.
In our view, the shift to a digitalised economy has made it starkly apparent that the traditional
test of taxable presence, the concept of Permanent Establishment, must be revised. We explain
the reasons for this in more detail in our discussion of the following points. Without such achange the BEPS project would not comply with its mandate from the G20 that `the existing
international tax rules on tax treaties, permanent establishment, and transfer pricing ...[must...]ensure that profits are taxed where economic activities occur and value is created’. Our proposals
for such changes are given under point 7 below.

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2. The key features of the digital economy identified by the Task Force and whether there
are other key features that should be taken into account;
In our view, the analysis put forward in the DD astutely describes the changing dynamics andimpacts of the DE on value creation and globalisation. In our view these aspects are best
understood in terms of (i) dematerialisation, (ii) connectivity and (iii) changing relations between
suppliers and customers.
Dematerialisation.
Although dematerialisation is not referred to in the DD’s analysis of the nature of the DE, it
emerges in the discussion of potential options in Part VII. It is therefore important to clarify andunderstand this aspect as it relates to the key features of the digitalised economy. First, it isimportant to clarify what dematerialisation does not mean. Dematerialisation does not mean thatpeople, both in the form of producers and consumers are eliminated from the business activity.
As indicated in Figure 4.A, in the Layered View of ICT, both producers and consumers as users
interact with each other via the information which passes through the ICT’s respective layers,which include both hardware and software, and both tangible and intangible services and goods.
In other words, there is no ‘purely digital’ transaction. Even the most remote, intangible,
digitised thing of value requires a physical server (asset) somewhere and physical developer(person) somewhere to design, improve and maintain inputs along a chain of value as well as aphysical consumer (person), who accesses (and adds to) the thing of value through the use of aphysical device (asset). Hence, the term ‘dematerialised’ should be understood more in terms of(i) the ability to deliver some products or services digitally (although through physical devices),and (ii) the decreased quantities of physical people and property required to carry out businessactivities due to the substantially greater capacity for volume and reach in the digitalised
economy. Hence, there is no basis for the term ‘fully dematerialised’.
Connectivity.
Connectivity refers to the substantially greater capacity for volume and reach in the digitalised
economy. As rightly observed in the DD, paras. 178-179, digital technology has enhanced `theability to carry out activities remotely, increasing the speed at which information can beprocessed, analysed and utilised, and because distance forms less of a barrier to trade, expanding
the number of potential customers that can be targeted and reached’. This ‘connectivity’`increases the flexibility of businesses to choose where substantial business activities take place’and `[a]s a result, it is increasingly possible for a business’s personnel, IT infrastructure (e.g.,servers), and customers each to be spread among multiple jurisdictions, away from the market
jurisdictions.’ Thus, it is rightly observed in para. 99 that the digitalised economy has increased
the pace of globalisation.
Changing relations between suppliers and customers.
In our view, the DE is part of the wider shift to the knowledge or cognitive economy, in which
economic transactions are less focused on discrete sales of physical commodities from active
producers to passive consumers. Instead, economic transactions increasingly involve theformation and maintenance of longer-term symbiotic relationships which create economic value.
On one hand, digital technologies enable businesses to maintain continuous relationships withcustomers, and supply them with hardware as well as a stream of services, and new products orenhancements. The largest firms, such as Amazon, Apple or Google, have been able to develop
235strategies of bundling a range of products and services, including sales of hardware devices aswell as digital products and services. 1
On the other hand, as noted in para. 24, digital technologies provide gatekeepers with thecapacity to collect substantial amounts of data from users for market research and to `customiseuser experience’. Further, as stated in para. 31, `the processing of this data can be usedautomatically to change the behaviour of those devices in real time.’ This collected and analysed
data, as described in para. 52, further enables developers to power even more applications (andcollect even more data), or market the data to other companies (advertising). Moreover, due tothe increased collection and processing capacity of digital technologies (paras. 105-107) `bigdata’ from consumers creates value for businesses in better business models, product and service
development, improved decision-making, segmenting of target populations for customised
products and services, managing performance and creating data transparency for greater
adaptability to market conditions.
Digital technologies also enable participative networked platforms (para. 90), which allow users
to generate user-created content, such as product reviews, creative or how-to videos, and social
media sharing, which adds value by attracting an audience and provoking interactions between
users and with the business (para. 22). Other positive externalities of consumer activity arepresent in value chains, such as network effects (paras. 108-111), evidenced insocial/professional networking sites, consumer reporting sites, and other participative networked
platforms.
Hence, the resulting value chain is a product of the symbiotic relationship between ICT users—
both businesses and consumers. In the DE, the traditional paradigm of the business transaction
breaks down. The sale of a physical commodity such as a tablet computer or a smartphone ismuch more than a one-off transaction between an active supplier and a receiving consumer.
Instead, transactions in the DE bind the business and customer into an ecosystem (para. 52),
enabling a continuous, symbiotic and reciprocal relationship of value exchange.
It must be recognised that customers now make a significant contribution to value creationand thus, add more to the business transaction than mere payment for goods and/or
services.
Taken together, the three aspects of dematerialisation, connectivity and changing suppliercustomer relationships in the DE change our traditional understandings of both value creation
between businesses and consumers as well as the business transactions between them. In ourview, in accordance with the astute analysis of sections II and III, yet contrary to the conclusionof section IV, para. 178, the DE has indeed changed the fundamental nature of the core activities
that businesses carry out as part of a business model to generate profits.
3. The examples of new business models in the digital economy and whether (and if so
which) other business models should be considered;In our view, the discussion of multi-sided business models (MSBMs) found in paras. 112-118 isvery relevant as MSBMs are central to the understanding of value creation in the DE. In the DE,
1

Although Google has developed by offering digital services, mainly its search engine, and its principle revenue
stream has come from digital advertising, it is now moving to tie these activities to hardware sales, e.g. through the
Nexus range of tablet computers, manufactured under licence by third parties, and most recently Google Glass.

3
36

there are `multiple distinct groups of persons [who] interact’ and their decisions affect each otherthrough positive or negative externalities. Moreover, in a MSBM, `the prices charged to themembers of each group reflect the effects of these externalities.’ In other words, the value of thebusiness activity is generated by both the business and the consumer.
In our view, the discussion of MSBMs should not be an afterthought but should be included withthe central description of business models, e.g., B2B, B2C, C2C, because in the DE, all of these
traditional business models converge in MSBMs and challenge the traditional understandings ofvalue creation as well as the business transaction paradigm.
4. The ability of measures developed in the course of the BEPS Project and the current
work on VAT/GST to address BEPS concerns in the digital economy;
The measures outlined in section 5 are viable options in addressing BEPS concerns in the DE. In
our view, two main action areas in particular could go a long way in preventing BEPS in the DE.
First, the artificial avoidance of PE status (Action 7), will require all three measures listed:revising the PE definition (para. 150); treatment of sales of affiliates within a multinational groupas effectively concluded by dependent agents (para.151); and revising the exemptions in Article
5(4) of the Model Convention (para. 152). Due to the ability to circumvent PE status through(often artificial) contractual arrangements and the segmentation of legal entities, as well as thechanging nature of what it means to do business in the DE, each of these measures is essential inpreventing BEPS.
Secondly, in assuring that transfer pricing outcomes are in line with value creation (Actions 810), the key issues listed in para. 160 are highly relevant. Our perspectives on each of these key
issues is as follows:(i) Intangibles: Below value and hidden transfers of intangibles are key agents in the shifting ofincome from parent, market and other operational jurisdictions to low or no-tax jurisdictions.
Both types of transfers are enabled by core informational deficits on valuation of comparable
prices and informational asymmetries between taxpayers and tax administrations. Moreover,with a more nuanced understanding of the changing paradigms of business models andtransactions due to the interplay of businesses and consumers in value creation, the concept ofconsumer value as an intangible also comes into play. Similar intangible concepts are not new both goodwill and brands, which involve customer perception and recognition, are intangible
assets under traditional business accounting. However, in the DE, the interaction between
consumers and businesses creates value above and beyond brand recognition and goodwill. As
described in sections II and III of the DD and summarized above, the value contributed bycustomers generates data for building and expanding market reach, product development,
advertising, network effects, and direct user-generated content. This value can be monetised (seeparas. 50-51) and hence, should be incorporated into business value as an intangible asset.
(ii) Business risks: The transfer of risk can easily be accomplished through contractual
arrangement and it is often difficult for tax administrations to determine which legal entity of an
MNE group actually bears this risk. In these considerations, the location of people and actual
business functions should be used to allocate risk among the MNE group and not mere
contractual arrangements.
(iii) Characterisation of transactions: In the area of identifying and in some cases,
recharacterising, the specific nature of transactions, clear rules and guidance are necessary to437

create certainty for taxpayers and administrable rules for tax administrations. In setting theserules, it is important to recognise asymmetries of information between taxpayers and tax
administrations. It should also be recognised that business structures and relationships will
inevitably continue to change, so that rules and guidance must include flexibility for taxpayers
and administrators to make new characterisations when appropriate. The more information isprovided to the tax administration through a country by country report and transfer pricing
master file and country file, the more accuracy there will be in determining the fair amount of tax
that should be paid.
(iv) Base eroding payments: Excessive cross-border payments are a prime driver of base erosion
and profit-shifting. Inadequate data on comparables (especially in the DE); a lack of tax
administration enforcement resources; complex fact patterns; questionable attribution of risk areendemic aspects of international corporate taxation.
Although para. 165 states that “transfer pricing rules based on the arm’s length principle(ALP) are theoretically equipped to address the proper amount of [cross-border]
payments”, these rules were conceived to function in a reality that, quite simply, no longer
exists. It is high time to acknowledge this core deficiency of the ALP and adopt tax
solutions for the present. The impact of digitalisation of the whole economy means that the
future is now.
(v) Global value chains and profit split methods: Increased integration of MNEs has been
demonstrated both theoretically and empirically,2 and is accurately summarised in para. 166 of
the DD: `With the advent of the development in ICT, reductions in many currency and custom
barriers, and the move to digital products and a service based economy, the[se] barriers tointegration broke down and MNE groups began to operate much more as single global firms.
Corporate legal structures and individual legal entities became less important and MNE groups
moved closer to the economist’s conception of a single firm operating in a coordinated fashion to
maximise opportunities in a global economy’.
However, what is also important to note is that this has made corporate legal structures less of abusiness decision and much more of a tax decision. According to the Ottawa Taxation
Framework, the principle of neutrality requires that business decisions be motivated by economic
rather than tax considerations. Due to the impact of digitalisation on the economy, global value
chains as well as the changing dynamics between customers and suppliers, should be examinedin the allocation of taxable profit.
This entails a move to the use of profit-split or other profit apportionment methods basedon actual economic actors (people as consumers and producers) and not legal
constructions.
As we have argued in previous submissions, for the BEPS project to be successful, it is essential
to replace the separate-entity principle with one which enables tax authorities to examine
multinational companies as what they are, unitary entities. There are a number of ways in which
this could be done, and we hope that the OECD will seriously consider them as work on the
Action Plan develops further.
If clear rules and guidance were given, taxpayers would have much more certainty than in thecurrent situation, where the lack of data on comparable prices forces taxpayers and tax
2

Dunning J.H. (1988) Explaining International Production, London: Unwin Hyman.

538

administrations into negotiations and time-consuming dispute resolution proceedings. And even
where there is a negotiation, MNEs often face the problem of `public licence’ when decisions byCompetent Authorities are viewed by citizens of the market jurisdiction as invalid due to an
imbalance of expertise and information possessed by parties to the negotiations. Therefore, thiswork on global value chain analysis and profit split methods should be pursued deliberately andseriously so as to avoid a tragic and colossal expenditure of political will and global resources inmaking the international tax system function effectively.
5. Whether other measures should be developed during the course of the work on otheraspects of the BEPS Action Plan to address BEPS concerns in the digital economy and if so
which ones;
In our view, the measures described in section V should be guided by fundamental examinationof the changing business models resulting from the impact of digitalisation, which permeates
almost every aspect of today’s economy. Further, while the measures outlined in section V are
valuable in curbing base erosion and profit shifting, without a systemic analysis of how theinternational tax system can better align with business model paradigms of the present economy,
the BEPS project will fail in the central purpose mandated by the G20: that of ensuring that`profits are taxed where economic activities occur and value is created’.
6. The broader tax challenges raised by the digital economy which have been identified by
the Task Force and how these challenges should be addressed, taking into account both
direct and indirect taxation;
The tax challenges identified by the Task Force are in our view characterised accurately on thewhole. From our perspective the main challenges are those identified in sections VI.3 and VI.4:
the ability to have a significant presence in a jurisdiction without meeting the threshold undercurrent tax rules for a taxable presence or nexus; and the value created by consumers. Discussion
on both aspects follows:(i) Nexus and the Ability to have a Significant Presence without Being Liable to Tax:
There are two components to this. On the one hand, as mentioned above, an importantcharacteristic of the DE is the closer and more continuing nature of relationships and interaction
with customers. Customers are no longer passive purchasers of discrete products, and businesses
aim to maintain long-term and interactive relationships with their customers in an exchange ofvalue. This includes systematic collection of data from and about customers or users, but extends
also to active contribution of information and content by those customers or users as outlined
above. This two-way relationship goes well beyond traditional functions of marketing, although
digital technologies have also transformed those.
At the same time, digital technologies provide the connectivity which enable these closer
relationships to be established and maintained at a distance, and hence across borders. We
therefore agree with the concerns expressed in para. 181 that this requires a reconsideration of
the treaty definition of what constitutes a permanent establishment (PE), and for attribution of
profits to a PE. The BEPS Action Plan stated that the reforms it envisaged were `not directly
aimed at changing the existing international standards on the allocation of taxing rights’.
However, it also accepted that Action 1 should `examine closely how enterprises of thedigitalised economy add value and make their profits in order to determine whether and to what

639

extent it may be necessary to adapt the current rules order to take into account the specificfeatures of that industry and to prevent BEPS’.
In our view, the features of the DE we have stressed, the closer interaction with customers andthe ability to maintain this at a distance, inescapably require a re-evaluation of the concept of a
PE and of attribution of profits to it. Traditionally, the claim of the source jurisdiction to taxing
rights based only on access to its market was not considered sufficient. This reflected theperception that a customer was simply a passive purchaser of a physical commodity
manufactured elsewhere. Today, however, the business engages much more closely anddynamically with the customer, and this interaction is essential to value creation. At the sametime, the connectivity facilitated by digital technologies makes it much easier to locate the sourceof supply so as to facilitate BEPS.
It is not only a matter of recognising that it is now possible to serve customers with a lower
physical footprint. It must be accepted that the claim of the source jurisdiction now also
rests on the contribution of active users and customers to value added.
(ii) Data and the Attribution of Value Created from the Generation of Marketable LocationRelevant Data through the Use of Digital Products and Services.
As described in sections II and III and outlined above, consumer data and activity is one of thetwin engines of ICT innovation and marketing. Unfortunately, the discussion in VI.4 neglects tomention that in addition to data, active customers and users make significant contributions tovalue added. Hence, the consumer is not merely a passive element, from which businesses
collect data. To the contrary, consumers often contribute personal data, product reviews,
instructional videos on the use of products, and generate network effects which add value to thebusiness. Thus, the changing role of consumer means that the business model is no longer B2C
but is now B2C2B on a continual basis. The value of these externalities is monetised by businessand should be reflected in tax system design.
7. The options to address these broader tax challenges discussed by the Task Force andsummarised in the discussion draftIn light of these considerations, we first support the option mentioned in section VII.3.1, thecomplete elimination of para. 4 from article 5 of the model convention. The concept of activities
of a purely preparatory and auxiliary character belongs in a much earlier era of export trade. If a
firm considers that it needs to own or lease the facilities listed in para. 4 (a) to (e), it must berecognised as having a close connection with customers in that market. At the very least, ifpara.4 of article 5 is not to be completely eliminated, then it should be made crystal clear thatpara. 4 activities will only be covered if they are truly preparatory and auxiliary in light of thebusiness of the taxpayer. The language in the Commentary on article 5, especially paras. 42.8
and 42.9, should be made considerably stronger and expanded to reflect at least the current
characteristics of the DE.
Much more important, however, is the option discussed in section VII.3.2.
In our view, it is time to replace the concept of a PE with a new one of Significant Presence. For
the reasons explained under point 1 above, we consider that it cannot and should not be limited
to `fully dematerialised digital activities’. In our view it is inappropriate to introduce a special
rule only for `fully dematerialised digital activities’, based on the criteria in para. 213. It seems to
740

us that this would violate the Ottawa Taxation Framework principle of neutrality. The criteria
would also be very hard to apply objectively.
Instead, we suggest that the new concept of Significant Presence should be an extension of theideas which lay behind that of the older concept of a PE. A degree of physical presence is clearly
relevant in deciding the extent of involvement of an enterprise with the host economy, and it
remains so. In any case, it would be difficult or even impossible for a host state to effectively
enforce a claim to tax firms with absolutely no physical presence in the jurisdiction. The problem
is caused by the outmoded concept of a physical place of business with a minimum of twelve
months of presence.
The criteria which we suggest for a Significant Presence should reflect the contribution to value
added resulting from the closer and interactive relationships with customers. These should
include:(a) relationships with customers or users extending over six months, combined withsome physical presence in the country, directly or via a dependent agent;(b) sale of goods or services by means involving a close relationship with customers
in the country, including (i) through a website in the local language, (ii) offering
delivery from suppliers in the jurisdiction, (iii) using banking and other facilities
from suppliers in the country, or (iv) offering goods or services sourced fromsuppliers in the country;(c) supplying goods or services to customers in the country resulting from or
involving systematic data–gathering or contributions of content from persons in the
country.
Although broad, these criteria would still exclude many businesses involved in the digitalized
economy. For example, a software designer which supplies a program in digital form tocustomers all over the world from a single website in the language of its residence country would
not be covered. The aim of the definitions is to capture situations where the firm has a significant
presence in the host country although digitally, and to include the element of value added fromsystematic collection of data and contributions of content from persons in the host country.
8. The potential cost of compliance arising from the options proposed to address the tax
challenges of the digital economy and suggestions for more cost efficient alternatives;
On the administrative challenges of the DE following para. 201, which include identification ofbusiness structures, the extent of business activities, information collection and verification andidentification of customers, we provide two suggestions:(i) Identifying customers is possible through tracing of IP addresses to devices used by thecustomers, the servers accessed, ISP services provided as well as customer information frommodes of payment. In situations where public devices are used, customers could be required tolog in with an address; and where mobile phone payment systems are used, companies could be
required to register customer information including an address when adding value to the payment
cards. Regulations requiring service addresses are required in the credit card industry and should
likewise be instituted for other modes of payment.

841

(ii) Identifying businesses information may be made possible through a central registration
system shared by national governments. Systems such as the Legal Entity Identifier would
provide useful models.
The digitalised economy also obviously enhances the techniques available to public
administrations. However, it should not be forgotten that there is also a `digital divide’, and thata number of tax administrations in developing countries are still inadequately computerised, or
indeed not computerised at all. Remedying this should be a high priority if the BEPS project isthe meet the requirement of the G20 that `Developing countries must reap the benefits of the G20
tax agenda’.
9. Whether the Ottawa taxation framework principles identified above are an appropriate
framework for analysing options to address the tax challenges, and whether and how theyshould be supplemented.
In our view, the Ottawa Taxation Framework should be amended to include the Principle ofProfit-Value Alignment. This Principle should be drawn from the St. Petersburg G20 LeadersDeclaration, particularly, that `international tax rules on tax treaties, permanent establishment,
and transfer pricing will be examined to ensure that profits are taxed where economic activities
occur and value is created’. Such a Principle should provide:
Profit-Value Alignment: International tax rules should ensure that profits are taxed
where economic activities occur and value is created; in particular, the location ofreal activities should take precedent over legal constructions.

All the reports and other details of the BEPS Monitoring Group are available at
http://bepsmonitoringgroup.wordpress.com/

942

Paris, 14 April 2014

OECD DISCUSSION DRAFT ON BEPS ACTION 1:
TAX CHALLENGES OF THE DIGITAL ECONOMY
Submitted by email: CTP.BEPS@oecd.org

Dear Jesse,
Please find below BIAC’s comments on the OECD Discussion Draft on BEPS Action Item 1 –Address the Tax Challenges of the Digital Economy, issued on 24 March 2014 (the “Discussion
Draft” or “paper”).
The Base Erosion and Profit Shifting (“BEPS”) project has a very ambitious timetable, so we thankthe Task Force on the Digital Economy (“TF”) for being flexible in its contacts with stakeholders, andfor issuing an early, non-consensus document to gather stakeholder input as soon as possible. In
order to help the TF deliberations as it now seeks to reach a balanced and proportionate
consensus, BIAC is submitting a consensus document that represent business views generally,rather than simply passing on views from our members. Given the complexity (and, in many cases,
newness) of these issues, we present our comments in two parts: a summary, and a more detailed
analysis. These parts should be read together.
General comments
We do greatly welcome the statement by the TF that there should not be a separate tax regime forthe “Digital Economy”. This is reinforced by the careful analysis in the Discussion Draft of the“Digital Economy” which shows that, broadly defined, all businesses are now “digital” in one way or
another. Therefore, we also support the position taken in the paper that any issues raised by“digital” transactions should be dealt with under the other 14 relevant BEPS Action Items dealing
with the many substantive areas of international tax rules.
We are, however, concerned that having said that, the Discussion Draft does appear to raise (and,potentially, make recommendations on) areas which do fall under other Action Items, or which areoutside the BEPS project entirely.
We understand the political (and public) origins of the concerns about certain types of “digital”
transactions, and we completely agree that these should be considered, and, if countries see fit,
acted upon. However, in keeping with the publicly stated parameters of the project, we do notbelieve this paper is the place to consider “source” vs. “residence” issues. That is clearly an issueof concern to G20 and OECD members, but if that discussion is to happen, it needs to take place
more broadly and more deliberatively than can be done in this paper. Furthermore, and as statedabove, we believe that the Discussion Draft should not seek to prejudge discussions still to be held

Business and Industry Advisory Committee to the OECD
13/15 Chaussée de la Muette
75016 Paris
France43

Tel. +33 (0)1 42 30 09 60
Fax +33 (0)1 42 88 78 38
email: biac@biac.org
www.biac.org

on other substantive Action Items, but leave those to be developed by the other Working Parties
according to the structure of the BEPS Action Plan..
In our comments, we have only commented briefly on the sections of the Discussion Draft which
deal with the two categories above. However, in relation to those proposals in Chapter VII relating
specifically to the Digital Economy – which we completely understand represent only individual
country suggestions, not a consensus view at this time – we provide more detailed analysis in orderto help the TF consideration of these items.
I will not repeat here all our comments and suggestions that are contained in the attached summaryand detailed analysis. However, I do think it is worth reiterating that the growth in the “Digital
Economy”, broadly or narrowly defined, has been one of the great economic success stories of thepast twenty years. Much of this success is down to decisions taken under OECD auspices in thelate 1990’s which resulted in tax not becoming a barrier to digital expansion. The resulting growth inconnectivity, technological leaps in developing countries, and new opportunities not just for large,
but mid-sized and micro-businesses throughout the world, has been remarkable, and enriching (inmany senses) for many people in many countries. It is entirely appropriate after twenty years, that
we should look at this area again, and, where unacceptable, aggressive tax planning occurs, seek
to counter that. But we should also be careful that in our efforts to end abuse, we do not also place
growth-inhibiting tax burdens on a broad technology that has been so central to the OECD’s core
mission of improving the lot of people around the world through increased cross-border trade andinvestment.
*************************************
We hope the TF finds our comments useful. As they consider changes, we hope that you and themembers of the TF will not hesitate to call upon us for any help that we might be able to give inorder for to reach a balanced and proportionate consensus report on this crucial area. We standready to respond.
Sincerely,Will Morris
Chair, BIAC Tax Committee
Mr Jesse Eggert
Senior Advisor, BEPS ProjectCentre for Tax Policy and AdministrationOECD
CC: Mr. Pascal Saint-Amans,
Director of the Centre for Tax Policy and Administration
OECD

44

2|PageSummary comments
1.

In the section 3 of this document we provide our detailed comments on all sections of theDiscussion Draft. Given the wide-ranging nature of the Discussion Draft, and the need for
detailed analysis of a number of the issues raised, we are also producing this very briefsummary our key comments and concerns which are more fully developed in our entire

submission.

General comments
2.

BIAC appreciates the opportunity to have input at this stage of the process, and we strongly
support the OECD’s conclusion that there should not be a separate taxation regime for the"digital economy". We strongly agree that the proposals to be developed under the otherActions of the BEPS Action Plan will address the challenges posed by the digital economy.

3.

Parts of the Discussion Draft range far beyond the Digital Economy, with some aspects
impacting other BEPS Action items and others touching upon issues explicitly excluded fromthe BEPS project. We believe that fundamental issues – such as source vs. residence
taxation, which are beyond the scope of the BEPS project – should be addressed, if at all,directly and separately, rather than tangentially in this paper. With those BEPS issues beyond
the Digital Economy we believe the best place to undertake that analysis is in work being
undertaken on those substantive Action Items.

4.

Arguments have been made that a market jurisdiction should have an entitlement to tax somepart of the profits of sales into the jurisdiction, based on the demand created by the market
place, even where an enterprise has no physical presence. We strongly believe that a
combination of an origin-based income tax and a destination-based VAT appropriately divides
the jurisdiction to tax between the countries where income producing activities occur and thecountries where consumption of goods and services occur. We are also concerned that a
number of proposals described in Chapter V, if adopted, would reflect a clear move a towards
formulary apportionment. The development of a hybrid tax system would feed uncertainty,
drive double taxation, and discourage investment. Deviations from well-established principles
of taxation should therefore be very carefully considered before being acted upon. BIAC
believes that this work should include an analysis of the purpose and economic burden of thecorporate income tax versus the VAT.

5.

We believe there are some potential contradictions in recent OECD proposals with respect tothe importance of people functions and the location of business activities. For example, theDiscussion Draft seems to consider tax nexus for enterprises delivering digital goods orservices based on the place where those good and services are supplied to, rather than where
functions are performed, risks are assumed and assets are used. These inconsistencies must
be resolved to provide a stable tax system that encourages cross-border investment.

6.

BIAC appreciates the extreme time pressure under which the OECD has been required todevelop these proposals and we appreciate the opportunity to comment on what is explicitly
identified as a non-consensus draft. We also understand the political imperative driving thisproject. Nevertheless, the proposals raised in this draft are complex issues which require timeand care to work through the analysis and study the expected repercussions.

45

3|PageSpecific Comments
Information and communication technology and its impact on the economy
7.

BIAC commends the Task Force for compiling a thorough and thoughtful analysis of the digital
economy and BIAC agrees that the digital economy is characterized by rapid technologicalprogress and shares the Task Force’s view that the digital economy of tomorrow may looknothing like the digital economy of today.

The digital economy, its key features and the emergence of new business models
8.

BIAC strongly agrees with the Task Force that it would be difficult, if not impossible, to ringfence the digital economy from the rest of the economy. BIAC also notes that it is equallydifficult to distinguish the digital economy from the larger economy. With the ever increasing
digitalization of commercial activity, it is difficult to distinguish “pure play” digital/internetcompanies from other companies. The Discussion Draft implicitly acknowledges this point in
its treatment of the internet of things, virtual currencies, and 3D printing, all of which create abusiness convergence between digital/internet service providers and providers of
manufacturing, design, development, and financial services.

9.

BIAC nevertheless acknowledges that digital/internet companies distinguish themselves from
low-technology enterprises through the positive contributions that digital/internet companies
make to the economies in which they are based. Academic studies demonstrate that an
economy in which a high-technology enterprise, such as a digital/internet company, is based
enjoys positive externalities in the form of increased employment in the local service sector
that exceed those associated with the presence of a low-technology enterprise.

Identifying opportunities for BEPS in the digital economy
10.

The Discussion Draft acknowledges that the nature of the strategies used to achieve BEPS in
digital businesses is similar to the nature of strategies used to achieve BEPS in more
traditional businesses.

11.

Detailed comments are provided in section 3 on opportunities for BEPS with respect to VAT,
avoiding withholding tax and eliminating or reducing tax in the market country.

Tackling BEPS in the digital economy
12.

BIAC strongly agrees with the view expressed by the Discussion Draft that other Action Plan
items will have an impact on BEPS in the digital economy. We also strongly agree with thestatement that is necessary to evaluate the impact of those other changes before considering
unique rules for the taxation of the digital economy that may turn out to be unnecessary. The
Discussion Draft provides insight into where some of the future action items may be headed.
It is worth noting that with all the proposed changes, there is no evidence in the Discussion
Draft that the countries see improved dispute resolution as part of the package of items
necessary to tackle BEPS in the digital economy. As business has repeatedly made clear,
improved dispute resolution is critical to implementing any fundamental restructuring of theinternational tax principles. The interpretation of these new rules will generate disputes andimproving dispute resolution must be addressed.

46

4|PageBroader tax challenges raised by the digital economy
13.

The Discussion Draft states that the evolution of business models in general and the growth ofthe digital economy in particular have resulted in non-resident companies operating in market
jurisdictions in a fundamentally different manner today than at the time that international tax
rules were designed. The draft also asserts that the traditional model of doing business inmarket economies is obsolete. BIAC believes that these assertions significantly overstate theimpact of digital methods of doing business on market economies. Companies still require
people, assets and functions which will create a tax presence in significant jurisdictions.

Potential options to address broader tax challenges raised by the digital economy (Ch. VII).
14.

BIAC strongly supports the Discussion Draft's reference to the Ottawa Taxation Framework(from 1998) principles – neutrality, efficiency, certainty and simplicity, effectiveness andfairness, and flexibility. We endorse the view that these principles are still relevant and,supplemented as necessary; can constitute the basis to evaluate both direct and indirect tax
options to address the tax challenges of the digital economy.

15.

We also believe that options should not contradict the sovereign choice of jurisdictions todetermine how tax is imposed on properly attributable income. With the exception of
appropriate CFC rules, countries should not be able to assert a claim to tax another’s income.

Modifications to the exemptions from permanent establishment status
16.

Business prefers bright line rules that provide certainty, so objectivity and clarity in theapplication of any new rules would be welcomed. However, the OECD/G20 should not makebroad changes without careful consideration of the consequences.

A new nexus based on significant digital presence
17.

This proposal seems to directly contradict that statement that ring-fencing the digital economy
is neither appropriate nor feasible. We note that the proposals in the Discussion Draft do notseem to focus on whether payments made in relation to goods and services are deductible fortax purposes, and rather largely focuses on B2C transactions. Without this key element, it isdifficult to see how this proposal targets base erosion. BEPS is intended to address artificial
profit shifting. If the income is attributable to actual activities that have moved out of thejurisdiction, then the profit shifting is not artificial and there is no BEPS issue. We also believethat this option is inconsistent with the emphasis on people functions in the draft Chapter VI
TPG revisions and violates the Ottawa principles.

18.

This option would result in significant controversy and double taxation and would discourage
the expansion of digital goods and services into remote economies, which will adversely affecteconomic growth.

Virtual permanent establishment options
19.

BIAC opposes the adoption of any of these virtual PE options because adoption would violate
the Ottawa Principles. Such options would create compliance difficulties and would add
uncertainty in many ways.

47

5|PageCreation of a withholding tax on digital transactions
20.

This option seems to reflect a concern where goods or services are provided into a jurisdiction
where there is no taxable nexus. This option raises questions with respect to consistency withtrade obligations and the practicability of imposing WHT on B2C transactions. In this regard, ahuge burden could be imposed on financial institutions to act as tax collector. Imposing agross tax without the need to determine profits may seem attractive at face value, but we notethat revenue is a poor proxy for net income and digital goods and services may nevergenerate a profit on a net basis. The administrative issues associated with this option would
be similar to those faced when imposing VAT on cross-border digital transactions.

Consumption Tax Issues and options
21.

VAT issues should be addressed by the ongoing work of the OECD and WP9 and theOECD/Business Technical Advisory Group (TAG) to the WP9.

22.

We note that many VAT issues in the Discussion Draft are not specific to the digital economy.
Instead, they are conceptual issues related to the design and the application of the VAT
system. All stakeholders agree that conceptually, a broad based VAT system, with ideally noor very few exemptions, and one standard VAT rate, would represent the most efficient andeffective structure for all relevant parties. It would take substantial complexity out of the VAT
system, would ensure neutrality for business, and would ease both compliance for businessand administration for governments.

23.

BIAC agrees that the most effective and efficient option to ensure appropriate VAT collection
on cross-border B2C services is to require the non-resident supplier to register and accountfor these supplies in the jurisdiction of the consumer. We support the adoption of consistent‘place of taxation’ and simplified procedures/mechanisms to allow easy and efficient collection.
Registration thresholds should apply where necessary to minimise the compliance burden on
business and the administrative burden for governments.

48

6|PageDetailed comments
General Comments
1.

BIAC appreciates the opportunity to have input at this stage of the process. We understandthat this is a report on the digital economy that identifies options for further discussion rather
than makes recommendations. Keeping this in mind, we have the following generalcomments.

2.

First, we endorse wholeheartedly the conclusion that there should not be a separate taxation
regime for the "digital economy", however defined.

3.

Second, we are concerned that parts of the Discussion Draft range far beyond the Digital
Economy. Some of this discussion impacts other BEPS Action items, but other parts touchupon issues explicitly excluded from the BEPS project – in particular “source“ vs. “residence”
taxation. In relation to the latter we believe that these fundamental issues should be
addressed directly and separately, rather than tangentially in this paper, for the reasons briefly
set out below. It is only by squarely facing the issues and doing the difficult analytical andpolitical work that these foundational questions can be properly resolved. In relation to thediscussion in the Discussion Draft of proposals affecting other Action Items, we believe thatrather than trying to resolve them in this document, the best place to undertake that analysis is
in work being undertaken on those substantive Action Items. So, we comment briefly on thesuggestions made with respect to other BEPS areas, but without proposing courses for action.
We do, however, comment in more detail on the proposals in Chapter VII on specific rules forthe digital economy.

4.

As an overall matter, the Discussion Draft raises the issue of whether a market jurisdiction
should have the jurisdictional basis to impose a net income tax based solely on the fact thatan enterprise may be able to make sales of goods or services (digital or otherwise) into thejurisdiction. We understand that arguments have been made that a market jurisdiction shouldhave an entitlement to tax the profits of sales into the jurisdiction, based on the value of themarket place, even if the enterprise may have no actual presence in the market jurisdiction. It
may well be that this is an appropriate discussion to have in relation to, for example,
comparability factors under Transfer Pricing rules (as has, indeed, been occurring in relation
to the ongoing project on intangibles). However, BIAC believes that the appropriate tax toimpose by reference to the place of consumption is a VAT. BIAC believes that the further
work on this Action Item would be clarified by an explicit analysis of whether current businessmodels or practices (digital or otherwise) warrant a deviation from the principle that the right toimpose an income tax should be based on the presence of actual business operations in astate. For completeness, we would further suggest that this work include an analysis of the
purpose and economic burden of the corporate income tax versus the VAT.

5.

We also think it important to resolve an apparent important inconsistency between certain of
the proposals in this Discussion Draft and other recent OECD/G20 work on the role ofbusiness substance to determine the right to tax and the measure of taxable income. The
draft revisions to Chapter VI of the Transfer Pricing Guidelines (“TPG”) specify that the returns
to intangibles should be allocated by reference to the location of personnel who perform orcontrol the development, enhancement, maintenance, and protection of the intangible, and notby reference solely to ownership, funding and bearing risk. In contrast, this digital economy
Discussion Draft expresses concern that taxpayers control the location of functions andassets, and thereby suggests that the location of the actual business activities giving rise to
the development, delivery and support of digital products and services may not be the49

7|Pagedeterminants of the jurisdiction to tax income arising from those activities. We believe thisapparent inconsistency needs to be resolved. Either the place of performance of profit
producing activities is a key factor or it is not. Uncertainty and unpredictability would begreatly increased if place of performance were used to determine the entitlement to returns on
intangibles, but not to determine tax nexus for enterprises delivering digital goods or services.
6.

We note with approval the many recent statements by OECD representatives that the OECD
continues to endorse the arm’s length principle (“ALP”). We also strongly support theconclusion in this Discussion Draft that the proposals to be developed under the other Actionsof the BEPS Action Plan will address the challenges posed by the digital economy. As noted
above, however, Chapter V of the Discussion Draft describes how some of the ideas now
being developed under those other Action Items would address the tax challenges of thedigital economy. We are concerned, however, that a number of proposals described in
Chapter V (discussed in more detail below) if adopted would move the OECD's application of
the ALP substantially in the direction of formulary apportionment. BIAC believes that theOECD should assess all capital allocation, interest expense allowance, and similar proposals
by the criterion of whether the proposal is consistent with the purpose of the ALP. A hybrid tax
system would allow countries to assert the ALP selectively (and almost certainly,
inconsistently with the practices of other countries), or to adopt elements of formulary when it
enhances tax revenue. Businesses would be caught in the middle and subjected to a highrisk of double taxation. Further, a hybrid system will substantially increase the administrative
burden associated with an either/or approach. Taxpayers will still be producing transfer
pricing studies, but will also be required to produce information that will support apportionment
in some cases. The current proposals for Transfer Pricing Documentation and the Countryby-Country Reporting template illustrate this tension.

7.

BIAC sympathizes with OECD executives and staff for the extreme time pressure under which
the OECD has been required to develop these proposals, and thanks them for already taking
into account many comments made by business in consultations. We appreciate theopportunity to comment on what is explicitly identified as a non-consensus draft, and hope that
our comments will be useful to allow the OECD to complete the next steps of this project withefficiency. We also understand the political imperatives under which the OECD believes it isoperating. Nevertheless, the proposals raised in this draft are complex issues which requiretime and care to work through the analysis and study the expected repercussions. We believethat decisions on significant changes to the international tax law should not be made in haste.
We, therefore, stand to help the Working Party and Secretariat in any way we can so that they
can produce consensus comments which enhance the OECD’s reputation for careful,analytical work that supports the foundation of sound tax policy. We look forward tocontributing to a productive dialogue with the OECD as it continues this important work.

50

8|PageSpecific Comments
I. INTRODUCTION AND BACKGROUND
8.

BIAC strongly supports the Discussion Draft's reference to the Ottawa Taxation Framework(from 1998) principles – neutrality, efficiency, certainty and simplicity, effectiveness andfairness, and flexibility. We endorse the view that these principles are still relevant and,supplemented as necessary, can constitute the basis to evaluate both direct and indirect tax
options to address the tax challenges of the digital economy. (Para. 7) 1 We apply thoseprinciples in our comments on section VII to analyse the proposed options.

II. INFORMATION AND COMMUNICATION TECHNOLOGY AND ITS IMPACT ON THE
ECONOMY
9.

BIAC commends the Task Force for compiling a thorough and thoughtful analysis of the digital
economy in Chapters II and III of the Discussion Draft. BIAC agrees with the Task Force thatthe digital economy is characterized by rapid technological progress and shares the Task
Force’s view that the digital economy of tomorrow may look nothing like the digital economy oftoday.

III. THE DIGITAL ECONOMY, ITS KEY FEATURES AND THE EMERGENCE OF NEW
BUSINESS MODELS 2
10.

BIAC strongly agrees with the Task Force that, “because the digital economy is increasingly
becoming the economy itself, it would be difficult, if not impossible, to ring-fence the digital
economy from the rest of the economy.” (Para. 59) As a corollary to this statement, BIAC
notes that it is equally difficult to distinguish the digital economy from the larger economy.
Moreover, with the ever increasing digitalization of commercial activity, BIAC notes that it isdifficult to distinguish “pure play” digital/internet companies - i.e., companies that use theinternet as their principal method to deliver goods and services, including communicating withusers and suppliers through hosted web pages - from other companies. The Discussion Draft
implicitly acknowledges this point in its treatment in Chapter II of the Discussion Draft of theinternet of things, virtual currencies, and 3D printing, all of which create a businessconvergence between digital/internet service providers and providers of manufacturing,
design, development, and financial services.

11.

BIAC nevertheless acknowledges that digital/internet companies distinguish themselves from
low-technology enterprises through the positive contributions that digital/internet companies
make to the economies in which they are based. BIAC reaches this conclusion because
academic studies demonstrate that an economy in which a high-technology enterprise, suchas a digital/internet company, is based enjoys positive externalities in the form of increased
employment in the local service sector that exceed those associated with the presence of a
low-technology enterprise.

1

These fundamental principles were further elaborated on and supplemented by the post Ottawa VAT work on ecommerce – the E-commerce Guidelines and the Consumption Tax Guidance papers in 2003 – and also the current workon the development of the International VAT guidelines,2
As the OECD proceeds with this topic, it might want to include a definitional section. One of the issues with the
Discussion Draft is that the definition of important terms is frequently unclear.

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9|Page

The Digital Economy Is Indistinguishable from the Economy
12.

As noted above, BIAC agrees with the Task Force that the digitalization of the economy has
made the digital economy and the larger economy generally indistinguishable from one
another. To this end, BIAC wishes to refine certain points in Chapter III of the Discussion
Draft to reflect this conclusion.

The Digital Economy Is Not Characterized by the Presence of New Business Models
13.

The Discussion Draft states that “[t]he digital economy has given rise to a number of new
business models” (Para. 60) and notes that examples of such “new "business models include
auction solutions, logistics services, online sales, the development and sale of applications,
online advertising, cloud computing, and payment services. BIAC respectfully submits that theactivities that the Discussion Draft identifies are not examples of “new” business models.
Rather, these activities are examples of the use of information and communication

14.

Technology (ICT) to operate existing business models more efficiently and to extend thesebusiness models through opportunities for new products and services. This conclusion follows
because, as the Discussion Draft acknowledges, these “new” business models have offline
analogues, through which marketplace, payment, logistics, auction, and other services havebeen provided since the 19th century. For example, in more traditional companies digital
activity generally flows from existing sale and supply chains and the digital component is used
to enhance capabilities within those flows.

15.

The Discussion Draft observes correctly that ICT enables enterprises to conduct “many typesof business at substantially greater scale and over longer distances than was previously
possible.” (Para. 60) BIAC considers this feature of ICT to be one of its key virtues. With ICT,
small- to medium-size enterprises are able to reach discrete and specialized markets at earlier
stages in their development than was previously possible. This creates considerable
economic efficiencies, and goods and services can reach even these specialized markets withmuch greater efficiency than before. As a result, businesses and consumers around the world
have access to a greater variety of goods and services, and more opportunities for economic
advancement, than ever before. We would also note that the ability to monitor and apply
standards remotely has actually led to the localization of production in some cases.
Communications enhancements have reduced the need to keep development and production
in close proximity.

16.

ICT does not change the fundamentals of business models, however. A retailer of LPs once
shipped LPs to consumers using the postal service. An online provider of song downloads
now uses ICT to deliver songs to consumers over the internet. The fundamental businessmodel of finding and developing artistic talent, marketing, and delivering musical content to
consumers remains the same. Similarly, a software developer and manufacturer once
shipped software on disk or CD directly to consumers or retailers. This same developer andmanufacturer may now provide access to this software online. The fundamental businessmodel of developing, delivering and supporting software for use by consumers remains thesame.

Digital/Internet Companies Do Not Enjoy Lower Costs than Their Offline Counterparts
17.

The Discussion Draft suggests that e-commerce companies enjoy a competitive advantage
over their offline counterparts because e-commerce companies are able to “eliminat[e] theneed for many of the wholesalers, distributors, retailers, and other intermediaries that weretraditionally used in businesses involving tangible goods.” (Para. 64) BIAC notes that the52

10 | P a g e

digitalization of certain forms of commerce has not resulted in a net reduction of costs.
Instead, digitalization has shifted these costs to new operational areas. In place of costs
associated with renting and operating retail space and transacting with intermediaries, ecommerce companies bear significant costs associated with developing, hosting, andoperating websites that are accessible to consumers around the world every day of the year.
These websites require ongoing R&D to ensure that they retain the right level of functionality
to provide consumers with the interactive experience that consumers expect from a virtual
marketplace. In some cases functions are shifted to third parties. For example, a digital
economy enterprise which sells tangible goods still needs to develop logistics systems todeliver the goods to its customers, just as a department store needs to handle its inventory. In
many cases for enterprises operating in the digital economy, these non-core functions areoutsourced to third parties. The statement in the Discussion Draft also fails to sufficiently
acknowledge how more traditional companies operate. Digital distribution functions may be
an adjunct to rather than a replacement for traditional distribution networks.
18.

Moreover, costs associated with activities such as product development, marketing, andcustomer support persist in the businesses of digital/internet companies, just as they do inother businesses. In many cases, these costs may be higher for digital/internet companies
that must contend with short product cycles, the rapid obsolescence of technology, and low
barriers to entry into markets. As the Discussion Draft acknowledges, this competitive
pressure drives some digital/internet companies to give away hardware, and to treat thishardware as an operational cost, in an effort to expand the market of customers for theirgoods and services. (Para. 15) In addition, the use of technology and data in business brings
with it specific legal costs, such as costs of complying with local country export controls anddata privacy rules. More traditional companies that are expanding their capabilities in thedigital sphere are expending significant amounts of capital in the development of new products
and have applied an impressive amount of resources in educating their customers as to thebenefits of these capabilities. The Discussion Draft underestimates the financial commitmentthat companies must make and the significant risks they incur in order to become successful
within the digital economy.

19.

The Discussion Draft states that technological advances make it possible for businesses tocarry on economic activity with minimal need for personnel to be present. The Discussion
Draft notes that businesses can increase in size and reach with minimal increases in thenumber of personnel required, so-called scale-without-mass. (Para. 98) While some start-up
companies certainly have succeeded in developing valuable businesses at an early stage intheir development, we believe this point is greatly exaggerated as a description of the industry
as a whole. Well-known “digital economy” companies have tens of thousands of employees.
Business cannot effectively scale without human and asset resources. 3 This misimpression of
the amount of business substance actually required to operate a significant “digital economy”
enterprise distorts discussions on the appropriate nexus rule for such companies through thefalse implication that such enterprises lack substance outside the market jurisdiction.

Key Features of the Digital Economy Are Key Features of the Economy
20.

The Discussion Draft identifies what the Task Force considers to be six “[k]ey features” of thedigital economy. (Para. 91) BIAC agrees that certain of these features are present in thedigital economy but observes that these same features are present in the larger economy.

3

One major digital economy company, for example, has 99,000 employees worldwide with 41,000 outside the U.S. Manyof its foreign marketing subsidiaries have over 1000 employees. Another digital economy company has around 30,000
people of which around half are in the US. There is “mass” behind this scale.

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11 | P a g e

For example, the Discussion Draft characterizes “[r]eliance on data” as a key feature of thedigital economy. BIAC notes that all enterprises, including digital/internet companies, “collectdata about their customers, suppliers, and operations.” (Para. 103) Moreover, this practice is
not new. By way of illustration, customer-facing enterprises used mailers, loyalty cards, andcontests to collect and analyse data about customer behaviour long before the internet cameinto being. What digital has provided is the ability to collect such data in a faster and moreaccurate manner. For example, data regarding engine performance was historically collectedby airline mechanics, pilots and flight reports. Much more accurate data is now collected fromthe engines themselves. The collection of data is not a new development and does not
require sweeping changes to the rules regarding nexus and tax base.
21.

BIAC respectfully questions whether the digital economy can properly be characterized ashaving a tendency toward monopoly/oligopoly if volatility is also a key feature of the digital
economy. (Paras 117 – 118) With low barriers to entry, the digital economy is consistently
witness to rapid ascents and declines. The now-defunct Friendster was considered “thehottest thing in social networking” 4 in 2003, one year before the founding of Facebook.
Although Facebook arguably dominates the English-language social networking space today,
its successor could be founded tomorrow. The trajectory of digital/internet companies thus
stands in contrast to historic monopolies, like that enjoyed by the United Fruit Company, which
dominated the banana trade virtually unchallenged for much of the 20th century.

22.

BIAC respectfully submits that the Discussion Draft overstates concerns about the mobility ofintangible assets, users, and business functions in the digital economy. Enterprises in allareas of the economy, including pharmaceutical, biotechnology, semiconductor, and natural
resources enterprises, develop, acquire, and exploit intangible assets. These enterprises
transfer intangible assets just as they transfer other, tangible assets, such as equipment.
Transfers of both tangible and intangible assets may constitute gain recognition events andresult in direct tax at the level of the transferor. In addition, in many cases, the physical easewith which an enterprise may transfer an intangible asset as opposed to a tangible asset isoffset by IP protection and other compliance burdens associated with intangible asset
transfers. Most OECD/G20 countries have developed rules that create significant tax costs
upon the cross-border transfer of intangibles. These rules should generally provide a proper
framework for addressing the issue of intangible transfers.

23.

BIAC also observes that users are generally not mobile because users live and work in one
place. Situations in which users reside in one country and purchase and/or accessapplications while located in a second country are less common. Similarly, business functions
are generally not mobile. Personnel who perform R&D, IT, logistics, marketing, management,
and other functions remain situated in a particular location. These personnel have always
been able to move among different locations and are no less rooted to a single location now
than before. BIAC nevertheless acknowledges that ICT enables enterprises to centralize
certain functions, such as finance, legal, management, and customer support functions, in asingle location to reduce costs and improve efficiency. This location might (or might not) be
remote from market jurisdictions. By definition, centralizing such functions means that thecentralized activity will be remote from the majority of market jurisdictions. Centralizing
functions does not entail the mobility of functions, however. Instead, centralizing functions
requires that these functions remain fixed at a single location. Current transfer pricing rules
can be used to address the issue of mobility with respect to services that are used internally.

4

Robert McMillan, “The Friendster Autopsy: How a Social Network Dies,” W IRED.COM (Feb. 27, 2013).

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24.

In its treatment of the mobility of business functions, the Discussion Draft suggests that
digital/internet companies are able to “carry on economic activity with minimal need for
personnel to be present.” (Para. 98) BIAC respectfully disagrees with this contention. BIAC
observes that all enterprises, including digital/internet companies, require human resources toscale, as evidenced by the tens of thousands of employees of the leading digital/internetcompanies. Although digital/internet companies may retain fewer salespeople as compared totheir offline counterparts, these same companies employ significant numbers of development,
marketing, operations, IT, and other personnel. Put differently, digital/internet companies
have reallocated the responsibilities of their employees but have not eliminated the need for
employees. This statement also reflects a potential misunderstanding by the OECD of how
companies operate in the digital sphere. Technology is developed by engineers, scientists
and other sophisticated professionals that have the ability to innovate. The technology isdeveloped where these people are located and can be both labour and capital intensive. Mostof these people are located in countries which are hardly thought of as tax havens and there is
not a tremendous amount of mobility within this population.

25.

BIAC also respectfully questions the utility of Figure 8, which appears below paragraph 98 of
the Discussion Draft and which depicts the “[a]verage revenue per employee of the top 250
ICT Firms.” As a threshold matter, BIAC notes that revenue generally does not translate into
profits for digital/internet companies and thus represents a false metric for the productive
capacity of employees of these companies. In addition, neither Figure 8 nor the source inwhich Figure 8 originally appears - i.e., the OECD Internet Economy Outlook 2012 - sets forth
the names of the “top 250 ICT Firms.” As a result, BIAC is unable to assess the relationshipbetween the average revenue per employee in Figure 8 and the profitability of the firms inquestion. Moreover, BIAC respectfully submits that an objective assessment of the relative
profitability of ICT employees must take place in the context of other high margin industries,
such as financial services, consulting services, and oil and gas.

Significance of Investment Decisions
26.

27.

Paragraph 101 notes that businesses are increasingly able to choose the optimal location for
productive activities and assets, even if that location may be distant from the location ofcustomers or the location of other stages of production. The ability of businesses to choose
the optimal location for assets and activities is not limited to the “digital economy” and thus
cannot be used to justify separate rules for digital enterprises. BIAC believes that thisstatement reflects concern on the part of some delegates that this ability to choose the optimal
location for productive activities and assets will permit taxpayers to locate productive activities
and assets where they are subject to little or no tax. BIAC believes that there are four true
statements about tax and investment decisions, unrelated to the digital economy:
1.

Taxpayers take into account the level of tax they will incur on their productive investment
when they make decisions about where to locate these activities.

2.

Low taxes or tax incentives will not make up for an unfavourable investment climate.

3.

Tax incentives can tip the scales towards a location that has an otherwise favourable
investment climate.

4.

A difficult tax environment including high rates, lack of clarity and the difficulty ofresolving disputes can discourage investment in an otherwise favourable environment.

In an open global market place, if countries seek to encourage business to make productive
investments in their jurisdictions, then consequences of these factors are clear. Countries55

13 | P a g e

need to focus on making the investment climate favourable. Tax regimes are a part of this,including tax regimes that are clear, predictable, and generally impose lower rates of tax on abroader base.
28.

This paragraph also raises concerns that countries wish to have it both ways. The BEPS
project generally has a theme of requiring more substance in order to support taxpayers’
allocating income to a particular jurisdiction. 5 This focus on increased substance isinconsistent with the suggestion that income of a MNE can be taxable in a jurisdiction wherethat MNE has no assets, functions, or employees. 6 That is, if a country wishes to focus on the“people functions” leading to the development of intangible property and assert that the people
functions are the principal source of profit creation (in distinction to the contributions of risk
and capital), then that country should not at the same time assert that another country where
the “people functions” are carried on, which lead to the creation of products that are marketedin the first country, must yield to the first country insofar as the right to tax the full return fromthose functions is concerned. This point will be discussed in more detail in comments on
section VII, but BIAC believes that the Task Force underestimates the need for people andassets in the production of digital economy products.

29.

The Discussion Draft does recognize the volatility of the market and notes that the few
companies that have managed long-term success typically have done so by investing
substantial resources in research and development and in acquiring start-ups with innovativeideas, launching new features and new products and continually evaluating and modifying
business models. (Para. 118) BIAC is concerned that although volatility and the resulting
need to continuously innovate is acknowledged, it is not taken properly into account for
purposes of profit attribution.
Particularly in the context of the Discussion Drafts on
intangibles, BIAC has been making the point that the OECD is undervaluing the contributions
attributable to managing business risk. These fundamental business decisions are generally
centralized in one or a few designated MNE group members, and are not decentralized into
the market jurisdictions. For example, risk management policies are generally determined at
headquarters, but their daily implementation and control are generally decentralized into a few
regional management companies.

IV. IDENTIFYING OPPORTUNITIES FOR BEPS IN THE DIGITAL ECONOMY30.

The draft acknowledges that the nature of the strategies used to achieve BEPS in digitalbusinesses is similar to the nature of strategies used to achieve BEPS in more traditional
businesses. (Para. 120) Some of the characteristics of the digital economy may exacerbate
the risk of BEPS, particularly in the context of indirect taxation. BIAC would like to point out
that MNEs are much more likely to be VAT compliant with respect to digital economy
transactions than smaller enterprises. Obviously, all businesses should comply with their tax
obligations, but in the case of VAT, MNEs function as an uncompensated tax collector. The
trade distortive effects that the OECD has pointed out in other contexts therefore operate in
the opposite direction. That is, consumers may be discouraged from acquiring digital goods
and services from MNEs because they do comply with their VAT obligations while smaller
companies do not. Tax authorities may find that digital economy-based technology solutions
may improve overall compliance with VAT by SMEs.

5

The OECD has identified actions 6 through 10 as directed at ensuring a taxpayer’s transactions have substance. In
addition, action 5, relating to harmful tax practices, is directed at ensuring that countries require substantial activity for any
preferential regime.
6
That is, if two men and a dog cannot support the attribution of income to a low-tax jurisdiction, then no men and no dog
cannot support the attribution of income to the market jurisdiction.

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14 | P a g eBEPS in the Context of Direct Taxation
31.

The draft identifies four elements of BEPS planning: avoiding a taxable presence; avoiding
withholding tax; low or no tax at the level of the recipient; and no current tax at the level of theparent. (Para. 122)

Eliminating or reducing tax in the market country
Avoiding a taxable presence
32.

The domestic laws of most countries require some degree of physical presence before
business profits are subject to tax. Articles 5 and 7 require a permanent establishment before
a non-resident may be subject to tax. Accordingly, a non-resident company may not be
subject to tax in the country solely by reference to the fact that it has customers there. (Para.
123)

33.

The Discussion Draft also states that the ability of companies to maintain some level ofbusiness connection "within a country" without being subject to tax on business profits fromsources within that country is the result of particular policy choices reflected in domestic law
and tax treaties, and is not in and of itself a BEPS issue. (Para. 124) However, digitalcompanies may be able to take greater advantage of these opportunities. This combined withthe elimination of taxation in the residence state, creates double non-taxation, and does raise
BEPS concerns. (Para. 124)

34.

First, BIAC believes a distinction needs to be drawn between actual presence “within acountry” and sales “to a country”. Activities “within a country” include sales affiliates, customer
support operations, and other personnel and assets that actually are established in market
jurisdictions by many digital economy companies. This is distinct from making sales tocustomers located in a country, which should not be considered a business connection “withina country”.

35.

BIAC believes that these choices relate to the fundamental jurisdictional issue 7 concerningwhen it is appropriate to impose income tax on participants in the economic life of a country.
A legitimate substantive basis for imposing a tax may arise from different contacts between
the country and the person or thing taxed. The location of a person, the situs of property, theperformance of an activity, the entry of a person or property into a jurisdiction all can support
the jurisdiction to impose a tax. Different contacts support different types of assertions oftaxing authority. For example, importation of non-income producing property into a jurisdiction
would support the imposition of a customs duty, but not an income tax on the person importing
the property. Although all taxes are designed to raise revenue, they legitimately reachdifferent aspects of the economic life of a country. Thus countries use a variety of tax
instruments to reach each of these aspects and a country may have a legitimate jurisdictional
basis for imposing one tax but not a different tax based on the type of connection between the
country and the thing that they wish to tax.

36.

The notion of an income tax -- particularly a net income tax -- requires identification of theperson receiving the income as a first step in determining the items of income and expensearound which the income tax net is drawn. Since that must be the first step in identifying the

7Countries should only impose tax if they have a substantive basis for their taxing authority. They may attempt to do so inother cases and may succeed if they have enforcement power, but an exercise of taxing authority in such a situation
where there is no substantive basis is illegitimate and the OECD/G20 should not condone such an exercise of taxing
jurisdiction.

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income tax base, the characteristics of that person seem more relevant than they might forother taxes, for example, excise taxes. Even in the case of a gross basis income tax, theidentity of the person receiving the income is relevant to the determination of the amount oftax imposed; bilateral income tax treaties grant benefits on fixed or determinable type incomeon the basis of the residence of the recipient. So, the status of the recipient of income is a key
concept in determining the amount of an income tax. Because of the intrusiveness of theincome tax, this status is relevant in a way that is not for other taxes. 8 Thus the basic
jurisdictional nexus is between the person earning the income and country with which that
person has substantial contacts justifying the imposition of a tax that requires detailed
information concerning the person subject to the tax. BIAC believes that this is thefundamental reason that countries have historically adopted an origin based income tax modeland refrained from imposing an income tax, particularly a net income tax, in the absence of
substantial contacts of the enterprise located in the country. Because of these sound reasons
the OECD/G20 should not lightly reject these historical standards.
37.

The single fact that may differ in the case of the digital economy is that the scale of remotesales has increased. The policy choice, therefore, is whether this fact justifies a modification
to the traditional nexus standards. BIAC believes that this increase in scale does not justify ageneral change, or a special rule for the digital economy, since over time trade in these goods
and services will become more reciprocal among jurisdictions.

38.

Traditionally, gross basis withholding taxes may be imposed on certain types of income evenin the absence of an actual business presence. For a gross basis withholding tax to beconsidered appropriate, the income should be of a type the production of which does not
require significant expenses. As previously discussed, the Discussion Draft asserts thatinternet businesses have significantly more revenues per employee. BIAC would like a further
explanation of how those figures were derived. We believe that in most cases internet
businesses are like any other. That is, it is difficult to move from a good idea to a businessprofit. Most businesses fail. Even successful businesses may have long periods of start-up
losses before becoming profitable such that a model that imposes tax on a gross basis is likely
to impose tax in many cases on amounts that do not reflect net profits. Gross revenue per
employee, even if high, does not mean that those businesses do not incur significant costs.
People may be replaced by technology, but technology costs may be expensive. For
example, search revenue per employee may be high but traffic acquisition costs (TAC) may
significantly reduce the profit opportunity on that revenue.

39.

Historically, there have been two primary bases for imposing income tax: source andresidence. 9 Tax treaties generally recognize that a jurisdiction where the source of income islocated (the jurisdiction in which the income “arises”) has the primary right to impose an
income tax on that income, and the jurisdiction of residence has a secondary right to impose
tax. A person’s income is generated by that person’s activity and/or property. Source rules
generally are intended to reflect the location of the person’s activity, or the location of theperson’s property, that generates the income or the origin of that income. Neither concept
focuses on the location of the customer.

8

See the FATCA rules.
The BEPS Action Plan provides: “While actions to address BEPS will restore both source and residence taxation in a
number of cases where cross-border income would otherwise go untaxed or would be taxed at very low rates, theseactions are not directly aimed at changing the existing international standards on the allocation of taxing rights on crossborder income.” (Action Plan p. 11.) So, while jurisdictions may debate these issues, the BEPS project is not intended tochanging the current standards.

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40.

Source rules are not universal or immutable, but there are some basic principles that are
generally used to determine source. Some of those principles are: place of activity(performance of services, profits attributable to a PE), place of use (rents and royalties 10 fromproperty), residence of the payor (interest and dividends), and residence of the recipient(capital gains, and business profits, not otherwise dealt with, and not attributable to a PE
outside the residence country).

41.

The income tax, at its most basic level, is an origin based tax on income created by activities
conducted in a particular place. That is, jurisdictional nexus is created by the location ofactivities 11 and assets of the person earning the income. The country or countries that have asubstantial nexus to those activities and assets should have the jurisdiction to tax that income.

Minimizing functions, assets, and risks in market to jurisdictions
42.

The Discussion Draft asserts “[i]n the context of the digital economy, an enterprise may
typically establish a local subsidiary or a PE, with the local activities structured in a way thatgenerates little taxable profit.” (Para. 125) The Discussion Draft acknowledges that this is not
a BEPS issue in and of itself, even if the enterprise takes taxes into account in deciding where
to locate personnel and functions. (Para. 125) The Discussion Draft asserts, however, that
this creates "incentives to purport an allocation of functions for tax purposes in ways that may
not correspond to actual business functions performed, and that would not be chosen in theabsence of tax considerations.” (Para. 125) How much profit a local entity generates
depends on the functions, assets and risks of that entity. There has been a lot of publiccomment on this issue, but the public comment does not necessarily reflect the actual
operations taking place in particular countries. In many cases, “digital economy” companies
only locate a small portion of their worldwide labour force in a jurisdiction and those personnel
are not responsible for intellectual property. Thus, minimal presence and low value functions
are what leads to the low profit attribution.

43.

The Discussion Draft states that authority to conclude contracts is one of the functions thatmay "purportedly" be in a non-resident entity, while the "effective authority" to conclude
contracts is in fact in the local entity. 12 (Para. 127) The draft continues as follows: “assets, inparticular intangibles, and risks related to the activities carried out at the local level may beallocated via contractual arrangements to other group members operating in a low tax
environment in a way that does not correspond to actual risks assumed or to functions
performed, assets used, or risks assumed related to the intangibles.” (Para. 125) The draft
also identifies "undervaluing" intangibles at the time of transfer as a risk. (Para. 126)

44.

The Discussion Draft also states “[o]perations in higher tax jurisdictions often are “allegedly”
stripped of risk, do not “claim” ownership of intangibles or other valuable assets, and do nothold the capital that funds the core profit making activities of the group.” (Para. 126 internal
quotations added.) BIAC has addressed some of these concerns in our comments in our
responses to the Discussion Drafts on intangibles. BIAC is very concerned with the tone of10

The market jurisdictions may believe that returns attributable to accessing a market are royalties. The OECD’s
Discussion Draft on intangibles rejects that view because the market cannot be owned or controlled by any person.
Assuming that this view is retained in the final version then the royalty analogy is not the appropriate method for
determining the source of income derived from the delivery of digital goods or services.
11
The word “activities” is used broadly here. Activities would include investing, bearing risk, holding title and managing
property.
12
Contract approval parameters are generally set at the headquarters company or regional management company, not at
the local market level. Difficult contract negotiations are generally escalated to the headquarters or regional managementcompany.

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this Discussion Draft, that it reflects an assumption that MNCs systematically misrepresent totax authorities the actual functions, assets and risks located in a jurisdiction.
45.

The emphasis on “alleged” and “purported” is misplaced. Within the limits of the law,
taxpayers are allowed to decide on the structure of their transactions. Taxpayers and tax
authorities may disagree with the consequences of transactions, but the pejorative language isunhelpful to the resolution of these difficult issues. The discussion of these issues needs totake place at the level of the appropriate policy without comments that imply taxpayers are
generally not following the current rules. Under current law, in cases where function does notfollow form and taxpayers only “purport” to do things rather than actually doing them, tax
authorities have the appropriate tools to challenge those allocations of income and assert
taxing jurisdiction.

Maximizing deductions in market jurisdictions
46.

This section asserts that companies artificially inflate expenses including interest, royalties,
and service fees. (Para. 128) We reiterate here the comments above. If the payments are
not arm’s length, tax authorities may challenge these allocations. The discussion on
appropriate rules should be based on the appropriate policy.

Avoiding withholding tax
47.

The Discussion Draft provides that companies may use treaty shopping structures to avoid
withholding tax that would otherwise be due and this raises BEPS concerns. (Para. 129)
BIAC will be providing comments on the recently proposed Discussion Draft on Treaty AntiAbuse rules.

Opportunities for BEPS with respect to VAT
48.

This topic is discussed at the end of this letter.

V. TACKLING BEPS IN THE DIGITAL ECONOMY
49.

BIAC strongly agrees with the view expressed in this section of the Discussion Draft that otherAction Plan items that will have an impact on BEPS in the digital economy. We also strongly
agree with the statement that is necessary to evaluate the impact of those other changes
before considering unique rules for the taxation of the digital economy that may turn out to beunnecessary. 13 The Discussion Draft provides insight into where some of the future action
items may be headed. It is worth noting that with all the proposed changes, there is noevidence in the Discussion Draft that the countries see improved dispute resolution as part ofthe package of items necessary to tackle BEPS in the digital economy. As business hasrepeatedly made clear, improved dispute resolution is critical to implementing any
fundamental restructuring of the international tax principles. The interpretation of these newrules will generate disputes and improving dispute resolution must be addressed.

Restoring taxation on stateless income
50.

“Structures aimed at artificially shifting profits to locations where they are taxed at morefavourable rates, or not taxed at all, will be rendered ineffective by ongoing work in the context
of the BEPS Project.” (Para. 146) Presumably this includes all the transfer pricing action

13

The timing on this Action Item may be premature. Action Item 1 should probably have been Action Item 15. That is theimpact of all the other changes should have been considered before taking action of the “digital economy.”60

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items (Actions 8, 9, and 10). The Discussion Draft also recognizes greater transparency andmandatory disclosure of aggressive tax planning arrangements, uniform transfer pricing
documentation requirements, and country-by-country reporting as contributing to this. BIAC
has previously submitted comments on these issues. We would like to highlight that theOECD needs to be mindful of the burden created by reporting requirements and ensure thatburden is appropriate and proportionate.
Measures that will restore taxation in the market jurisdiction
51.

These measures include the prevention of treaty abuse (Action 6). A Discussion Draft on thiswas published recently. BIAC has submitted separate comments on this topic.

52.

On preventing the artificial avoidance of PE status (Action 7 – which is due by September2015), the Discussion Draft mentions possible changes to the rules concerning the conclusionof contracts and dependent agents (Para. 150) and possible changes to the Article 5(4)preparatory and auxiliary activities. (Para. 151)

Measures that will restore taxation in both market and ultimate parent jurisdictions
53.

The Discussion Draft identifies three action items in this context. These are the work on
hybrid mismatch arrangements, the work on base erosion via interest deductions and otherfinancial payments, and the actions to assure that transfer pricing outcomes are in line withvalue creation.

Neutralize the effects of hybrid mismatch arrangements
54.

The OECD recently published two Discussion Drafts on these topics. BIAC will be developing
comments on these Discussion Drafts.

Limit base erosion via interest deductions and other financial payments
55.

The Discussion Draft points out that “many large and well-established digital economy players
are cash rich and they often finance new ventures, the acquisition of start-ups, or other assets
with intra-group debt.” (Para. 155) Intra-group financing entities are often established in low
tax jurisdictions. The existing rules permit companies to fund profit-generating activities of thegroup with intercompany debt even though the group as a whole may be much less heavily
leveraged. (Para. 156) This issue is not unique to digital economy companies and may beless prevalent in the “digital economy” than in other sectors of the economy.

56.

The Discussion Draft identifies this as an area where mechanisms within or beyond the arm’s
length principle may be necessary and suggests a formulary approach which ties deductible
interest payments to external debt payments which may lead to results that better reflect thebusiness reality of MNE groups. (Para. 157) This would obviously be a significant change
from current law and a significant move towards formulary apportionment. BIAC has serious
doubts concerning the feasibility of such an approach. In order for this to work, countries
would not only deny deductions for intra-party debt, they would also have to permit a
deduction for a portion of the external interest expense incurred by an entity located outside of
their jurisdiction. Since, these countries are now allowing that deduction presumably theywould also want the option to impose a withholding tax on the portion of external interest paid.
Instead of actual intra-company debt would there now be deemed intra-company debt thatwould be subject to withholding tax? That does not seem appropriate since there would be no
income in that jurisdiction since the only income is held by unrelated parties who are notnecessarily located in the jurisdiction of the entity that incurs the third party debt. Would each61

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company have a share of the external debt? If so, how would each company determine ashare of that in a timely manner such that withholding tax could be imposed without burdening
capital markets? Perhaps withholding agents have to determine which treaty applied to some
portion of each payment. Perhaps withholding agents would withhold at the highest possible
applicable rate and investors would be required to apply for refunds in every jurisdiction towhich interest was allocated.
Counter harmful tax practices more effectively
57.

The Discussion Draft notes that a number of OECD and non-OECD countries have introduced
preferential tax regimes for IP. (Para. 158) The OECD will be examining whether thoseregimes constitute harmful tax preferences, specifically whether they require substantial
activity. If the regimes are found to be harmful, then the relevant country will be given an
opportunity to abolish the regime or remove the features that create the harmful effect. Thismay have more of an impact within the EU because of the limitations on State Aid. If certain
regimes are found to be harmful, they may violate the EU’s prohibitions against State Aid;
countries may, in fact, be obliged to get rid of them (or face penalties). If countries establish
tax incentives, then taxpayers should be free to take advantage of them. It is not a BEPS
concern if a consequence of taking advantage of a legal tax incentive is low or no tax on theincome covered by that incentive.

Assure that transfer pricing outcomes are in line with value creation
58.

This is the work being done under action items 8 through 10 and should have the effect ofaligning income with the location in which the income arises.

Intangibles, including hard-to-value intangibles, and cost contribution arrangements
59.

60.

The BEPS work on intangibles will address the below value transfer of intangibles by taking
several steps. (Para. 160) These include:
1.

A broad definition of intangibles -- this is intended to ensure that any intangible forwhich unrelated parties would pay compensation must be compensated in a related
party transfer;2.

Entities that contribute value by performing or managing development functions or bybearing or controlling risks are appropriately rewarded;3.

Valuation techniques may be used when appropriate comparables cannot be found;

4.

In the case of partly developed or hard to value intangibles, post-transfer profitability(commensurate with income) should be taken into account.

BIAC has submitted comprehensive comments on the topic of intangibles and stands by thosecomments.

Business risks
61.

The Discussion Draft states that the BEPS work will require the control of risk, the financial
capacity to bear the risk, and the management of risk to be more closely aligned. (Para. 163)
Even more importantly, the Discussion Draft states “the guidance will also identify risks that,by their nature, are borne by the MNE group as a whole and therefore which cannot readily be
assigned to a single group entity.” (Para. 163) The Discussion Draft does not say what would

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be done with these risks. Ignoring commercial risk is one of the principal tenets of formularyapportionment (those advocating for formulary approaches basically consider the return from
intangibles and risk to be spread over all the activities of the group). So, ignoring risk would
be a significant move in the direction of formulary apportionment. As mentioned earlier in thiscomment letter, the managing of global risk is one of the principal functions of senior
management. Management is responsible for identifying the direction of the business,
deciding which ventures to pursue and which to abandon, and developing or acquiring new
products or businesses which they believe will be successful. These basic decisions
determine whether a company will become and remain successful. Even successful
businesses must continuously evaluate and manage these risks. These risks are not
managed in the contract manufacturing entity or the contract research and development
facility, but they are key to the continuing vitality of any business 14 and an approach thateither ignored these risks or allocated them on the basis of a formula would fundamentally
misallocate business risk. This approach would divorce taxation from business and economic
realities; a result that appears contrary to the goals of the OECD. Additionally, formulaic
apportionments carry significant risks of creating their own base erosion problems.
Base eroding payments
62.

The Discussion Draft describes, in brief, certain targeted measures that could be helpful inaddressing base eroding payments. These could include measures that preserve somereliance on the ALP but depart from it in certain respects. These approaches could include
caps on certain payments or formula based allocations. (Para. 165) Our earlier comments on
allocating interest using formulas could be relevant here depending on what is allocated andwhether withholding taxes potentially apply. This would be another significant step in the
direction of formulary apportionment.

Global value chains and profit methods
63.

The Discussion Draft provides that:“Attention should therefore be devoted to the implications of this increased integration in
MNEs and evaluate the need for greater reliance on value chain analyses and profit split
methods. This work should also address situations where comparables are not available
because of the structures designed by taxpayers and could also include simpler andclearer guidance on the use of profit splits along the lines that have been successfully
applied in connection with global trading and other integrated financial services
businesses.” (Para. 166)64.

The output is to be delivered by September 2015.

65.

BIAC is very concerned that all of these elements taken together represent a significant
erosion of the ALP. As we stated at the beginning of this letter, this hybrid approach will
potentially lead to a high risk of double taxation and will potentially create a significant drag on
trade and investment.

14

Even companies that have been successful over a long period can fail because they fail to manage business risk andchange. Kodak is a prime example of the sort of failure.

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Measures that will restore taxation in the jurisdiction of ultimate parent
66.

The Discussion Draft provides that to address BEPS in the digital economy, CFC rules must
effectively address the taxation of mobile income created by the digital economy. (Para. 168)
To address this situation, consideration should be given to CFC rules that target income
typically earned in the digital economy, such as income earned from the remote sale of digital
goods and services. (Para. 169) 15 Remote selling is neither new nor unique to the digital
economy. Internet/cloud technology has made remote selling pervasive in the economy. So it
would be difficult and unfair to limit rules on remote selling to digital economy transactions.
The draft also says that the work will need to take into account the need for anti-inversion
rules. (Para. 169)

67.

BIAC believes that the purpose of the corporate income tax and the economic burden of thattax are relevant to whether a CFC approach or another approach is appropriate to reducing
the incidence of low or non-taxation. That is, if other BEPS concerns are addressed and yet
there is still low-taxed income: does any country have jurisdiction to tax that income? If sowhat is the basis of that jurisdiction? The corporate income tax ensures a comprehensive
income tax; without a corporate income tax, corporate earnings would not be taxed until paidout to individual shareholders. 16 It is also widely acknowledged that corporations do not bear
the economic burden of the corporate tax, although it is less clear where that burden falls.
Traditionally, the impact of corporate taxation has been believed to borne by the shareholdersof the corporation since it reduces the value of their shares. More recently some have argued
that the burden of the corporate tax falls on labour or the consumer. The U.S. Congressional
Research Service believes the traditional analysis is generally correct. 17 This is relevant to
the policy analysis because if the corporate tax functions as a pre-payment of the personal
income tax and the economic burden of the tax in fact usually falls on the shareholders of thecorporation, then the jurisdiction which ought to be determining whether residual tax should be
imposed on a corporation that is earning income subject to a low rate of tax ought to be thejurisdiction in which the shareholders reside. Taxing the ultimate individual shareholders is
probably impractical. However, taxing the ultimate parent in the jurisdiction in which it resides
is probably a reasonable proxy for taxing the individual shareholders. If that conclusion iscorrect, is the jurisdiction of the ultimate parent obliged to tax low taxed income or can it makea sovereign choice to tax that income only on repatriation to the ultimate parent or not at all?
BIAC believes that countries do have the sovereign right to make these choices and that after
appropriate returns are paid based on a FAR analysis, the right to impose an additional tax on
corporate profits ought to be reserved to the jurisdiction of the ultimate parent.

68.

This issue goes to the origin theory of income taxation vs. the supply/demand theory. Under
the supply/origin theory: "profits originate where the factors that produce the profits operate
and the source of the “normal” return of equity capital should therefore be identified “to thelocation in which the actual operation of the capital occurs”; 18 ... the mere consumer market
does not represent a factor contributing to the added value of the company. 19 “[A]ctivity
somewhere, as reflected by the entrepreneur's risk assumption, labour deployment, andproperty investments, remains a necessary component to an enterprise's creation of products

15

See the recent US Treasury proposal on CFC rules for the digital economy.
The Corporate Income Tax System: Options for Reform, the Congressional Research Service, p. 15.
17
Ibid at 16.
18
Anne Schafer and Christoph Spengel, ICT and International Taxation: Tax Attributes and Scope of Taxation,
19
Business Profits TAG, final report, paragraph 40.
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22 | P a g eand services. Nothing in the "new" economy changes the proper justification for a state toimpose an income tax on an enterprise." 2069.

The Final Report also says: "No member of the TAG argued that tax rules should be modified
to shield countries from the effect of technological developments on their tax base. Countries
do not have a right to a particular level of tax revenues regardless of where business profits
originate." 21 So, if activities have shifted to outside the jurisdiction, countries will lose tax
revenue and that is appropriate. BEPS is intended to address artificial profit shifting. If theincome is attributable to actual activities that have moved out of the jurisdiction, then the profit
shifting is not artificial. We are concerned that the digital economy proposals are inconsistent
with the other BEPS action items that strive to attribute more profit to the location where
activities take place. We believe that countries cannot have it both ways. If they want to lookto the location of people functions in the context of the attribution of income to thedevelopment of intangibles, they should also look to the location of people functions in thecontext of the digital economy.

70.

BIAC also believes that this does not deny a market jurisdiction an appropriate share of taxing
jurisdiction because proper application of a destination based VAT will provide an appropriatebase for taxing the value attributable to the market. 22

71.

In contrast to an income tax, a VAT is intended to impose a broad-based tax on final
consumption by households. The central design feature of a VAT is that the tax is collected
through a staged process. Each business in the supply chain takes part in the process ofcontrolling and collecting the tax, remitting the portion of the tax corresponding to its margin.
That is the VAT of a business is the difference between the VAT on its taxed inputs and the
VAT on its taxed outputs. The tax is collected in principle on the “value added” at each stageof the collection process.

72.

The economic burden of a VAT is supposed to be borne by the ultimate consumer (in contrast
to the corporate income tax). We believe that the OECD should take a careful look at theeconomic burden of both of these taxes in the context of the digital economy. If companies
are competing on price then VAT compliant MNEs may be bearing the burden of the VAT
because SME competitors may be less likely to be VAT compliant and will undercut more
compliant companies on price. Thus, VAT compliant businesses may be bearing at least a
portion of the VAT. Also, companies may want to use a uniform pricing model acrossjurisdictions and in order to avoid pricing differentials caused by different VAT rates, some
VAT may be borne by MNEs (which may mean that it is ultimately borne by shareholders).
Business also believes that in determining the economic burden of the VAT compliance costs
should be taken into account. These costs are higher than they need to be because
governments have not coordinated their rules; compliance is more burdensome than it needs
to be; penalties are significant; and there is no process for resolving double taxation disputes.

20

Business Profits TAG final report paragraph 50.
Ibid para. 118.
22
There are political reasons that some jurisdictions do not want to rely on a VAT to tax the value attributable to themarket. These vary but include the fact that, as discussed, the economic burden of a VAT is supposed to fall on the final
consumer. That is, jurisdictions may wish to tax corporate income precisely because the economic burden does not fall on
their residents. In some jurisdictions VAT rates are already very high and there is not a lot of scope to raise rates further.
Sub-national governments may impose VATs, so revenue from a VAT would have to be shared between national and subnational governments. Some jurisdictions may have constitutional or other restrictions that limit their ability to impose a
VAT. These political concerns of course need to be properly taken into account, but that should be done after the tax
policy analysis of the proper scope of the income tax and the VAT, so countries understand that they are making politicalconcessions to achieve a consensus solution.
21

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Precisely because the economic burden is supposed to be borne be the customer, thecompliance costs business incurs are an economic burden on the company. 23
73.

The fundamental policy issue in relation to the international application of the VAT is whether
a VAT should be imposed by the jurisdiction of origin or the jurisdiction of destination. Under
the destination principle, tax is ultimately levied only on the final consumption that occurs
within the taxing jurisdiction. If countries adopt a destination based VAT, in the case of across-border transaction, the country of origin is ceding its taxing jurisdiction to the country ofdestination. This may be the right policy, but the economic result is that the country ofdestination is taxing value added in other jurisdictions.

74.

Under the destination principle, exports are not subject to tax (and are entitled to a refund of
input tax) and imports are taxed on the same basis as domestic supplies. Thus, the valuethat was added outside of the jurisdiction of consumption is subject to full VAT in thejurisdiction of final consumption. In other words, the jurisdiction of consumption is able toimpose a tax on the value created by activities taking place outside the jurisdiction and assets
whose use and value is outside the jurisdiction.

75.

Under the origin principle, each jurisdiction would levy VAT on the value created within its own
borders. Thus, jurisdictions would tax exports on the same basis and at the same rate as
domestic supplies and would tax imports as domestic supplies with a credit for the
hypothetical value of its VAT (not the actual VAT paid in the country of export). By imposing
tax at the various rates applicable in the jurisdictions where value is added, the origin principle
could influence the economic or geographical structure of the value chain and undermine
neutrality in international trade.

76.

Obviously this is true and could also be true for origin-based income taxes. That is, imposing
income tax on the place where value is created can and does influence the economic andgeographical structure of the value chain, as discussed above companies take taxes into
account in deciding where to locate productive activities. The OECD has recognized that
consumption taxes are preferable to income taxes, precisely because consumption is lessmobile and does not create distortions. This does not mean that all taxes – income taxes inthis case -- should be imposed on the basis of place of consumption. A distinction between
origin based income taxes and destination based consumption taxes allows both thejurisdiction of origin and the jurisdiction of destination to tax value creation in an appropriate
way.

77.

Although VAT is a tax on final consumption, VAT is not imposed on actual consumption but on
proxies that are intended to predict the likely place of consumption. In the context ofdeveloping VAT guidelines, the OECD is identifying which proxies work best in certain
circumstances. Once proxies are identified, actual consumption is irrelevant to determining
the place of taxation. That is, the proxy trumps the place of consumption if they differ. In thecontext of digital transactions there are four possible proxies being considered. Those proxies
are: consumer residence; actual location of the consumer; residence or location of the
supplier; and place of performance. It is likely that the only really feasible proxy in the majorityof cases will be consumer residence. The residence of the consumer is the proxy (andtherefore the deemed place of consumption) for digital transactions. In other words, the place

23

Some have argued that making use of the infrastructure of a country ought to be a sufficient basis for finding a PE andimposing an income tax. We disagree with that view, but note that MNEs not only make use of the infrastructure of acountry, but also contribute to it. Serving as the government’s VAT collector is a prime example of such a contribution.

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of actual consumption would be irrelevant and the place of consumer residence would
generally be the place of consumption.
78.

BIAC believes that this division of taxing jurisdiction between VAT and income tax allows bothjurisdictions (e.g. origin and destination) to tax a “fair share” of the value attributable to eacheconomic transaction. That is, the country where the functions that generate income havejurisdiction to tax income and the country of consumption (probably deemed to be the countryof the consumer’s residence) has jurisdiction to impose a VAT. Each country gets one “bite of
the apple”, with the VAT share on final consumption actually being the far larger amount as it
is imposed on gross revenue without regard to profitability.

VI. BROADER TAX CHALLENGES RAISED BY THE DIGITAL ECONOMY
79.

The Discussion Draft states that the evolution of business models in general and the growth ofthe digital economy in particular have resulted in non-resident companies operating in market
jurisdictions in a fundamentally different manner today than at the time that international tax
rules were designed. (Para. 174) The draft also asserts that the traditional model of doing
business in market economies is obsolete. (Para. 174) BIAC believes that these assertions
grossly overstate the impact of digital methods of doing business on market economies.
Companies still require people, assets and functions which will create a tax presence insignificant jurisdictions.
The main challenges of the digital economy are identified inparagraph 177 as:
1.

Nexus – the reduced need for physical presence in order to carry on business raises
questions as to whether the current rules are appropriate;

2.

Data – the use of data raises questions concerning how to attribute value created fromthe generation of data through digital products and services, and how to characterize aperson’s supply of data;

3.

Characterization – how should payments attributable to new digital products andservices be characterized;

4.

VAT collection – particularly with respect to goods and services acquired by private
consumers.

Nexus and the ability to have a significant presence without being liable to tax
80.

The Discussion Draft recognizes that advances in digital technology have not changed thefundamental nature of the core activities that businesses undertake to generate profits.
Businesses still need to source and acquire inputs, create or add value, and sell to customers.
(Para. 178) The digital economy has had an impact on how these activities are carried out.
There is a need, therefore, to consider whether the current rules are fit for purpose. (Para.
180) The ability to provide digital products and services to a market at lower costs means thathigh quality products and services can be provided to small and remote markets that would
normally not benefit from current technological advances. This has a positive impact on thesemarkets and tax rules should encourage this development. Imposing expensive and complex
tax burdens which are unrelated to local profit or activity would have the opposite effect.

Data and the attribution of value created from the generation of marketable location-relevant
data through the use of digital products and services

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81.

The Discussion Draft provides that data gathered from various sources is a primary input into
the process of value creation in the digital economy. (Para. 183) A key challenge is theattribution of value to this data and the extent of value relative to other sources of value –systems, software and people. It may be challenging to assign an objective value to raw data
(Para. 183) and determine the ownership of that data. Personal data is generally considered
to be owned by the individual to whom it relates, rather than by a company. (Para. 183)

82.

BIAC believes that raw data has little or no intrinsic value, especially generally available raw
materials such as usage data. Value is created by the aggregation of data and the applicationof analytics, which is achieved through investment in people and technological resources.

Characterization of income derived from new business models
83.

This section of the Discussion Draft raises the question of whether monetization models
utilizing new delivery methods of goods and services challenges the rationale behind existing
categorisations of income and consistency of treatment of similar types of transactions. Theseissues are raised, in particular, with respect to "cloud computing" transactions, including
infrastructure as a service, software as service, or platform as a service. (Para. 187)

84.

The Discussion Draft includes a lengthy factual description of the nature of cloud computing
transactions. (Paras 79 - 84). BIAC generally agrees with that description and the broader
factual statements contained in Chapters II and III of the Discussion Draft relating to cloudcomputing models. To consider the appropriate characterisation for such transactions, theDiscussion Draft notes that it will be necessary to examine the rationale behind existing rules
in order to determine whether those rules produce appropriate results in the digital economy
and whether differences in treatment of substantially similar transactions are justified in policy
terms. (Para. 188)

85.

With respect to the characterisation of cloud computing transactions, we note the prior OECD
work in this area, which produced guidance that remains useful today. In 2001, the OECDpublished the final report of the Technical Advisory Group on Treaty Characterisation ofElectronic Commerce Payments. 24 That TAG addressed the characterisation analysis for avariety of e-commerce transactions for purposes of the OECD Model Convention. The TAG
discussed general principles which should be applied to the characterisation analysis, thenapplied those principles to 24 specified transactions. Those 24 transactions included several
remote access transactions, including “application hosting”, “web site hosting”, “datawarehousing”, and “streamed (real time) web based broadcasting”, which would be describedas "cloud computing" transactions today.

86.

The TAG evaluated the available precedents for characterising such payments as businessprofits or royalties, and concluded that the most useful guidance existed under U.S. tax law.
Accordingly, the TAG adopted the principles of U.S. Internal Revenue Code section 7701(e) to
guide its characterisation analysis. The TAG report states as follows:
27. The Group also examined a few transactions where it could be argued that tangible
computer equipment (hardware) was being used by a customer so as to allow the relevant
payment to be characterised as “payments for the use of, or the right to use, industrial,commercial or scientific equipment” [the report here referred to application hosting, website hosting and data warehousing examples].

24

Taxation and Electronic Commerce - Implementing the Ottawa Taxation Framework Conditions (2001).

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28. The Group examined various factors used to distinguish rental from service contracts
for purposes of section 7701(e) of the U.S. Internal Revenue Code and found these factors
to be useful for purposes of determining whether payments are for “the use of, or the rightto use, industrial, commercial or scientific equipment”. Once adapted to the transactions
examined by the Group, these factors, which indicate a lease rather than the provision ofservices, can be formulated as follows:(a)the customer is in physical possession of the property,(b)the customer controls the property,(c)the customer has a significant economic or possessory interest in theproperty,(d)the provider does not bear any risk of substantially diminished receipts or
substantially increased expenditures if there is non-performance under thecontract,(e)the provider does not use the property concurrently to provide significant
services to entries unrelated to the service recipient, and(f)the total payment does not substantially exceed the rental value of thecomputer equipment for the contract period.

29. This is a non-exclusive list of factors, and some of these factors may not be relevant inparticular cases. All relevant facts bearing on the substance of the transaction should betaken into account when determining whether the agreement is a service contract or alease.
87.

The TAG then applied these principles to application service provider and data warehousing
examples, concluding in both cases that the payment would be for the provision of services,and not for the lease of industrial, commercial or scientific equipment, as follows:
30. Applying these factors to application service provider transactions, the Group
concluded that these should generally give rise to services income as opposed to rental
payments. In a typical transaction, the service provider uses the software to provide
services to customers, maintains the software as needed, owns the equipment on which
the software is loaded, provides access to many customers to the same equipment, andhas the right to update and replace the software at will. The customer may not havepossession or control over the software or the equipment, will access the software
concurrently with other customers, and may pay a fee based on the volume of transactions
processed by the software.
31. Likewise, data warehousing transactions should be treated as services transactions.
The vendor uses computer equipment to provide data warehousing services to customers,
owns and maintains the equipment on which the data is stored, provides access to manycustomers to the same equipment, and has the right to remove and replace equipment atwill. The customer will not have possession or control over the equipment and will utilise
the equipment concurrently with other customers.

88.

The guidance provided in the TAG continues to be useful today in characterising payments forcloud computing transactions. While the TAG language discussed above has not beenformally incorporated into the OECD Commentary, guidance on certain analogous
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transactions recently has been incorporated in the Commentary. 25 In particular, theCommentary discusses how satellite operators and their customers frequently enter into"transponder leasing" agreements under which the satellite operator allows the customer toutilize the capacity of a satellite transponder to transmit over large geographical areas. The
Commentary concludes that in most cases, payments for these transactions should becharacterised as business profits rather than royalties. This is true even in the context oftreaties that include the leasing of industrial, commercial or scientific (ICS) equipment. In
reaching its conclusion, the Commentary points to the fact that customers typically obtain
access to the transponder's transmission capacity, rather than physical possession of thetransponder itself. We believe this analytical approach should apply to cloud computing
transactions, and that the current Commentary guidance is consistent with the TAG report andthe principles of section 7701(e).
89.

In most cases, an application of the factors accepted by the TAG to XaaS transactions would
characterize payments for cloud computing transactions as business profits (based on theprovision of a service), rather than royalties. As with transponder leasing agreements, we
believe this is true even in treaties that include the leasing of ICS equipment in the definition ofroyalties because the user generally does not acquire physical possession of the server inmost cloud computing transactions.

90.

We would be pleased to work with the OECD to develop language for the Commentary thatprovides guidance for payments from cloud computing transactions.

Collection of VAT in the digital economy
91.

Detailed comments on VAT are provided at the end of this document.

VII. POTENTIAL OPTIONS TO ADDRESS THE BROADER TAX CHALLENGES RAISED BY THE
DIGITAL ECONOMY
Framework for evaluating options
92.

The Discussion Draft states that the Ottawa framework of neutrality, efficiency, certainty andsimplicity, effectiveness and fairness, and flexibility continues to be a good starting point.
(Para. 204) BIAC strongly endorses the use of the Ottawa framework. The framework will alsoneed to take into account the key features of the digital economy as outlined in section III.

93.

The principle of neutrality means that “ring fencing” the digital economy and applying separate
tax rules is neither appropriate nor feasible. (Para. 205) BIAC agrees completely with thisconclusion.

94.

Another key point is that the OECD expects that action on the other action items will raise theeffective tax rates of digital economy companies. If that is not the case and effective rates inthe digital economy remain extremely low, then “addressing the broader tax challenge of thedigital economy becomes a more pressing concern.” (Para. 208) While not surprising, thisstatement seems somewhat inconsistent with the notion that countries are free to choose toimpose low (or no) tax on income properly attributable to that jurisdiction because it implies
that a certain level of income tax ought to be paid at the corporate level in all cases. If income
is subject to tax in the appropriate jurisdiction, then whether that jurisdiction chooses toimpose a low tax or any tax at all, is a sovereign choice for that jurisdiction. If that jurisdiction25

See e.g., OECD Commentary on Article 12, para. 9.1.

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28 | P a g edoes not choose to impose tax, then (apart from appropriate CFC rules) other countries
should not be able to assert a claim to tax that income.
Options proposed to the Task Force
Modifications to the exemptions from permanent establishment status
95.

The Discussion Draft raises the question whether the activities described in Article 5 (4) of theOECD Model Convention could constitute core functions of a business. (Para. 210) At leastin the case of maintaining a warehouse, that activity normally could be considered a "core"
activity only of an enterprise whose principal business function is to provide warehousing
services. Warehousing is an activity within almost every industrial supply chain. But it isseldom if ever a core function – indeed it is an area that many companies outsource in full orpart and it is a function that is generally acknowledged as being easy to benchmark, given themultitude of third party comparables. It would also be unfair and distortive if companies that
outsource their warehousing function are potentially treated differently from those companies
who primarily insource. BIAC believes that if Article 5(4) is to be changed, then any suchchanges should modify the preparatory or auxiliary exception only for those enterprises whose
primary source of revenue is an Article 5(4) activity. BIAC supports a policy that all
businesses are subject to tax in the jurisdictions in which revenue-generating functions
relating to their core competencies take place.

96.

Changes to the definition of PE are part of Action Item 7 which is due by September 2015.
BIAC will provide comments at the appropriate time on OECD/G20 proposals modifying theserules. Business prefers bright line rules that provide certainty, so to the extent the changes
the OECD/G20 is considering move in that direction, that would be a plus. However, as we
discuss at length in other parts of this comment letter, PE rules that minimize exposure to local
country tax have a sound basis in policy. The OECD/G20 should not make broad changes
without careful consideration of the consequences.

A new nexus based on significant digital presence
97.

The Discussion Draft includes an option of an alternative nexus test when a business is “fully
dematerialized.” (Para. 212) This seems to directly contradict the statement in paragraph 205
that ring-fencing the digital economy is neither appropriate nor feasible. Paragraph 213
provides a potential test for determining whether "fully dematerialized digital activities" areconducted, including the following elements:•

The core business relies completely or in considerable part on digital goods or services;•

No physical elements or activities are involved in the value chain other than theexistence use, or maintenance of servers and websites or other IT tools and thecollection, processing, and commercialization of location-relevant data; 26•

Contracts are concluded exclusively remotely via the Internet or by telephone;•

Payments are made solely through credit cards or other electronic means;

26

This condition is the most difficult to understand how it could apply to any significant enterprise. Assuming that theobject of this option is to define a category of digital enterprises that provide valuable services cross-border, it is hard toconceive of such a business that does not include as part of its value chain development, operations, customer support,
marketing, management and similar functions which allow the enterprise to identify new services, develop thetechnologies to perform the services, and deliver the service to the market.

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98.

99.

•

Websites are the only means used to enter into a relationship with the enterprise; nophysical stores exist for the performance of core activities other than offices located in
the parent company or operating company countries (emphasis added – BIAC
questions why these operations seem to be ignored);•

All or the vast majority of profits are attributable to the provision of digital goods orservices;•

The legal or tax residence and physical location of the vendor are disregarded by thecustomer;•

The actual use of the digital good or the performance of the digital service does not
require physical presence.

If a fully dematerialized business is considered to exist, then a significant digital presence
could be considered to exist in a country, under the following circumstances:•

A significant number of contracts for the provision of fully dematerialized digital goods orservices are remotely signed between the enterprise and a customer that is resident for
tax purposes in the country;•

Digital goods or services of the enterprise are widely used or consumed in the country;•

Substantial payments are made from clients in the country to the enterprise; or•An existing branch of the enterprise in the country offers secondary functions.

As a general comment before analysing this under the Ottawa principles, it is interesting tonote that the tests do not look to whether the payment by the recipient of the good or service
is deductible. BIAC believes that this is because many of the transactions intended to becovered by this option are B2C so a deduction would not be available. It would seem that inorder for this to be a base erosion problem, a deductible payment would be necessary. To
reiterate, as to profit shifting, the BEPS project should be targeting artificial profit shifting, if
profit producing activities shift, profits should move. Countries do not have a right to aparticular level of tax revenues regardless of where business profits originate. It seems
fundamentally inconsistent for market jurisdictions to argue that income from intangibles
should be allocable to people functions (where the research and development takes place)and ignore the people functions when the transaction is digital (where the digital content iscreated). The digital content ultimately is created by people, so if people functions should
trump then there is no basis for a nexus that looks solely at consumption activity. Otherwise,
this option is inconsistent with the emphasis on people functions in the draft Chapter VI TPG
revisions.

Ottawa Principles:
100. Neutrality: As the Discussion Draft notes in paragraph 205, ring-fencing the “digital economy”
would violate the neutrality principle. That is, tax rules and therefore conditions would differ
between traditional and electronic commerce. The option of special nexus rules clearly ringfences some portion of the “digital economy” and therefore violates this principle. Paragraph
216 also raises neutrality issues because it raises the possibility of separate income attribution
rules for “fully dematerialized digital businesses.”72

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101. Efficiency: BIAC believes that the efficiency criterion is also violated. BIAC believes that thenexus based on significant digital presence must be based on taxation of net, not gross,income. 27 Net basis taxation will require some sort of return and depending on how the many
subjective terms – significant number, substantial payments, widely used – are defined this
could result in tax returns in many additional countries where the company has no physicalpresence at all. Establishing the accounting systems necessary to file returns in many
additional countries is a significant burden and one of the principal reasons for the historicalPE standard.
102. Certainty and Simplicity: The nexus test contains many subjective criteria such that thecriterion of certainty will be violated. The test uses terms such as “considerable part”,“significant number”, “widely used or consumed”, “substantial payments”, which are all
subjective and probably intended to be subjective. The determination of a "significant
number" will vary widely between jurisdictions depending upon factors such as market size.
103. At the same time, however, one of the core elements of the definition would seem to apply
only in exceedingly rare cases. One element of the proposed definition of a fully
dematerialized digital business is that “no physical elements or activities are involved” in thevalue chain other than servers, websites and the collection of location-relevant data. Anyenterprise of sufficient size to have its goods or services "widely used" in a country will have
many employees who perform critical business activities other than “the collection, processing,and commercialization of location-relevant data.”
As written, it is hard to conceive of anenterprise to which this element of the definition could apply. This would lead companies tobe concerned that the test does not really mean what it says.
104. Effectiveness and Fairness: This criterion is more difficult to judge given that the standard is“that taxes imposed are designed to produce the right amount of tax at the right time, andavoid creating new opportunities to artificially avoid taxation.” The Discussion Draft does notprovide details of how profits would be attributed to a taxable presence imposed under thisnew nexus standard. Accordingly, it is difficult to judge whether the right amount of tax would
be imposed at the right time. The nexus rules fail the fairness test depending on whether what
appear to be absolute tests are in fact absolute tests.
105. Flexibility: This criterion is difficult to apply; since it is difficult to anticipate which direction
technology will take. However, the number of absolute tests proposed likely will make the test
less flexible. For example, new technology may make the criterion of “contracts areconcluded exclusively remotely via the internet or by telephone" irrelevant.
106. BIAC believes that the proposed option of a new nexus based on a significant digital presence
clearly fails the Ottawa principles.
107. Looking at the new nexus test more generally, we believe that the only argument in favour of
the adoption would be that it would permit market jurisdictions to impose an income tax on“fully dematerialized digital activities” in certain limited cases. Whether this is appropriate is apolitical decision for countries. On the other hand, this option would result in significant
controversy and double taxation. This option also would discourage the expansion of digital
goods and services into remote economies, which will adversely affect economic growth.

27

In part, because one of the other alternatives is a gross basis tax.

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108. Accordingly, BIAC recommends that if countries wish to collect more tax from thesetransactions they should impose VAT on a wider range of deliveries of digital goods andservices and not adopt income tax rules that violate the Ottawa principles as described above.
109. The Discussion Draft also proposes the option that a fully dematerialized business could beconsidered to have a significant digital presence if it uses personal data obtained by theregular and systemic monitoring of Internet users in that country through the use of multi-sided
business models. (Para. 215) BIAC believes that this is narrower than the above proposals,
but it is not clear who is doing the regular and systemic monitoring of the Internet users: theenterprise itself? If the data is obtained and analysed by another entity, then it would seemthe profits from those activities should be attributable to the other entity and therefore should
not give rise to a nexus for the business purchasing the data.
110. The Discussion Draft acknowledges that development of these options would “requireevaluation of the above elements to determine which combination of factors would result in an
appropriate nexus to address the tax challenges of the digital economy effectively, whileproviding enough clarity to minimize dispute. It would also require consideration of how profits
would appropriately be attributed, and whether doing so would require modification of thecurrent rules for the attribution of profits to PEs. The work would also need to consider
whether such a change would require a change in the attribution rules for all enterprises orwhether the changes could be limited to “fully dematerialized digital business.” (Para. 215)
111. This seems inconsistent with the statement in the Discussion Draft that ring-fencing the digital
economy and applying separate rules is neither appropriate nor feasible.
Virtual permanent establishment
112. The Discussion Draft includes "for the sake of completeness" virtual permanent establishment
options considered by the Business Profits TAG. (Para 217) It does not seem that these
options are being actively considered by the Task Force since the options are merely statedwith no assessment of pros and cons as were expressed by the Business Profits TAG. BIAC
opposes the adoption of any of these virtual PE options because adoption would violate theOttawa Principles.
113. Neutrality: A virtual PE establishment is not real; there is, in fact, no place of business in thecases in which the virtual PE options seek to deem a PE to exist. The neutrality principle
would be violated to the extent that the options would result in different tax outcomes forconventional and digital forms of commerce. 28
114. Efficiency: Extending the PE concept to cover situations where websites are being hosted in acountry would create serious compliance difficulties. A business may not even know where a
website is hosted. Tax administrations would have to attempt to enforce their tax rules in theabsence of physical assets and employees. 29
115. Certainty and Simplicity: The virtual PE proposals would add uncertainty to the determinationof whether a PE exists. For example, businesses may not know where the servers hosting its
operations are located. Businesses may have difficulty identifying where contracts areconcluded and to the extent there are thresholds, it may be difficult to have reliable information

28
29

Final Report of the Business Profits TAG, para. 332.
Ibid at para. 333.

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on whether the thresholds are exceeded and it will be difficult to know at the outset whether
the thresholds will be exceeded.
116. Effectiveness and Fairness: The virtual PE options attempt to tax business activities that are
not carried on within a country. Thus, creating a PE is “unfair”. It is also likely to be ineffective
both because it will be difficult to administer and unless profit attribution rules arefundamentally changed, little or no profit will be attributable to the virtual PE.
117. Flexibility: It is unclear whether these models would be flexible enough to deal with emerging
technologies. 30
Creation of a withholding tax on digital transactions
118. A further proposed option is a final withholding tax on certain payments made by residents ofa country for digital goods or services provided by a foreign e-commerce provider. (Para. 218)
Presumably, the justification for such a tax is that the provider delivers a substantial amount ofgoods or services into a jurisdiction but does not maintain a taxable nexus in that jurisdiction.
Consistency with trade obligations would need to be considered, as would the difficulties of
imposing a withholding tax in the context of B2C transactions. The burden of complying with awithholding tax may be imposed on financial institutions. (Para. 218)119. A withholding tax would allow the market jurisdiction to collect some revenue without theburden of imposing net income filing requirements and determining the profits attributable tothe market jurisdiction. It would likely therefore be simpler in some respects. However, thisoption raises difficult characterization issues and those issues have caused significant
controversy and double taxation in the software and service industries. Revenue is a poor
proxy for net income. As discussed above, developing digital products and services may
require significant investment in time and money. Many products and services never makeany money on a net basis. Because of these concerns any withholding tax should be at avery low rate. India’s High Powered Commission recommended a 3% rate for these reasons.
120. Neutrality: “It would be difficult to justify applying withholding tax only on cross-border ecommerce and not on traditional cross-border trade. Such a tax would violate the neutrality
principle as presented in the Ottawa framework principles. The alternative of applying the tax
to all forms of cross-border trade would mean, however, the introduction of tariff-like taxation,
which might well be against WTO rules and principles.” 31
121. Efficiency: There are also administrative concerns many of these transactions will be B2C 32
and very low value. It is unlikely that individual consumers will collect and pay over a
withholding tax. Imposing a withholding tax on these transactions will create significant
burdens for the financial system.
122. Certainty and Simplicity: A withholding tax applicable only to digital transactions would requirea definition of the transactions to which it applied. This would likely be a difficult task. 33
123. Effectiveness and Fairness: Given the difficulty of imposing a withholding tax on B2Ctransactions, this option may not be effective. It also appears to fail the fairness test since the31

Ibid at para. 260.
We reiterate that in the case of B2C transactions there should not be a base erosion concern.
33
Final Report of the Business Profits Tag, para. 265.
32

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withholding tax would be levied regardless of profitability. A tax on gross revenues is a very
poor proxy for a tax on net income.
124. It seems to us that the administrative issues will be essentially the same as those which would
be created by imposing VAT on cross-border digital transactions. Since the VAT is theconceptually more appropriate tax in this context, the consideration argues for preferring a
VAT over a withholding tax.
Consumption tax issues
125. Business believes that a combination of an origin-based income tax and a destination-based
VAT appropriately divides the jurisdiction to tax between the countries where income
producing activities occur and the countries where consumption of goods and services occur.
The VAT issues can and should be addressed by the ongoing work of the OECD and WP9and the TAG. They have clearly demonstrated that they are able to produce an international
consensus in the area of VAT. The OECD’s Committee on Fiscal Affairs (CFA) approved thebusiness-to-business (B2B) aspects of the VAT Guidelines in January 2014. The indirect tax
issues highlighted in the Discussion Draft are already due to be further examined by theOECD – “how to ensure the effective collection of VAT with respect to the cross-border supply
of digital goods and services” – is covered by the WP 9 work related to B2C and is currently
discussed in the well-established OECD VAT TAG process. BIAC is actively contributing tothis work. This work also plays a critical role in resolving the VAT aspects addressed in the
BEPS discussion draft on the digital economy. The OECD can assess whether the existingprocess is likely to continue to produce consensus. Business participants in the technicaladvisory group are optimistic that an international consensus will be reached on additionalguidelines concerning the taxation of digital goods and services in the area of B2Ctransactions.
Exempt sector and multi-location entities
126. The Discussion Draft identifies remote digital supplies to exempt business (Para. 137) and toa multi-location enterprise (MLE) (Para. 140) as aspects which, under certain conditions,create opportunities for tax planning by businesses and corresponding BEPS concerns forgovernments in relation to VAT. Concerns particularly relate to the extent that Guidelines 2
and 4 of the OECD’s “Guidelines on place of taxation for B2B supplies of services andintangibles” are not implemented.
127. Before commenting on this aspect in further detail, we would like to first highlight some moreconceptual aspects that are not specific to the digital economy.
128. All stakeholders, including governments, business or academia, agree that conceptually, abroad based VAT system, with ideally no or very few exemptions, and one standard VAT rate,would represent the most efficient and effective structure for all relevant parties. It would takesubstantial complexity out of the VAT system, would ensure neutrality for business, and wouldease both compliance for business and administration for governments.
129. Therefore, these issues relating to the exempt sector and MLEs in the exempt sector are notspecific to the digital economy. Instead, they are conceptual issues related to the design andthe application of the VAT system. As the Discussion Draft points out these issues arise to
the extent that Guidelines are not implemented. (Para. 136) Thus, implementation of the
Guidelines would alleviate these BEPS concerns. (Para. 171) Business supports theimplementation of the Guidelines and urges governments to implement the principles of the
Guidelines in a consistent fashion.
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130. BIAC would also like to point out that the imposition of new VAT on exempt purchasers ofdigital (and non-digital) products and services is a significant issue. Universities, hospitals,
governments, local government bodies and many others buy vast quantities of services (digitaland otherwise) and do not have the budget to pay additional VAT. Although this is not purely
a digital issue, as the OECD examines the application of VAT to the exempt sector, theseissues should be taken into account to ensure that the exempt sector is not exposed tosignificant additional costs whilst also ensuring a level playing field for domestic and foreign
providers of goods and services.
131. Finally, we would like to clarify two editorial aspects of the Discussion Draft to ensure acommon understanding:132. In paragraph 140, an MLE is referred to as a multinational business that has establishments indifferent jurisdictions. This could be misunderstood as including subsidiaries of multinationals.
However, putting this statement into the context of the relevant example described in the
Discussion Draft, and considering the work already done on the VAT Guidelines, it should beclear that it can only mean a multinational business established as a single legal entity with
branches of that same entity in different jurisdictions.
133. Paragraph 171 states that “Guideline 2 recommends that the taxing rights on cross-border
supplies of services and intangibles between businesses be allocated to the jurisdiction where
the customer has located its main business establishment and that business customers be
required to self-assess VAT on remotely delivered services acquired from offshore suppliers
according to the rules of the jurisdiction in which they are located”. We agree with theallocation of the taxing rights to the jurisdiction where the customer is located, and with therequired self-assessment of VAT by the business customer, but we would like to point out thatin context of Guideline 2 of the International VAT Guidelines, which deals with legal entities
that are established in one location (Single Location Entity, SLE), the taxing rights will always
be allocated to the jurisdiction where this legal entity is located. Therefore, there is no “main”
business establishment in this context, as the business is only established in one location.
Consumption tax options
134. The Discussion Draft states that the main VAT challenges created by the digital economy
relate to exemptions for importation of low value parcels (Para. 219) and the increase in direct
sales of services to consumers (Para. 222) (not the tax treatment of the exempt sector).
Paragraph 189 states that the challenge posed by the digital economy may result “in no VAT
being levied at all on these flows, with adverse effects on countries VAT revenues and on thelevel playing field between resident and non-resident vendors. (Para. 189)
135. With respect to low value imports and remote digital supplies to consumers, there is a need tofind a balance between the need for appropriate revenue protection, avoidance of the
distortion of competition and the need to keep the cost of collection proportionate to the small
level of VAT collected. (Para. 193)
136. With respect to remote digital supplies to consumers, the Discussion Draft notes thatcompliance by non-resident suppliers is essentially voluntary as VAT jurisdictions have limitedmeans to enforce compliance by non-resident non-established suppliers. (Para. 195)
Experience suggests that MNEs do comply, in part because of reputational reasons. (Para.
195) We expect that this issue will be returned to Working Party 9 to be dealt with be the
VAT/TAG.

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137. BIAC agrees that the most effective and efficient option to ensure appropriate VAT collection
on cross-border B2C services is to require the non-resident supplier to register and accountfor these supplies in the jurisdiction of the consumer. (Para. 221) Countries should consider
simplified registration regimes to minimize the compliance burden. (Para. 222)
138. Remote digital supplies to consumers are covered by the WP 9 work on B2C as part of thedevelopment of the International VAT Guidelines, and are currently being discussed in the
VAT/ TAG.
139. To safeguard VAT revenues and to be able to accurately, timely, and efficiently comply with
the VAT obligations, clear, consistent and easy to apply rules are of utmost importance forbusiness. This is even more important in the B2C context, both for imports of low-valued
goods and for remote digital supplies to consumers, where businesses have to deal with highvolume and low value cross-border transactions.
140. Striking the right balance between the VAT at stake and the administrative costs for businessand governments related to that collection is crucial. The wrong balance discourages
compliance and can lead to a distortion of competition for business. This is a significant
concern for the international business community related to cross-border B2C supplies,
particularly in the context of e-commerce related supplies. It is important to recognize that VAT
revenues are best safeguarded and collected when the administrative costs of collection andcompliance are reduced. Nevertheless, thresholds and exemptions will still be necessary.
Business should not be forced to deal with compliance burdens in relation to a de minimis
level of transactions, especially where the business may have no control over whether the
obligation is incurred because customer’s ability to purchase goods and services without
regard to borders.
141. The question that therefore arises is how can collection be made as easy and as efficient as
possible for business while ensuring enforceability for governments?
142. Two aspects play a vital role here:a)Internationally consistent ‘place of taxation’ rules are required that allow business todetermine, in an easy and efficient manner, where a transaction should be taxed for
VAT purposes.

b)Internationally consistent simplified procedures/mechanisms are required, particularly forforeign businesses selling digital supplies cross-border, to allow business to collect andpay the VAT in an easy and efficient manner, while at the same time, improving
enforceability for governments.

143. In a B2B scenario, the two aspects identified above are covered by the International VAT
Guidelines based on the destination principle and the recommendation to apply the reverse
charge regime as the collection mechanism. Adoption of the Guidelines by governments
would ease the burden of the collection of the VAT for business while ensuring full
enforceability for governments.
144. Consistent application of the destination principle by governments around the world, together
with the application of a reverse charge regime is vital. It was suggested in the ‘E-commerce
Guidelines and the Consumption Tax Guidance’ papers issued in 2003 and has been further
explored and reconfirmed again by the VAT Guidelines. In a B2C scenario, it will be moredifficult but not impossible to implement consistent place of taxation rules and simplified
procedures. Flexibility on the use and evidence of place of taxation proxies, easy access to
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information, easily accessible, simplified, and standardized and technology friendly
administrative procedures and an effective administrative cooperation between governments
are crucial to make this happen.
145. A tax is not worth anything if it cannot be collected. Particularly when it comes to high volume
low value transactions, the OECD should aim for place of taxation rules that allow VAT to becollected in an easy and efficient manner.
146. Business needs flexibility both on appropriate proxies for place of consumption andappropriate indicia to determine the application of those proxies. It may, in some cases, be
impossible not just burdensome for business to identify the residence of their customers andthey therefore may need to rely on appropriate indicia of residence such as the address
associated with a credit card. Only if flexibility is ensured will business be able to effectively
collect the VAT at stake. Substantial work has already been done on this aspect in somejurisdictions, for example in the EU, which should be considered, learned from and further
explored.
147. Procedures/mechanisms need to be as simple as possible. This will enable foreignbusinesses to collect and pay the VAT in efficient manner, while improving enforcement forgovernments. Business agrees that vendor collection is the most viable option. (Para. 222)
Business also agrees that simplified registration systems and registration thresholds arenecessary to minimise the compliance burden on business. (Para. 223) The simplified
registrations system should allow business the choice and maximum flexibility (i.e. direct
registration, simplified registration, collection by a 3rd party intermediary on behalf of the
supplier, etc.).
148. Such a system will only work if business has easy access to information in order to know how
to comply and if governments provide easily accessible, simplified, standardized andtechnology friendly administrative procedures. Technological solutions should be web-based,
secure, and should cover remote selling of goods and remote supplies of services. In
addition, governments must establish effective administrative cooperation. Without suchcooperation, it will be impossible to simplify and standardize the compliance requirements,
leading to inefficiencies for business and less compliance with VAT overall. Thus, businesssupports the notion expressed in paragraph 224 that improved international cooperation
between jurisdictions is likely to be required. We would note, however, that this paragraphfocuses on cooperation in enforcement actions. While such cooperation is both necessary
and appropriate, cooperation needs to begin with designing simple, consistent VAT systems
and extend through the cycle to dispute resolution. The issue of double VAT taxation isdifficult for two reasons. First, unlike an income tax dispute, it is essentially impossible to split
the tax because the issue is always in which jurisdiction did consumption occur? Therefore toreach resolution one jurisdiction has to concede that its VAT will not apply. Second, although
VAT is covered by the Mutual Agreement Procedures of income treaties and the MLAT, we
believe it is unlikely the Competent Authorities would be willing to deal with VAT issues. If theCompetent Authorities were to accept a VAT case, it is unlikely they would have a basis toreach agreement because of the jurisdictional nature of these disputes.
149. Remote B2C digital supplies may involve multiple parties in the supply chain which can makeit difficult to determine who the supplier of the service is to the final consumer. Knowing the
supplier is key, particularly when aiming at supplier registration as the mechanism to collectthe VAT at stake. The OECD must develop clear rules on this. These rules should be
informed by EU rules in this area.

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150. In some cases business may wish to use third party intermediaries in the collection process.
This should be an option for foreign business, not a requirement. Financial intermediaries
may not have the relevant information to determine VAT properly. So financial intermediaries
can only be a part of the solution if both the supplier and the intermediary agree.
151. All of these aspects need to be further explored and the OECD VAT TAG process is the rightplatform for governments and business to work together to develop an efficient solution. Thissolution can only work through effective administrative cooperation between governments.
152. Finally, there is one very important point to highlight when it comes to supplier registration as
collection mechanism for VAT purposes. As mentioned in footnote 25 of the VAT Guidelines, aregistration for VAT purposes by itself does not constitute a permanent establishment.
Business experiences more and more that, by acting as VAT collectors for governments,
foreign VAT registrations are misused by governments and are re-qualified as a permanentestablishment for corporate tax purposes, forcing business to pay corporate tax in ajurisdiction where, based on international direct tax principles, no corporate tax should be due.
In the long term, and if this continues to happen on a larger scale, such developments mightundermine an efficient collection of VAT by dissuading businesses from registering for VAT
purposes. This would result in VAT revenue losses for governments and distortion ofcompetition for business.
Co-ordination with other digital economy options
153. In section VII, various options unrelated to VAT are proposed to address the broader tax
challenges raised by the digital economy. Some of these options could have an impact on
VAT. For example, any changes to the current permanent establishment concept may have aneffect on the application of the simplified VAT registration procedure. Such changes might also
influence the application of the reverse charge mechanism.
154. Therefore when considering these options from a direct tax perspective, adequate time must
be dedicated to fully understanding the potential VAT consequences.

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Public Discussion Draft

BEPS ACTION 1:
ADDRESS THE TAX CHALLENGES
OF THE DIGITAL ECONOMY (OECD)
24 March 2014 – 14 April 2014
The information supplied below is provided in good faith for your assistance. In accepting this information
you acknowledge your agreement that it will not be used against any of the parties referred to, or bedisclosed to any third party without our prior agreement

Boku background
Boku is a mobile payment services provider, enabling people across the globe to pay for the things they areinterested in using the one device they’re never without, their mobile phone. The company contracts with content
providing merchants to collect payments on their behalf. The company then sub-contracts with Mobile Network
Operators or “Carriers” – sometimes via other intermediaries – to collect the payments from final consumers. There
may also be additional intermediaries in the beginning of the chain between Boku and the content providing
merchant. Therefore the longest chain in the payment collection that we tend to see can include five unrelated andseparate companies.

Comments:
Based on experience from our role in the payment collection services chain and in response to the particularquestions posed we would make the following comments:• Whether it is possible to ring-fence the digital economy from the rest of the economy, and if not,whether specific types of digital transactions could be identified and addressed through specific rules;• The key features of the digital economy identified by the Task Force and whether there are other key
features that should be taken into account;
Response - the risks of using the current VAT regime to resolve where the liability for paying VAT incross border e-commerce transactions mean that these can identify a business as supplier where this is
not the case and therefore include any other legal obligations belonging to that transaction that should
properly belong to the original supplier. Some countries like Italy and Germany take the view that if abusiness remits the VAT that all other legal obligations accompany the VAT liability. This is an issue thatshould be taken into account.
• The examples of new business models in the digital economy and whether (and if so which) otherbusiness models should be considered;Response - It should be noted that not all e-commerce services will be subject to VAT at standard rates,for example payment by mobile phone is starting to expand to cover other types of transactions such as
online gambling, which is generally VAT exempt in the UK and instead subject to other duties which areapplied differently, or services like parking are also effectively arranged and paid for online but again
may be subject to different tax treatments. Also confusion arises around various different methods ofdigital payment methods and whether these fit within Payment Services legislation, for example emoney, or are instead varieties of “VATable” voucher type arrangements. This confuses the issue of81

what the tax points are for e-commerce services which also impacts on who is liable to pay the tax. Any
resolution of the VAT issue should address these points so that tax is only liable once.
• The ability of the measures developed in the course of the BEPS Project and the current work on
VAT/GST to address BEPS concerns in the digital economy;• Whether other measures should be developed during the course of the work on other aspects of the
BEPS Action Plan to address BEPS concerns in the digital economy and if so which ones;• The broader tax challenges raised by the digital economy which have been identified by the Task Forceand how these challenges should be addressed, taking into account both direct and indirect taxation;• The options to address these broader tax challenges discussed by the Task Force and summarised in
the discussion draft;
Response - potentially a withholding VAT type system could work on the basis that this would becollected by the payment collection business without any accompanying other legal and product liabilities
or other responsibilities. To avoid double taxation it would be suggested that where verified local VAT
registration numbers are provided by the relevant supplier withholding VAT would not be applicable.
This would have the benefit that it would be clear who would remit the VAT – either the payment
collector or the supplier where a local VAT registration number was provided. This could solve theproblem of enforcing local registration which in the EU has been found to be extremely difficult.
• The potential cost of compliance arising from the options proposed to address the tax challenges of thedigital economy and suggestions for more cost efficient alternatives;• Whether the Ottawa taxation framework principles identified above are an appropriate framework foranalysing options to address the tax challenges, and whether and how they should be supplemented.
Greta Kemper
Global Indirect Tax Manager
Boku
3rd April 2014

82

The Committee on Fiscal AffairsOECD
2 rue André Pascal
75775 Paris Cedex 16
FranceApril 14, 2014

Dear Sirs
RESPONSE OF BRITISH SKY BROADCASTING GROUP PLC (“BSKYB”) TO THE OECDDISCUSSION DRAFT: TAX CHALLENGES OF THE DIGITAL ECONOMY
We are pleased to have the opportunity to comment upon the Discussion Draft published by
the OECD on 24 March 2014 (referred to in this letter as “the Draft”).
1 Summary Comments
1. BSkyB supports the OECD’s initiative to combat BEPS;
2. We are of the view that it is a mistake to consider the digital economy as a separate
phenomenon. There is no such thing as the digital economy per se. There are,simply, businesses - which employ digital technologies to a greater or lesser extent;
3. Subject to (2), we believe that the Ottawa principles of neutrality, efficiency, certainty,
effectiveness and flexibility should be upheld in any anti-BEPS measures, together withan overriding principle that no new taxes should be introduced as part of efforts totackle BEPs in this area;
4. BSkyB recommends that the most appropriate focus for reform to combat BEPS in thisarea may be for tax authorities to modernise their approach to applying the existing
domestic and treaty rules as to whether a taxable presence or permanent

British Sky Broadcasting Ltd, Grant Way, Isleworth, Middlesex TW7 5QD
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Page 183

establishment exists, with particular regard to the interpretation of the existing
exemptions;
5. On the other hand, we have concerns that several of the possible approaches set out
in Section VII of the Draft do not comply with the core principles set out above;
6. We urge the Digital Economy Task Force to move as rapidly as possible to a distillationof its firm proposals, given the very short timeframe within which the final document
must be prepared.
2 Background
BSkyB is the UK’s leading entertainment and communications provider, supplying TV, fixed line
telephone and broadband to more than eleven million households. We are listed on the
London Stock Exchange and we are a constituent of the FTSE100 index.
BSkyB is also a major contributor to the UK economy through taxation: in the most recent
survey carried out by PwC for the Hundred Group of leading UK businesses, BSkyB made thebiggest UK tax contribution of any media company.
BSkyB’s business is predominantly carried out in the UK, but we also have a large customer
base in the Republic of Ireland, and operations in a number of other jurisdictions. Wherever we
operate, we pursue a policy of open and constructive engagement with the tax authorities, andseek to contribute constructively to the formulation of policy.
As such, we welcome the OECD’s initiative on BEPS, since we believe it presents anopportunity to achieve greater clarity and certainty in the rules of international taxation. In
principle this should be good both for business and for tax administrations, and should help toachieve a better understanding of international taxation among opinion formers and the public.

3 Guiding Principles in formulating new proposals

British Sky Broadcasting Ltd, Grant Way, Isleworth, Middlesex TW7 5QD
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Page 284

With regard to Action 1 (Address the Tax Challenges of the Digital Economy), BSkyB believes
that there are a small number of guiding principles which should inform the measures taken tocombat BEPS.
Underlying our support for these principles is our belief that there is no such thing as the “digital
economy” as a separate branch of the global economy. Instead, digital methods andtechnologies are merely tools which businesses use, to a varying extent, in pursuing theiroverall commercial objectives. It follows from this that there should not be a separate set ofrules for the digital economy, but that instead, knowledge and understanding of these digital
tools should inform the development of policy in other areas, for example the transfer pricing
approach to intangibles and the definition of taxable presence.
Most of the core principles which we support are enshrined in the so-called “Ottawa
Framework”, which was developed in the 1998 Ministerial Conference on Electronic
Commerce, but are still highly relevant today:
•
•
•
•
•

Neutrality
Efficiency
Certainty & Simplicity
Effectiveness & Fairness
Flexibility

We are pleased to note that the Draft endorses those principles, and that it states that they canhelp form the basis for evaluating the options for tax reform today.
We believe that one further principle should also apply. This is that there should be no newtaxes as a result of the response to BEPS in the “digital economy”. We consider, instead, thatthe challenges presented by BEPS are best dealt with by updating and modifying existing
principles and rules.
Indeed this follows directly from the principle of neutrality: if thisprinciple is to be upheld, any new taxes would need to apply to conventional business in thesame way as digital businesses, and we do not believe that such sweeping change, affecting
all types of business, is either necessary or desirable.

British Sky Broadcasting Ltd, Grant Way, Isleworth, Middlesex TW7 5QD
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Page 385

We are concerned that some of the potential options set out in Section VII of the Draft do notsatisfy certain of these principles. We discuss these options below, by reference to theprinciples in question.
3(a) Neutrality
It is important that whatever steps are taken to address BEPS, or the danger of BEPS, theyshould not result in digital business being taxed more heavily than conventional business.
In this respect we agree with many of the observations in section 2.1.1 of the Draft. As statedthere, most countries, in their domestic tax law, “require a degree of physical presence before
business profits are subject to taxation”. That is certainly true in the strict sense of corporate
income tax on profits. However, in certain cases there will nevertheless be an in-country tax
burden on the foreign operator of a digital business, in the form of withholding tax on royalty
flows. In this context, the withholding tax amounts to a form of proxy corporate income tax.
Indeed, if there is not a suitable tax treaty between the home country of the operator and thecountry of consumption, such a withholding tax can form a significant net cost of doing
business in the country in question.
These well-established concepts reflect two important policy principles that many industrialised
countries have long subscribed to:
1. The distinction between doing business in a country and doing business with a country.
In the former case, a permanent establishment (P.E.) will generally arise, because theforeign supplier has enough commercial substance locally to warrant the local tax
authority having some taxing rights over profits generated there; while in the latter
case, in the conventional analysis there is so little being done in-country that local
taxation of the profits would be disproportionate.
2. The aim of achieving an equitable level of taxation in a situation when the supplierdoes not have a P.E. and where the income is generated, not by a real commercial
business operation, but by a passive / portable asset such as a patent or a copyright.
If this is the case, a withholding tax liability may arise in the country of consumption.

British Sky Broadcasting Ltd, Grant Way, Isleworth, Middlesex TW7 5QD
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it in error, please notify the sender immediately. You should not otherwise copy it, refax it or use or disclose its contents to anyone.

Page 486

In our view, some of the examples of possible options for change set out in Section VII of the
Draft violate the principle of neutrality.
The proposal at 3.4 for the creation of a new withholding tax on digital transactions falls into
this category: a targeted special withholding tax that would apply to the supply of digital goods
or services, but not to conventional supplies, would violate the principle of neutrality. As aconsequence of this, it might have harmful economic effects, since it would act as adisincentive to the use or development of more efficient means of production and distribution,
and would encourage suppliers to revert to more conventional, less efficient means.
For example, if the new withholding tax applies to a supply of software that is downloaded froma website, but not to an old-fashioned sale of a disk with the software stored on it, businesses
will tend to post the disk to the customer. We do not think that tax policy should distortbusiness behaviour to encourage less efficient practices in this way.
Similarly, the proposal at 3.3 to introduce the concept of a “virtual permanent establishment”
which, by reference to at least the first two of the three stated scenarios, could only apply to adigital business (and never to a conventional business) also appears to be inconsistent with theprinciple of neutrality.
3(b) Efficiency
The proposals for modifying rules on consumption taxes have the advantage of not involving
wholly new taxes, and as noted in the Draft, these developments have been anticipated tosome extent within the EU.
However, as the Draft also rightly points out, it is critical that the tax authorities achieve asignificant improvement in the registration and compliance requirements involved, failing whichsuch changes are likely to lead to a quite disproportionate compliance burden. For smaller ormore cost-sensitive vendors, this compliance cost could, on the margins, make it more costeffective for them not to supply customers in particular countries – a highly undesirable
outcome.

British Sky Broadcasting Ltd, Grant Way, Isleworth, Middlesex TW7 5QD
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Page 587

3(c) Certainty & Simplicity
The proposal for a new category of nexus based on significant digital presence is likely to add
significant additional complexity and uncertainty for business. This would potentially apply inthe case of enterprises which are engaged in certain “fully dematerialised digital activities” andwhich maintain a “significant digital presence” in the economy of another country.
The Draft sets out some potential elements of a test to determine whether a business has a“fully dematerialised digital activity”. The fact that eight of these elements are enumerated(with an indication that there could be others), and that some of them involve subjective
judgments or are burdensome to prove, are evidence in themselves of a lack of certainty andsimplicity (for example, a “considerable part” of the business must rely on digital goods orservices; the “vast majority” of profits must be attributable to the provision of digital goods andservices; and it must be demonstrated that customers are not influenced by the residence andlocation of the vendor).
Similarly, the “significant digital presence” test would include at least four elements, including
deciding whether the number of remotely signed contracts is “significant” whether digital goods
or services are “widely consumed” in the territory, and whether “substantial” payments are
made by in-country clients. Even if an attempt were made to introduce thresholds to help
define these otherwise subjective measures, these would be likely to have distortive effects forbusinesses at the margins of those thresholds, and possibly lead to competition between tax
authorities to create more benign conditions than in other countries. We do not consider that
this is likely to be regarded as a positive outcome by many OECD members.

4 Next Steps
We consider that the process of developing an effective response to the BEPS challenge in thisarea is best advanced by seeking to maintain the core principles described above.
British Sky Broadcasting Ltd, Grant Way, Isleworth, Middlesex TW7 5QD
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Page 688

As such, in our view the most appropriate way forward may be to seek to modernise theapproach to applying and interpreting the application of existing rules governing taxable
presence and permanent establishment. This may make it unnecessary to modify the
exemptions themselves, as is briefly suggested at 3.1. This would notably have the merit ofsatisfying the principle of neutrality.
We would also caution against introducing too much subjective judgement into the analysis, forexample by eliminating all of the subparagraphs (a) to (d) in para 4, Article 5 of the Model
Treaty.
Changes in approach and interpretation should instead be targeted at the specific areas wheredifficulties have arisen in applying Article 5 in modern economic circumstances.
In our view these difficulties are largely to be found in relation to subparagraphs (a) and (b)(storage activities), whereas on the other hand we do not consider there is significant scope for
BEPS abuse in an activity such as information gathering (subparagraph d) for example.
Finally, in the indirect tax field, we would commend the actions already taken within the EU tomodernise the rules on Place of Supply from January 2015.
This, together with theadministrative support of concepts such as the Mini One Stop Shop, could be taken as a
blueprint for developments outside the EU.

We would therefore encourage the Action Group to concentrate its efforts in these areas as it
moves towards the formulation of its final proposals.

Yours faithfully

British Sky Broadcasting Ltd, Grant Way, Isleworth, Middlesex TW7 5QD
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Page 789

Jonathan Smith
Head of Direct Tax
British Sky Broadcasting Group plc

British Sky Broadcasting Ltd, Grant Way, Isleworth, Middlesex TW7 5QD
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it in error, please notify the sender immediately. You should not otherwise copy it, refax it or use or disclose its contents to anyone.

Page 890

OECD Centre on Tax
Policy and Administration
2, rue André Pascal
75775 Paris
France10 April 2014

Submitted by email: CTP.BEPS@oecd.org

BUSINESSEUROPE Comments on the OECD Public Discussion Draft entitled“BEPS Action 1: Address the Tax Challenges of the Digital Economy” 24 March2014 – 14 April 2014
BUSINESSEUROPE represents through its members 20 million European small,medium and large companies. Active in European affairs since 1958,
BUSINESSEUROPE’s members are 41 leading industrial and employers’ federations
from 35 European countries, working together to achieve growth and competitivenessin Europe.
BUSINESSEUROPE is pleased to provide comments prepared by the members of its
Tax Policy Group, chaired by Krister Andersson, on the OECD Discussion Draft entitled“BEPS Action 1: Address the Tax Challenges of the Digital Economy, 24 March 2014 –14 April 2014” (hereinafter referred to as the Draft).

General Comments
Before going into any specifics, BUSINESSEUROPE would like to emphasise theimportance of distinguishing between income tax and consumption taxes (VAT, GST,etc.). In the OECD framework and as a global standard, income tax is based onresidence and source. Consumption taxes on the other hand aim at taxing
consumption. Levied on the supply of goods and services, VAT/GST are taxes that are
self-declared and business serves to collect these taxes for the government. As clearlystated in the BEPS Action Plan, it is not the purpose of the BEPS project to change
existing international standards on the allocation of taxing rights on cross-borderincome. Consequently, the place of consumption is not and should not be a factor
when allocating income for income tax purposes. Instead, the place of consumption isrelevant for consumption tax purposes such as VAT or GST.
The combination of origin based income tax and destination based consumption tax
allows for a reasonable allocation of taxation rights between the country of origin and

AV. DE CORTENBERGH 168

BUSINESSEUROPE a.i.s.b.l.

BE-1000 BRUSSELSBELGIUM
VAT BE 863 418 279

TEL +32(0)2 237 65 11
FAX +32(0)2 231 14 45
E-MAIL: MAIN@BUSINESSEUROPE.EU

WWW.BUSINESSEUROPE.EU91

EU Transparency register 3978240953-79

the country of destination. This way, the income tax and the consumption taxes
complement each other. This of course is not always the case since there are countries
that do not have a consumption tax. That however is not an issue that requires action
on a global level. Rather, this is a national issue to be solved in the countries inquestion.
That being said, BUSINESSEUROPE believes that the Ottawa taxation framework
principles (neutrality, efficiency, certainty, simplicity, effectiveness, fairness andflexibility) constitute an appropriate framework when analysing the tax challenges.
While it is clear that technology has rapidly evolved since 1998, the Ottawa taxation
principles for electronic commerce outlined above, and developed under the leadershipof the OECD CFA in 1998, remain relevant and valid.
We share the view presented in the Draft that it is not possible to ring-fence the digital
economy. However, the Draft also tries to identify features that distinguish the digital
economy. In our opinion, the features identified in the Draft are neither accurate norlimited to the digital economy. They may be relevant for some businesses in the digital
economy, but they are not likely to be limited to the digital economy or to cover all
aspects of the digitisation of the economy. Considering the complexity of this topic andthe speed with which business models evolve, the features identified are likely to
become obsolete in the near future. Consequently, we believe that the OECD should
not develop any new guidelines, recommendations or amendments to the OECD Model
Convention based on the Draft. Indirect tax issues referenced in the BEPS Draft are
already being reviewed by the OECD through its existing WP 9 efforts related to B2C,
and are also being discussed in OECD work on international VAT/GST guidelines.
Business is fully engaged in that process.
In fact, it is our firm opinion that no specific rules are required for the digital economy
as a “sector”. Considering that it is not possible to ring-fence the digital economy, we
believe that it would be highly inappropriate to develop separate principles or rules fortaxation of the digital economy from those applied to businesses engaged in the“conventional” economy.

Specific Comments
Nexus
The Draft points out that it is possible to be heavily involved in the economic life ofanother country without having a fixed place of business or dependent agent. In mostcases, neither tax treaties (OECD Model Tax Convention Articles 5 and 7) nor
domestic laws allow a country to tax income from a non-resident if there is not sufficientnexus. Sales to customers located in that jurisdiction would not constitute a sufficientnexus.

922

It is also stated in the Draft that the digital technology has had a significant impact on
how activities are carried out, by enhancing the ability to carry out activities remotely,
increasing the speed at which information can be processed, analysed and utilised,
and, because distance forms less of a barrier to trade, expanding the number ofpotential customers that can be targeted and reached. According to the Draft, thisincreases the flexibility of businesses to choose where substantial business activities
take place, or to move existing functions to a new location, even if those locations may
be removed from both the ultimate market jurisdiction and from the jurisdictions inwhich other related business functions may take place.
In our opinion, this is true for all businesses and not only limited to the digital economy.
Globalisation and the reduction of cross border obstacles allow businesses of all kinds
to locate various functions in the most appropriate locations. Access to natural
resources, cost of labour, capital costs, political stability, business climate, taxes etc.
are all factors that are taken into account in such decisions. This is however not amatter of base erosion or profit shifting. This is sound business management aimed atenhancing economic efficiency and value. The only reason for countries to prevent thisglobal aspect of modern business would be for protective reasons, which is contrary to
the purpose of the OECD. Taxes must not be used to prevent trade and investment.
We do not consider the fact that a business can provide customers in a jurisdiction withgoods and services, without a physical presence in that jurisdiction, to be an issue ofgreat concern. Income taxes are not and should not be based on the location ofcustomers. In our view this could potentially be an issue in a formulary apportionment
situation but not as a BEPS concern. Given the fact that the Draft does not seem toclearly make this distinction, we would like to make some comments with respect to thefundamental income tax principles.
As previously stated, income tax is based on residence and source. Clearly, thetraditional division of income based on factors such as functions of R&D, production
and marketing is relevant also for the digital economy. Customers and markets are
obviously necessary for any business, irrespective of whether a product is sold over thecounter, by mail order through a catalogue or by digital means. A market is a conditionof doing business but does not constitute functions, assets, risks or income by itself.
Markets with many customers having disposable income may provide a business
opportunity, but that is all it is: an opportunity. In order to turn those opportunities into
income, companies must develop products that customers want to buy, find theircustomers, and deliver their products. Companies that cannot perform these functions
will not earn income. The income that companies do earn is attributable to theperformance of those functions, not the mere existence of the market. If the only thingthat happens in the market jurisdiction is customer activity, it is difficult to see how,under traditional notions of income taxation, any income (as opposed to other bases oftaxation) can be attributable to the market jurisdiction. This is true both for the digital
economy and for the conventional economy.

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Thus, the fact that a company provides goods or services to customers in a country
does not by itself constitute a jurisdiction to levy income tax. If there is no need for aphysical footprint, then the infrastructure of that country is not utilised and,
consequently, that country should not have a jurisdiction to tax that income. The
country where consumption takes place may, however, levy a consumption tax.
We understand that it is not the purpose of the BEPS project to alter fundamental
principles of international taxation. Some of the options tabled in the Draft imply
reallocation of income taxation to where the consumption occurs, even though there isno nexus. This would mean that the jurisdictions claiming the right to tax under current
principles (based on function, assets and risks) will have to give up all or part of thatright. These are most likely to be small economies with substantial exports and small
markets of their own. Should those countries choose not to give up that right, double
taxation would inevitably be the result. The negative revenue implications for a large
number of countries could be substantial. In fact, many countries with small domestic
markets could experience a considerable erosion of their national tax base as aconsequence of actions taken by the largest economies represented in G20, taking
actions in the name of the BEPS project.
Furthermore, we believe that the Draft contradicts other actions of the BEPS project.
Several of the action points in the BEPS project require more substance in order togrant taxpayers the allocation of income to a jurisdiction or to grant treaty benefits.
However, in the Draft the OECD seems to search for ways to allocate income to a
jurisdiction where the taxpayers have no or very little substance (assets, function or
employees). This is a contradiction in objectives that should be spelled out andexplained. The risk of extra-territorial taxation should also be addressed and its
consequences analysed. This has unfortunately not been done in the Draft.
We would furthermore like to make some specific comments with respect to the optionsin Chapter VII of the Draft related to nexus issues.
PE Exemptions in para. 4 of Article 5 of the OECD Model Convention
BUSINESSEUROPE strongly opposes any amendment of para 4 of Article 5 of theOECD Model Convention. Para 4 provides certainty with respect to the activities listed
therein. Should the paragraph be amended or should the paragraph or parts of it bedeleted, countries may consider all activities that currently fall under its scope as
constituting a permanent establishment. The impact on conventional businesses would
be severe. Businesses would have to re-evaluate all such activities and assess
whether they would constitute a permanent establishment. This would result in either
cost intensive restructuring or in a significant increase in the number of permanentestablishments.
We strongly question whether such an extension of the permanent establishment
concept would be feasible. If this would be the case, every enterprise would be94

4

required to file a tax return in every country where that enterprise has sales. In practice,
this would prove to be very difficult, if not impossible, especially for SMEs. We worry
that further BEPS concerns would emerge as a result of the difficulties to attribute cost
deductions, losses etc. to all the countries where an enterprise is considered to have apermanent establishment.
Furthermore, if this option was adopted, the increase in the number of permanentestablishments would most likely require businesses to register for VAT purposes inevery country where they would be deemed to have a permanent establishment. Tax
administrations tend to require a VAT registration where a permanent establishment forincome tax purposes exists, even though there is no link between the two. This would
further add to the administrative burden for businesses.
Significant Digital Presence Nexus
We firmly oppose the option to establish an alternative nexus for businesses to address
situations in which businesses are conducted wholly digitally. This is, in our opinion,
contrary to the conclusion in the Draft that the digital economy cannot be ring-fenced
and would create great uncertainty on practise. Furthermore, an action that would
differentiate wholly digital activities from other activities would be contrary to theneutrality principle in the Ottawa Framework.
Virtual PE
As previously mentioned, there is in our opinion no jurisdiction for a country to tax
income where there is no physical nexus in that country. A virtual permanentestablishment concept is a matter of formulary apportionment or splitting the cakerather than a BEPS concern. It would be very difficult to find sound and acceptable
rules for allocating profits to a virtual PE.
The concerns in relation to para 4 of Article 5 above are applicable to the virtual
permanent establishment concept as well. A virtual permanent establishment would
also lower the threshold significantly and, as a result, lead to a significant increase in
the administrative burden for businesses and an increase in double taxation cases
worldwide.
VAT Collection
CFA have requested WP9 to develop guidelines for applying the destination principle tocross-border supplies of services and intangibles to final consumers.
BUSINESSEUROPE endorses the OECD’s work on VAT Guidelines, and would like tostress that this is the venue for further work on the topic at the global (OECD) level.

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We would recommend that governments take a closer look at the international
VAT/GST guidelines.
As previously stated, BUSINESSEUROPE believes that the appropriate means oftaxing consumption is with consumption taxes rather than income taxes. VAT and otherconsumption taxes do not require allocation of revenue, costs, losses, etc. Thisdifference from income tax makes consumption taxes more suitable in this respect.
The Draft identifies two main challenges with respect to VAT collection, namely the
exemptions for import of low valued goods and the remote digital supplies to
consumers.
With respect to the first mentioned challenge, we question whether this is an issue thatwarrants attention from the OECD. As stated in the Draft, a low value threshold exists
because the administrative cost associated with collecting the VAT likely outweighs thepotential VAT revenue. The risk of abuse should be taken into account by countries
when calculating the appropriate threshold. If countries find such a threshold in theirdomestic VAT systems problematic, they are free to adjust or remove the threshold inquestion. It should also be mentioned that the need for a threshold is reduced with the
reduction of the compliance and administrative costs of collecting the tax. This being
the case, we believe that the best way forward here is for governments and the OECD
to aim at reducing the compliance and administrative burden for businesses.
With respect to the challenge regarding remote digital supplies to consumers, weunderstand the concern expressed in the Draft. We believe that the appropriate meansof addressing this issue is by enhanced administrative cooperation between tax
administrations. Enhanced administrative cooperation would help the consumer
countries tax administration to enforce and collect the VAT due. However, it should be
noted that the framework with respect to distance selling requires a certain level oflegal certainty and a feasible registration process. Whilst this may be the case for EU
countries, the OECD should take into account that not all the OECD member countries
have well developed VAT or similar systems. It is thus of utmost importance that theOECD keeps encouraging countries to simplify registration regimes and administrativeand compliance burdens in general.
Finally, there is one very important point to highlight when it comes to supplierregistration as a collection mechanism for VAT/GST purposes. As mentioned in theOECD VAT/GST guidelines, a registration for VAT purposes by itself does notconstitute a permanent establishment. It is the experience of more and morebusinesses that, by acting as VAT/GST collectors for governments, foreign VAT
registrations are misused by governments and are being re-qualified as permanentestablishment for corporate tax purposes. This forces businesses to pay corporate tax
in jurisdictions where, based on international direct tax principles, no corporate tax
should be due. In the long term, and if this continues to happen on a larger scale, suchdevelopments could undermine the efficient collection of VAT/GST by dissuadingbusinesses from registering for VAT/GST purposes.

96

6Withholding taxes
Another option suggested in the Draft is to impose a withholding tax on certain
payments made by residents of a country for digital goods or services provided byforeign e-commerce providers.
It is not further specified in the Draft how such a withholding tax would be designed
other than that the financial institutions involved with those payments could be the ones
to bear the compliance burden.
In theory, levying a withholding tax may sound appealing since it would not require net
income filing and allocations of revenue and costs. However, this option is also incontradiction with the conclusion that the digital economy cannot be ring-fenced. In
addition, it does not stand up to the Ottawa taxation framework conditions.
Furthermore, we question whether it is appropriate for the OECD to suggest taxes thatwould be imposed on foreign providers and limited to the digital economy. The risk ofextra-territorial taxation must be addressed and analysed.
The digital economy, or the digitisation of the global economy, continues to evolve.
Generally, there is no special legislative regime preventing small enterprises with
innovative ideas from emerging and becoming successful. In our view, these small andinnovative enterprises are essential in the modern economy. This being the case, it isneither desirable, nor appropriate to increase the threshold for starting a digitalbusiness. A withholding tax on digital goods and services would discourage rather thanpromote cross border trade, investment and economic growth. A broad-based
consumption tax, which does not make any difference between foreign and domestic
providers and between digital goods and services and conventional goods andservices, would in our opinion be preferable compared to a withholding tax.

Concluding remarks
Considering the complexity of this topic and the speed with which business models
evolve today, a specific set of rules for the digital economy does not seem warranted or
achievable. Taxes must not be used as barriers to trade and investment, to thedetriment of the welfare of citizens. The digital economy is an area where a more indepth policy debate on the merits of direct/indirect tax solutions is needed. It is alsoessential to analyse the risk of extra-territorial tax situations. Furthermore, making
consumption the basis for income taxation would have significant revenue implications
for a large number of countries, in particular for small countries with a limited domestic
market.
The BEPS Action Plan states that actions are not directly aimed at changing theexisting international standards on the allocation of taxing rights on cross-borderincome. However, several of the action points calls for greater reliance on where97

7

economic activity takes place and in Action 1 the importance of actual sales for taxable
profits is emphasised.
The argument that income can be taxed on the basis of the location of sales andirrespective of substance and presence of assets, functions and employees, is in sharp
contrast to the BEPS approach, requiring and calling for more substance in order forcompanies to allocate income to low tax jurisdictions. Although markets are essential tobusinesses, they provide by themselves nothing more than a business opportunity to
be explored. They do not constitute a basis for income taxation. However, sales andconsumption are justifiably important sources of revenue for countries relying on
consumption taxes like the VAT, GST or other consumption based taxes.
BUSINESSEUROPE is concerned that the nexus options in the Draft would lead to
additional administrative and compliance burdens for businesses and substantially
increase the risk of double taxation. To widen the scope of the permanentestablishment concept would result in a completely new system for allocatinginternational taxation rights across countries. It would also result in the reallocation of
taxation rights between countries, which would diminish tax revenues for small open
economies. It is essential that the larger economies in the G20 include small
economies in Europe, Africa and elsewhere if a completely new framework forallocation of international taxation rights are to be developed.
On behalf of the BUSINESSEUROPE Tax Policy GroupYours sincerely,

James Watson
Director
Economics Department

988

Cristina Trenta1
Senior lecturer in Tax Law, Örebro University (Sweden)
PhD European Tax Law, PhD Commercial Law
April 12th, 2014

Tax Policies in P2P Digital Content Distribution
This comment touches upon a number of issues mentioned by the OECD in BEPS
Action12, and specifically: the sharing economy and peer-to-peer technologies3; consumer-toconsumer models and peer-to-peer technologies4; barter transactions as a free supply5. It also
deals with the impact of copyright law on tax law and specifically on VAT in the event of
copyright infringement in connection with the distribution or re-distribution of digital content
over non-proprietary platforms. A large quantity of the content available on the Internet, either
for viewing or downloading, is protected by copyright6.

Peer-to-peer and content distribution
P2P networks7 are increasingly becoming an important medium for the exchangeof digital information, in both legitimate and illegitimate scenarios. New businessmodels are prefigured, pioneered, and fostered by early adopters and innovative
companies, but the disruptive, personal, many-to-many model P2P enables haslargely framed it also as a threat to the media and content industries as a whole. All
digital or digitizable media products, software, films and music in particular, whose
distribution models have been overlaid by the new, different and largely unorthodox
technologically-driven social dynamics of large-scale sharing face an unprecedented
challenge, an interesting opportunity, and the risk of legal double-standards.
In 2011, the OECD themselves highlighted how this broader world plays a crucialrole in the world’s communication systems 8. This awareness was already there evenmore before 2000, as doctrine stressed this multi-platform nature of the Internet
while discussing the idea of “cyberspace”. P2P technologies are entirely different fromthe “traditional” model of business we are used to see on the Web based in client/server model. To explain where the differences lie and why this has vast
The author can be contacted at cristina.trenta@oru.se.
OECD (2014), Public Discussion Draft, BEPS ACTION 1: Address the tax challenges of the digital economy, 24
March 2014 – 14 April.
3
OECD, Ibidem, para. 2.5 p. 17.
4OECD, Ibidem, para. 2.1.3., p. 26.
5OECD, Ibidem, para. 177, p. 56, and para.185, p.58.
6
Montagnani, M. L., A New Interface Between Copyright Law And Technology: How User-Generated Content
Will Shape The Future of Online Distribution, Cardozo Arts & Entertainment Law Journal, 2009, p. 724.
7This paper has bee presented at the European University Institute Robert Schuman Centre for Advanced
Studies, Conference in Florence, March 2014, Policy challenges in digital markets, Tax Policies and P2PContent Distribution, and it is based on Trenta, C., VAT in Peer-to-peer Content Distribution, Towards a Tax
Proposal for Decentralized Networks, JIBS Dissertation Series No. 90, ISSN 1403-0470, 2013, and further
investigates fiscal policies and the possible introduction of a new tax for social, and specifically P2P-based,
content distribution.
8
OECD (2011), Communications Outlook 2011, Internet Infrastructure, p. 195.
1

2

99

repercussions on VAT and taxation in general I will briefly discuss the traditional wayof downloading files (or accessing information) using the client / server model versus
a P2P approach (Fig. 1 and 2), and for a traditional intranet for a company versus a
P2P intranet (Fig. 3 and 4).
In these scenarios, all transactions are legitimate transactions, and Company A is
pushing music towards users. It could of course be any kind of copyrighted,
digitizable content, such as video, or text.

Figure 1
In Fig. 1, which deals with the traditional client / server model, Company A, alegitimate source offering their services to the public, acts as the source hub. As aresult, Company A knows whom they finalize their transactions with and, among
other things, can provide proper accounting. User1, user2, etc., all get their content
from Company A.
Let’s see what happens when the same company engages in the same businessusing a P2P model (Fig. 2). It could very well be, because indeed that’s how theunderlying P2P technology works, by distributing load, that only User1 accesses
Company A, while most or all of the other users just access User1 or another user inthe chain. In P2P networks, everyone who acquires by download (in P2P language,
leeches) also provides by upload (in P2P language, seeds).
This has two immediate implications: Company A, the initial provider, mightknow nothing at all about all transactions past the initial one with User1; every single
user is both acquiring the resource and giving it away at the same time.

100Furthermore, P2P technology maximizes performance and minimizes loads by
splitting up resources in individually-provided chunks, so that every users acquires
and provides pieces of the content, never the whole. That means that resources User5
acquires may actually be provided for a 12% by User2, for a 35% by User3, and so on.
It is crucial to highlight that this is nothing like saying that User1 downloads a

Figure 2
resource from Company A and then decides to distribute it: this is one single process,and it is the technology that the legitimate provider (Company A) has chosen to use to
distribute its resources that allows and sustains this. P2P works by distributing
bandwidth load for efficiency, so there is no current way Company A can prevent thefact that every user becomes a redistributor as soon as they have a piece of theresource. And when Company A is busy or overloaded, User<n> practically never getsto Company A.
As an interesting consequence, it seems that if we say that for example User3 inthe chain is simply breaching Copyright law, we are de facto ruling out P2P ascompletely unlawful per se. It is not content, it is not a transaction, it is a wholetechnology which is rendered illegal on the spot.
In the second scenario, we illustrate how this is not just something that impacts
the entertainment and media industry, but it is a disruptive model whenever appliedand compared to current practices (Fig. 3 and 4). A medium-sized Company B has an
intranet or WAN, a local network connecting independent offices, Site A and Site B.

101

Figure3
These could very well be offices in partner companies in different countries: in thisexample Site A is located in the EU and Site B is extra-EU. In Fig. 3 we see a
simplified model of a traditional intranet. Site A hosts a file server where all users
host work-related files. Since we are presuming complete legality, everything has aplace, even territoriality, as the files are all hosted in Site A, in the EU, and all
individual transactions can be traced.

Figure 4
In Fig. 4, a P2P model for the same intranet is outlined. Technically, nothing
prevents that. Again, there is now no central repository and all users in the network
are both suppliers and customers: they cannot be traced easily, and so cannot figures
and general use.

102

Armed with the technical understanding of the way the technology works, andaware of the impact it might have in a business environment, we can now properly
frame the issue.

Nature of P2P transactions
If we acknowledge that P2P is just and a completely different distribution model,
we have questions to ask. Among them, how does VAT work? These users could easily
be located in different parts of the world. And do they one by one configure an
economic activity? What about consideration? The fact is, there is no current way for
Company A, the legitimate source, to fulfill VAT and other legal requirements onbehalf of all transactions.
Now, if these files are part of ongoing working relationships as they are in the
scenario, they carry legitimate fiscal duties with them. But how can the place of
supply and place of enjoyment, for example, be identified and defined? How can thenumber of transactions between Site A and Site B be counted for all involved duties?
The fact is that in figure 1 and 3 which represent the classic client / server model,
there is no problem whatsoever in picturing these operations as liable for VAT
purpose. It should be an issue if they are not.
While in Fig. 1 and 3 the provider and its servers may be considered as apermanent establishment according to the OECD Model Tax Convention 9 or a fixedestablishment according to the VAT Directive10, the situation is much less clear in the
scenarios depicted in Fig. 2 and 4, where the same file or files are still delivered by thecompany but by using P2P as its means of transportation. All users now actively
distribute resources.
The parties will receive the same file, or the same content, unaware of any issue
concerning taxation, and possibly free of VAT charge as of today, because of the lackof provision within the VAT Directive, and consequently in the national tax systems.
The fact is that the same content is acquired in both Fig. 1 and 2, but VAT liabilitychanges. It seems there is an urgent issue concerning in which ways it might bepossible to tax these new operations (Fig. 2 and 4) for VAT purposes, whether they
can be read as a services according to the VAT Directive11.

The role of taxation
Taxation in this context is a particularly critical element, with vast repercussions
on the development of a mature, profitable market. Taxes as a public revenue have tobe related to demonstrations of the economic capacity of individuals as a parameterof contribution to public expenditure12. The analysis carried out13 has positively
identified expressions of economic capacity in BT P2P swarms. They can be
OECD Model Tax Convention, Article 5.
Directive 2006/112/EC, Article 43 and 56.
11
Directive 2006/112/EC, Article 2 (1) (c).
12Lupi, R., Diritto tributario, Oggetto economico e metodo giuridico nella teoria della tassazione analiticoaziendale, Giuffrè, 2009, p. 9.
13
See Trenta, C., VAT in Peer-to-peer Content Distribution, Towards a Tax Proposal for Decentralized
Networks, JIBS Dissertation Series No. 90, ISSN 1403-0470, 2013.
9

10

103

configured “as a ‘third mode of production’ based on the cooperation of autonomous
agents”14
But do P2P transactions fall within the field of VAT? Should they? Will they in theforeseeable future? Do we need different or new taxation policies to address these
new business models? What benefits businesses enterprises, the international
community, the EU and national tax authorities might achieve by considering themfully integrated with the different taxation systems? What fiscal, and hence economic,
consequences might result from classifying a file-sharing operation as liable for tax
law for all players involved? Would this create a new market and foster economic
growth?
BT P2P networks are characterized by several VAT-relevant traits: an economic
connotation; a production chain, if different; a strong impact on competition in theinternal market; and presence of consideration inside swarms in the form of digitalbarter. On the other hand, in its theoretical application to BT P2P networks, VAT
shows both internal and external limiting factors, and fails prominently when
dealing with the business models thriving in the digital market. Internally, we havethe important issue of legal and illegal profiles. In cases dealing with digital
copyright infringement, this alone can seriously compromise the possibility toconsider a transaction in a P2P network as falling inside the VAT scope. According
to the European VAT system, illegal transactions are considered as falling out of thescope of the VAT system if the goods that are provided are totally outside ofcommerce. It is immediately apparent that understanding the level of illegality for
copyright infringement while using P2P technology is of the utmost importance forassessing the viability of P2P in both private and business scenarios.
From this perspective, copyright law is central to any discussion which deals
with such a disruptive technology as P2P, introducing a fully different way to
distribute digital content that does not rest well with the state of the law. This is also
the reason why it is important to understand how copyright law connects to profiles
in tax law. The attributed level of criminal liability of an activity because of
copyright infringement is for example crucial in the whole conversation about P2P.
The changes brought along first by Web 2.0 and then by the explosion of mobile
access and social media have turned spectators into content creators and suppliers:
videos on YouTube, reviews on Amazon, news on Digg. This is a radical change andthis is a complicated change15. On the other hand, private users and companies whoalready run P2P-based legitimate services, and there are some, also face potential
legal risks just because of their adoption of P2P technology because of its perceived
allure of unlawfulness. The Advocate General Poiares Maduro, in his Opinion in the
Google France SARL and Google Inc. Case16 explains very well how technological
Bauwens, M., The Political Economy of Peer Production, 2005, Ctheory.
http://www.ctheory.net/articles.aspx?id=499.
15
Pascu, C., Osimo, D., Ulbrich, M., Turlea, G., Burgelman, J. C., The potential disruptive impact of Internetbased technologies, First Monday, vol. 12, no. 3, 2007.
http://firstmonday.org/htbin/cgiwrap/bin/ojs/index.php/fm/article/view/1630/ 1545. Accessed 2011/05/03.
16
Joined Cases C-236/08 to C-238/08, Opinion of Mr Advocate General Poiares Maduro, Google France SARLand Google Inc. v Louis Vuitton Malletier SA (C-236/08), Google France SARL v Viaticum SA and Luteciel SARL
(C-237/08) and Google France SARL v Centre national de recherche en relations humaines (CNRRH) SARL and
Others (C-238/08), [2010] ECR I-2417.
14

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evolution and invention raise issues of IP infringement, but that is no rational
reason to ban and stop development and progress.
Several reasons seem to suggest that BT P2P transactions are not liable to VAT
in the event of criminal copyright infringement. After the Lisbon Treaty, infringing
BT P2P operations are framed as a European crime, rendering such operations illegal
in all Member states17. International conventions present a similar scenario18.
Furthermore, linking the supposed VAT liability of one operation to theexamination of its degree of illegality in the light of VAT principles to understand if
the operation is inside or outside VAT purposes does not seem the right way to go.
Externally, both the principles of tax territoriality and the regulations concerning
the place of supply for VAT do not only present issues in connection with theiradaptability, but could be said to be totally alien to the distributed logic that drives
P2P. Secondly, it is difficult to calculate the taxable amount in P2P transactions. In
swarms, consideration is present in the form of digital barter, but monetaryequivalents are not simple translations. Case-by-case analysis would probably be theway to go, but given the large number of transactions happening at the micro-level
this methodology does not seem to offer a feasible solution. This scenario led me to
explore the possibility of tracing possible alternative solutions for taxing BT P2P
transactions outside of the strict boundaries of VAT.
A necessary precondition of such an investigation is an understanding of thepossible consequences of not taxing P2P transactions. It could be argued that
introducing a new, separate tax could bring along disadvantages: fiscally speaking, aseparate administration to manage the new obligations, for example. Future changes
in VAT in the field would have to take into account this additional tax. Those changes
would bring additional costs at the European as well as at the national level.
Consequences would be certainly even more complex if we consider not just tax
design and tax bases, but the political and social point of view.
On the other hand, the lack of tax regulations in the field would leave P2P in thegray areas outside of any fiscal regulations, seriously hampering the business
opportunities that might be exploited by entrepreneurial companies. Where there is
uncertainty, even when it might seem to be favorable, so to speak, uncertainty,
business plans are difficult to plan and execute. Opportunities for resource collection
through taxes would not be taken as well, and legislators would proceed unhinderedin the false belief that, as far as consumption taxation goes, regulating traditional
electronic commerce inside the VAT Directive was everything the market needed,
completely discarding how uneven the playfield actually is.
It could be argued that a new tax could introduce a distortive element in theeconomy of digital transactions, since taxpayers would choose transactions to avoid
alternatively VAT or the other tax. This is a possibility, and something that would
require study and careful planning. A simple suggestion could be that of linking thetwo taxes to mitigate the effects due to the introduction of the new one.
TFEU, Art. 83.
More details in Trenta, C., VAT in Peer-to-peer Content Distribution, Towards a Tax Proposal for
Decentralized Networks, JIBS Dissertation Series No. 90, ISSN 1403-0470, 2013.
17

18

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In 1998, the EU Commission, in their guidelines on electronic commerce andindirect taxation, prescribed that the existing VAT system had to be applied toelectronic commerce, and no new taxes had to be introduced 19. This document could
not foresee nor regulate the dramatic changes that radical turns of the table such as
distributed P2P allow to content distribution over the Internet. What was proper
almost 15 years ago is not necessarily so now: regulatory tax frameworks need tochange with the needs of the society they are an expression of.
Furthermore, in a more rigorous legal line of thought, BT P2P transactions do not
identify as a traditional electronic commerce model, which share a common root in
the existence of a provider and a consumer and configure static, point to multi-point
services20.
As of today, P2P distribution lies outside of any taxation system, in a sort of “nontaxation zone” which prevents any successful business (and hence fiscal and social)
exploitation of the technology. This ill compares to the scenarios illustrated by theOECD in that same 1998 in Ottawa 21, where both double taxation and unintentional
non-taxation in electronic transactions were pointed out as sub-optimal:
unintentional non-taxation presupposes a tax system regulating a transaction, or
better a transaction that escapes taxation while being part of the tax system.
Unintentional non-taxation does not seem to refer at all to a total lack of any
regulatory frameworks.
As the OECD outlined in that document, electronic commerce assumes different
forms and “(t)axation should seek to be neutral and equitable between forms ofelectronic commerce and between conventional and electronic forms ofcommerce”22.
Literature stressed this duality as well of that of “(d)oing business over theInternet or via the World Wide Web” 23. Right now, this situation does not reflect inmy opinion an equitable taxation, as per the OECD guidelines, between traditional ecommerce (taxed), and non-traditional (e-commerce) P2P transactions (non-taxed).
As businesses move on the Internet and new approaches are tried out, legislation
should start to regulate those forms of digital supplies which are not integrated in thecurrent legal frameworks. Technological changes have an impact in the capability ofstates to collect taxes, and will probably affect the distribution of the tax burden 24 in
COM (1998) 374 final, Communication from the Commission to the Council, the European Parliament and theEconomic and Social Committee, Electronic commerce and indirect taxation, para. V. “The first guideline has
been formulated to reflect the basic concept that existing taxes should apply to electronic commerce: In the fieldof indirect taxation all efforts should to be concentrated on adapting existing taxes and more specifically VAT to
the developments of ecommerce. no. new or additional taxes are therefore to be considered”.
20
Wareham, J., Zheng, J. G., Straub, D., Critical themes in electronic commerce research: a meta-analysis,
Journal of Information Technology, vol. 20, no.1, 2005, pp. 1 – 19.
21
OECD (1998), Electronic Commerce: Taxation Framework Conditions, Ottawa (CA), A Report by theCommittee on Fiscal Affairs, as presented to Ministers at the OECD Ministerial Conference, A Borderless World:
Realising the Potential of Electronic Commerce, October 8 1998, p. 3. See also OECD (2001), Taxation andElectronic Commerce Implementing the Ottawa Taxation Framework Conditions, p. 17.
22OECD (1998), Electronic Commerce: Taxation Framework Conditions, Ottawa (CA), A Report by theCommittee on Fiscal Affairs, as presented to Ministers at the OECD Ministerial Conference, October 8 1998.
23
Frecknall, H. J., Glaister, K., Electronic Commerce and International Taxation: A Square Peg in a RoundHole? European Management Journal, vol. 19, no. 6, 2001, p. 655.
24
Tanzi, V., Globalization, technological developments, and the work of fiscal termites, International Tax Policyin the New Millennium, Brooklyn Journal of International Law, 2001, vol. 26, no. 4, pp. 1261 – 1284.
19

106the long run. Positive consequences for the collectivity and potentially large tax
revenue sources in the future25 are being squandered.
The EU legal framework introduces the principle of technological neutrality,
maintaining that there can be no difference in regulations based upon technologicaldistinctions. According to this framework, regulators neither impose, nor
discriminate in favor of any specific type of technology, except where necessary 26 Thisis explicitly stated by the Commission in their Net Neutrality Declaration 27. Similarly,
the Communication on the open Internet and net neutrality in Europe 28 maintains
that:(t)he essence of net neutrality and the issues underpinning the debate
concern first and foremost how best to preserve the openness of thisplatform and to ensure that it can continue to provide high-quality
services to all and to allow innovation to flourish, while contributing toenjoyment of and respect for fundamental rights, such as freedom of
expression and freedom to conduct business29.
There are two reasons why net neutrality is important. It eliminates the risk of
future discrimination, and it facilitates fair competition 30 ensuring the survival of thefittest model, rather than that of the one favored by network bias 31 Could we have
network and fiscal neutrality with little or no regulation at all? Or with flawed
regulations not calling for net neutrality? It seems difficult to maintain such a point ofview. Nonetheless, such a question allows to illustrate an important consequence ofan unbalanced market: the possible disadvantage would impact both traditional andnew operators, depending on the sector being considered. In the case of telephony,for example, new non-traditional players have a clear competitive advantage servicewise, for example by leveraging audio / video calls 32 or infrastructure-wise, as in thecase of P2P-based architectures such as that of Skype.

Otto H., Chang, O. H., Yen, D. C., Electronic commerce: how should it be taxed?, Journal of Contemporary
Accounting, vol. 1, no.1, 2000, p. 92.
26
Shin, D. H., VoIP: A debate over information service or telephone application in US: A new perspective inconvergence era, Telematics and Informatics, vol. 23, no. 2, 2006, pp. 57 – 73. See also Bolen, C., Commission
begins proceeding on VoIP disinclined toward economic regulation, Electronic Commerce and Law Report, vol.
9, no. 7, 2004, pp. 151 – 152.
27
Keller, P., European and International Media Law: Liberal Democracy, Trade, and the New Media, Oxford
University Press, 2011, p. 439.
28
COM (2011) 222 final, Communication from the Commission to the European Parliament, the Council, theEconomic and Social Committee and the Committee of the Regions. The open internet and net neutrality inEurope.
29
COM (2011) 222 final, Communication from the Commission to the European Parliament, the Council, theEconomic and Social Committee and the Committee of the Regions. The open Internet and net neutrality inEurope, para. 2, p. 3.
30
Wu, T. Network Neutrality, Broadband Discrimination, Journal of Telecommunications & High Technology
Law, vol. 2, no. 1, 2003, p. 142.
31
Shin, D. H., Convergence of telecommunications, media and information technology, and implications forregulation, Info, vol. 8, no. 1, 2006, pp. 42–56; Shin, D. H., VoIP: A debate over information service or
telephone application in US: A new perspective in convergence era, Telematics and Informatics, vol. 23, no. 2,
2006, pp. 57 – 73.
32
OECD (1998), Internet Voice Telephony Developments, OECD Digital Economy Papers, no. 35, p. 7.
25

107

This is indeed a challenge to present tax administrations, especially if we include
the implications of intellectual property rights legislation33. On the other hand, it
might lead to increases in tax revenue coming from innovative, unforeseen sources.
The possibility to introduce a new tax was considered admissible and used to extract
more revenue from taxpayers34. From a taxation perspective, a full understanding of
the technological layer is a must if we want to regulate it. Unfortunately, the tax
debate in the field is mostly inexistent.
From an economic perspective, the fact that P2P technology is vastly impacting
the way of doing business is not for disputation, as the OECD had already mentioned
in his work on Peer-to-Peer networks in OECD countries 35. Its social and economic
resonance is profound. If the first function of legal science is to write, and rewrite,
uniform rules for society, those making economic activities possible in the first place
are necessary, and those that allow carrying them out efficiently in a fair, leveledmarket are crucial36.
This might imply finding new ways. For example, taxation could be applied not toa taxable person as identified by the law, but to a more generically defined but still
specific actor who plays a role on the economic scene37.
Currently, traditional consumption taxation systems ignore not only the realnature and fiscal implication of P2P networks, but P2P tout court. P2P is invisible.
The solution is not to give up and declare an area franca, but to dig into thecomplexity of swarm transactions to understand how it works and provide solutions,
if tentative. Such an analysis would also help foster an integral revision of the weakparts of the VAT system when it comes to distributed services.
The introduction of a new European tax would also acknowledge the economic
impact of these new technologies, beyond any specific analysis of them either
fulfilling or not fulfilling the rigid conditions of VAT, the existence of juridical
relationships among the parties involved in a transaction, and the omnipresent
territoriality rules, and would prevent the possible fragmentation of the internalmarket due to the introduction of different and diverse levies at the national level for
private copies38. It would also steer the conversation towards effectively governing thephenomenon instead of trying to cure the symptoms without addressing the cause.
If tax burdens should not be seen as repressive and expropriative tools threatening
one’s rights, but rather as equalizers turning abstract rights into concrete facts,
domestic solutions are the wrong answer: this is a fiscal policy challenge the EUneeds to adress as a whole.
Scott, C., Derrick, F., Sedgley, N., Consumption taxes in the Internet world, International Advances in
Economic Research, vol. 9, no. 4, 2003, p. 308.
34
Globalization, technological developments, and the work of fiscal termites, International Tax Policy in the New
Millennium, Brooklyn Journal of International Law, vol. 26, no. 4, 2001,pp. 1261 – 1284.
35
OECD (2004), Peer-to-Peer Networks in OECD countries, Information Technology Outlook.
36
Schiavolin, R., L’imposta regionale sulle attività produttive, Giuffrè, 2007, p. 14.
37
Schiavolin, R., Ibid., 2007, p. 16.
38
See for instance the German and Italian experience respectively: Ordentliche Bundesdelegiertenkonferenz,
Dortmund, January 2009, Europawahlprogramm (vorläufig, Stand: 31.01.09) VIII. Kultur, Bildung und
Forschung – Der GRÜNE Weg in die Wissenschaftsgesellschaft; Bill (Proposta di Legge), Camera dei Deputati
no. 187, XVI Legislatura (Extended Collective Licensing), April 2008.
33

108

Draft diagram for a possible new form of EU taxation on the
distribution of digital content

109

Our new address from 31 March 2014 is:
CBI, Cannon Place
78 Cannon Street
London EC4N 6HN

14 April 2014

CBI RESPONSE TO THE OECD DISCUSSION DRAFT ON BEPS ACTION 1: ADDRESS THE CHALLENGES OF THE
DIGITAL ECONOMY
1. The CBI is pleased to comment on the OECD’s discussion draft on Action 1: Address the challenges ofthe digital economy (‘the discussion draft’) published on 24 March 2014.
2. As the UK’s leading business organisation, the CBI speaks for some 240,000 businesses that together
employ around a third of the private sector workforce, covering the full spectrum of business interests
both by sector and by size.
Our comments
3. The OECD has requested comments as to whether it is possible to ring-fence the digital economy fromthe rest of the economy and, if not, whether specific types of digital transactions could be identified
and addressed through specific rules.
4. The CBI considers that it is not possible to ring-fence the digital economy. Every traditional business willbe “digital” at least to some extent and every digital business will be “traditional” at least to someextent. It is not practical to identify a clear dividing line between digital and non-digital businessactivities. It is also impractical to identify specific types of digital transactions for the purpose of
applying a special set of rules. Any such attempt is likely to result in uncertainty and difficulty at theboundary and give rise to complexity and compliance cost.
5. Furthermore, the discussion draft sometimes implies that businesses which are more digital in nature
have greater opportunity for base erosion and profits shifting. We do not consider that this isnecessarily the case and there may be merit in the final report on the digital economy in presenting
digital businesses in a more neutral light.
6. The CBI believes that the challenges posed by the digital economy can best be met by the other actionsof the BEPS project, particularly those relating to the definition of permanent establishments and thoserelating to transfer pricing. This is a much more appropriate approach than developing new options
such as those outlined in Section VII 3 of the discussion draft (although we presume that option 3.1 willin any case be considered under Action 7 of the BEPS Action Plan).
7. We have not analysed those options in great detail in this comment letter but we consider that all of
the other options present enormous practical difficulties and that they are very likely to result indouble or multiple taxation when applied to the various business models of our members. The CBItherefore strongly urges that full consideration be given to the other BEPS actions first before reassessment as to whether the new options should be considered.
8. We also note that the revision of the chapter of the OECD Guidelines on Intangibles may address someof the concerns and urge that this work be completed before the new options are taken further. The
implications for the timetable of the BEPS programme should be fully considered and it may be that a

CBI, Cannon Place, 78 Cannon Street, London EC4N 6HN
T: +44 (0)20 7379 7400 F: +44 (0)20 7240 1578 W: www.cbi.org.uk
Director-General: John Cridland CBE President: Sir Michael Rake

Registered No: RC000139 (England andWales) Registered Office: CBI, Cannon Place, 78 Cannon Street, London, EC4N 6HN
110

further review of the digital economy should come later in the process, or as part of a subsequent
process, once the expected direction and impact of work under other actions is clearer.
9. We agree that there is a significant role for VAT to play in addressing the challenges of the digital
economy - although VAT cannot, by itself, address the concerns in their entirety or take the place of aproperly imposed tax on profits. We agree that further work is required on many aspects of VAT asapplied to the digital economy, not least of which is the difficulty of ensuring compliance. It is very
important that this latter area is fully addressed as those businesses which are in compliance with their
obligations will otherwise be placed at a competitive disadvantage with remote businesses which arenot. We agree that VAT should be levied on a place of consumption basis, and at the rate applicable tothat place. Finally, we note that there is a substantial body of experience in EU which might usefully bedrawn upon here.
10. We note that although we do not see any of the options proposed under paragraphs 3.2 to 3.4 of the
discussion draft as necessary or workable, however we believe that it is essential that, if the review
suggested in paragraph 208 concludes that additional measures are needed, then that review should
clearly set out:
i.
ii.
iii.

The nature and source of the concerns which remain;
Why those concerns are not capable of being addressed by the other BEPS Actions; andWhat objectives those additional measures are designed to achieve.

The above criteria will provide with clear metrics against which to consider the necessity andappropriateness of any additional measures proposed. In our view, it is particularly important to give
clarity as to the reason for, and intended extent of, any re-allocation of taxing rights to customer
jurisdictions –and to ensure that any measures have the effect of correcting misallocations rather thangoing beyond that and creating excessive allocations of taxing rights to customer jurisdictions.
11. Finally, once the OECD Digital Economy Task Force has completed its work and issued its report, weunderstand that it will be disbanded, at least in its current form. It would be advantageous if amechanism could be found for monitoring the digital aspects of the work of the other groups so that
digital economy aspects can be appropriately coordinated through to the conclusion of the BEPS
project.

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BEPS Action 1: Address the Tax Challenges of the Digital Economy
Response by the Chartered Institute of Taxation

1

Introduction

1.1

We refer to the public discussion document published by the OECD on 24 March2014 regarding BEPS Action 1: Address the Tax Challenges of the Digital Economy.

1.2

We welcome the opportunity to comment on this work being done by the OECD and
do not underestimate the challenges arising from the digitalisation of global markets.
However, as we explain in more detail below, many of the challenges identified do
not involve Base Erosion or Profit Shifting – they are consequences of advances intechnology.

1.3

The document provides a good analysis of the growth of the digital economy, andillustrates that some of the specific BEPS concerns will be met by other work
streams. In our view the challenges identified and discussed in Parts VI and VII of
the document open up profound questions of how taxation should operate in a worldof increasing digital commerce. We suggest these questions would best be
discussed and debated outside the framework of the BEPS project. This is necessary
to ensure sufficient time to consider difficult and complex decisions.

1.4

The BEPS project is very much focussed on direct taxation. We consider that indirect
taxation has a contribution to make in enabling the territory of the customer to levy
tax – albeit that it is collected from a digital supplier with a presence in a different
country, and potentially borne by the consumer. An increased focus on indirect tax
may assist to at least partially address the concerns that have been raised. However,it should be recognised that simply because a jurisdiction is entitled to levy VAT,
does not mean that it is or should be entitled to a tax on business profits.

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2

What is the digital economy?

2.1

Parts II and III of the Discussion Document provide good background information on
the development and influence of information and communication technology, andhow the ‘digital economy’ has become an increasingly large part of the whole
economy. These parts, therefore, provide important context for the rest of the
document.

2.2

In particular, it is our view that these parts of the Discussion Document deal
comprehensively with the first three bullet points raised in paragraph 10 in Part I of
the Discussion Document (the particular issues on which the OECD requests
comment). They illustrate that it is not possible to ring-fence the digital economy fromthe rest of the economy and there would be substantial difficulties in creating special
rules for digital business.

3

Are there any BEPS issues presented specifically by the digital economy?

3.1

Parts IV and V of the Discussion Document illustrate what, in our view, is an important
point: BEPS is, largely, a feature or result of mismatches and missing elements in theinternational tax system. MNE’s that work in the most ‘digitised’ areas of the economy
or use primarily digital methods to trade may be better placed to take advantage ofsuch mismatches and missing elements; however, none of the BEPS issues are
exclusive to such digital companies, and, in our view, there are no such ‘exclusive’issues.

3.2

In relation to the fourth bullet point of paragraph 10, the other actions contemplated by
the BEPS project will address BEPS for digital and non-digital companies alike.

3.3

In addition, the current work on VAT/GST (in Europe and the US) should also address
BEPS issues. This is particularly so in relation to larger enterprises. In our view it will
prove very difficult to eradicate a loss of VAT from smaller enterprises trading crossborder, as enforcing registration and collection may be impossible.

3.4

In relation to the fifth bullet point of paragraph 10, we do not see any value in othermeasures beyond those identified for direct taxation. In relation to indirect taxation, we
would take the view that compliance would be encouraged if VAT/GST on digitaltransactions was set at lower levels.

4

The real challenges of the digital economy

4.1

We suggest that the broader challenges of the digital economy raised in Part VI of
the Discussion Draft would exist even if the mismatches and missing elements of thecurrent system were all eliminated. These challenges do not involve Base Erosion orProfit Shifting; rather they are a consequence of advances in technology.

4.2

We do not under-estimate these challenges, nor suggest they should not be debated.
However, in our view, they open up profound questions of how taxation should
operate in a world of increasing digital commerce. Thus, in relation to the sixth bullet
point in paragraph 10, we suggest that these questions need to be discussed anddebated outside the framework of the BEPS project. This is necessary to provide
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time to investigate and consider difficult and complex decisions in this area.
4.3

What is not addressed in the Discussion Document is the extent to which tax
challenges are perceived to be greater in countries that have been somewhat slower
to adopt digital technologies, and thus may have a lower level of ‘digital exports’. The
Discussion Document does not, in our view, sufficiently question whether the tax
challenges of the digital economy could be more a matter of timing rather thanpermanent, and as digital exports become more evenly spread, the challenges
recede.

4.4

If the challenges are a ‘timing issue’, any adaptions to the international tax systemthat entrench the current differences between economies are likely to lead to issues
persisting rather than being solved.

4.5

Part VII of the document sets out potential options to address the tax challenges
purportedly raised by the digital economy. We propose these should be debatedseparately from the BEPS action points. None of these recommendations should be
introduced under the BEPS umbrella, as they are not addressing questions of Base
Erosion or Profit Shifting.

5

Options to address the broader tax challenges and cost of compliance

5.1

As noted above, our view is that the issues discussed in Part VI of the Discussion
Document should be addressed separately to the BEPS project. However, on theparticular questions posed by bullet point seven (the options to address the broader
tax challenges and eight (cost of compliance) we comment as follows.

5.2

A direct tax on profit attribution based on sales, which is what the ‘New Nexus basedon Significant Digital Presence’ represents, goes against principles that value iscreated where a product is created not simply by a market for that product; it would
be a fundamental - and in our view, inappropriate - shift in the international tax
system. There appears to be some confusion with fragmentation issues in Paragraph214, as these are mentioned in the fourth bullet point in that paragraph. Theseshould be dealt with by other strands of the BEPS project.

5.3

A system based on a New Nexus based on Significant Digital Presence would also
be very complex to administer and substantially increase compliance costs forbusiness through increasing the number of returns required and the complexity of
attributing profit to various jurisdictions.

5.4

The approach does also not fit well with a central concept of the BEPS project as awhole which is that value is created where significant people functions are located.

5.5This is particularly relevant if a digital presence is considered to be created fromcollecting data – data collection itself, however massive, is generally useless.
Although data is an important aspect of digital businesses, data itself has no intrinsic
value. Value is created by properly analysing data, and knowing what data to throw
away. This analysis will be done by people or, possibly, in part by people and in partby algorithms designed by people. The crucial question is thus where the significant
people functions’ analysing the data or creating the analysis tools exist.

5.6

Turning to the three ‘virtual PE’ models – the first is rendered impossible bytechnologies that allow transactions to be made from multiple server locations; thesecond seems to be a restatement of the ‘New Nexus’ concept, and the third would
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seem to be a logical extension of current rules, but would be of limited application.
5.7

Applying a withholding tax to digital transactions raises similar concerns to the ‘New
Nexus’ idea, in that it marks a shift in taxing where sales are made rather than where
product is created. If the withholding tax is a substantial amount (certainly anything
above 10% and probably anything above 5%) double taxation is highly likely to occur
as the state where the product is created is unlikely to give full double tax relief on
profits for the withholding on revenue to be fully compensated.

5.8

A withholding tax also transfers the burden of compliance/payment from producer toconsumer, with the difficulties noted in the Discussion Document.

5.9

In our view, none of the options proposed address the question of increasing ‘digital
exports’ in those countries currently lagging behind. Such an increase is likely to
reduce international tensions over taxation of the digital economy.

6

Smaller enterprises

6.1

We suggest that specific consideration should be given to small and medium
enterprises when considering any measures. There will always be a greater
challenge of compliance for small and medium enterprises. The emergence of the
web makes it much easier for quite small businesses to send goods or services
internationally but compliance with some of the measures proposed would bechallenging.

6.2

We suggest that there should be a sensible threshold for any compliance measuresthat are proposed.

7

VAT/GST

7.1

The Discussion Document raises a Consumption Tax Option. A ‘consumption tax’(such as VAT) is best suited to the concerns about digital economy operators inmarket countries where they may have customers but no other presence. On theother hand, corporate profits based taxes, as origin based taxes, are less well suited
because the tax is on the source of the profit rather than where the customer isbased.

7.2

We would broadly agree that the principle effect of the Consumption Tax Option
would be to require non-resident suppliers to register and account for VAT in statesof consumption. Detailed consideration needs to be given to the compliance issues
which would be much more significant for a global system than for the EU (where asingle portal is being adopted).

7.3

As noted above, such a system would present a particular issue for small
enterprises. It would be too much of an imposition to require them to register for VAT
in another jurisdiction where they undertake a single transaction or very few
transactions (digital or otherwise). Having a low threshold for registration would be apotential barrier to small businesses competing in a global market.

7.4

There are significant steps being taken in the EU in this respect. The EU has
introduced changes to its place of supply rules that will affect businesses providing
telecommunications, broadcasting or electronically supplied services within the EU.
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This change comes into effect on 1 January 2015. The aim is to move revenue fromthe supply state to the consumer state and negate the incentive for suppliers to move
operations to countries with low VAT rates. We do not yet know whether the change
will lead to increases in consumer prices.
7.5

We suggest that the EU experience will be informative and will, in due course, informthe debate on what a combination of VAT and BEPS changes could mean.

7.6

We suggest that this analysis is done before layering on additional measures andcompliance burdens beyond those already contemplated by BEPS.

8The Chartered Institute of Taxation

8.1

The Chartered Institute of Taxation (CIOT) is the leading professional body in the
United Kingdom concerned solely with taxation. The CIOT is an educational charity,
promoting education and study of the administration and practice of taxation. One of
our key aims is to work for a better, more efficient, tax system for all affected by it –taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects oftaxation, including direct and indirect taxes and duties. Through our Low Incomes Tax
Reform Group (LITRG), the CIOT has a particular focus on improving the tax system,
including tax credits and benefits, for the unrepresented taxpayer.
The CIOT draws on our members’ experience in private practice, commerce andindustry, government and academia to improve tax administration and propose andexplain how tax policy objectives can most effectively be achieved. We also link to,
and draw on, similar leading professional tax bodies in other countries. The CIOT’scomments and recommendations on tax issues are made in line with our charitableobjectives: we are politically neutral in our work.
The CIOT’s 17,000 members have the practising title of ‘Chartered Tax Adviser’ andthe designatory letters ‘CTA’, to represent the leading tax qualification.

The Chartered Institute of Taxation
14 April 2014

P/tech/subsfinal/International2014

5116

Opinion Statement FC 7/2014 of the CFE
on the OECD Discussion Draft: Address the tax challenges of thedigital economy (BEPS Action 1)

Prepared by the CFE Fiscal Committee
Submitted to the OECD in April 2014
in April 2014117

Preliminary version

CFE (Confédération Fiscale Européenne) is the umbrella organisation representing the tax professionin Europe. Our members are 32 professional organisations from 25 European countries (21 EU
member states) with 180,000 individual members. Our functions are to safeguard the professional
interests of tax advisers, to assure the quality of tax services provided by tax advisers, to exchange
information about national tax laws and professional law and to contribute to the coordination of tax
law in Europe.
CFE is registered in the EU Transparency Register (no. 3543183647‐05).
We will be pleased to answer any questions you may have concerning CFE’s comments outlined
below. For further information, please contact Mr. Piergiorgio Valente, Chairman of the CFE Fiscal
Committee, or Rudolf Reibel, Fiscal and Professional Affairs Officer of the CFE, at brusselsoffice@cfeeutax.org.
Please note that due to the short deadline, the CFE comments hereunder are to be consideredpreliminary and thus may be subject to reconsideration. In this event, we shall inform the OECD of
any changes.
Sincerely yours,
Confédération Fiscale Européenne

Ring-fencing the digital economy (para 10 of the Discussion Draft)
CFE strongly agrees with the statement in paragraph 59 of the Discussion Draft that “because thedigital economy is increasingly becoming the economy itself, it would be difficult, if not impossible, toring-fence the digital economy from the rest of the economy”.
We therefore doubt that solutions should be specifically designed for digital businesses. Instead, we
believe that the relevant digital aspects should be addressed in the context of the work on other
BEPS actions, e.g. a definition of “permanent establishment”.
We believe that any definition of the digital economy, parts of it like fully immaterialised services,
could not keep pace with the rapid emergence of new business models and technology, so thatfrequent updates of any such definition would be required, all of which would have to go throughthe national legislative processes. This would significantly reduce the operability of such definition.
Ottawa framework
CFE strongly supports the key principles of neutrality, efficiency, certainty and simplicity,
effectiveness and fairness and flexibility, as expressed in the Ottawa framework. These shall be a
guidance when designing tax solutions affecting the digital economy.
Exemptions from permanent establishment status (3.1)

118Preliminary version
Many businesses which use digital methods carry on their business in a great number of different
countries without satisfying the traditional OECD definitions of a Permanent Establishment (PE) andso, under current rules, fail to create a taxable presence in the source country.
However, we do not believe that the solution to this problem should be a major reworking of theexisting rules which could have as an end result that multinationals are deemed to have PEs in a very
considerable number of countries and an obligation to make returns in those countries.
Although we recognize that finding a method by which non-resident MNEs may be liable to tax on apart of their profits by another State (such as the State wherein their customers/users are based)
despite the lack of physical presence and/or the lack of activities therein which result in a PE under
the current version of the OECD Model, the elimination of Article 5(4) all together, or the limitationof Article 5(4), may have far-reaching consequences which go beyond circumventing BEPS in thedigital economy.
One could consider limiting the Article 5(4)(a)-(d) exceptions to a PE to where the maintenance of astock of goods, warehouse etc. is itself of a preparatory or auxiliary character, and not an integral
feature of the business in question.
If there is to be a change of definition, we urge OECD to introduce a number of further examples in
the Commentary so that it will be clearer as to what sort of activities will be considered to be of apreparatory or auxiliary character.
Significant digital presence / virtual permanent establishments (3.2 and 3.3)
None of the proposed definitions of a new nexus based on “significant digital presence” nor “virtualPE” appears convincing, as their application would lead to massive legal uncertainty.
The concept of “significant digital presence” creates a PE in a country for fully dematerialised digital
activity if certain tests are satisfied including if there are a significant number of contracts signed
remotely by the enterprise and a tax-resident consumer of that country or the customer, or
substantial payments are made by the consumers resident in the country. Because of the wording“significant”, there have been suggestions to introduce thresholds. In our view, however, theconcept of thresholds would not fit in a direct tax solution and would, by distinguishing between
digital and non-digital services, not be in accordance with the Ottawa principles.
As we do not believe that there should be separate rules for the digital economy, we are notconvinced that extending the definition of PE to “virtual” PEs will offer a workable solution. We areconcerned that such concept would lead to the creation of a taxable presence for almost any
activity.
Transfer pricing aspects
A substantial portion of the proposals brought forward are based on detailed transfer pricing reports
and documentation being provided. Whilst being in agreement with transfer pricing and the arm's
length principle, a comment/concern is the extent to which transfer pricing documentation andreporting seems to be required under the current proposed discussion draft. Requiring "uniform
transfer pricing" documentation which is further split into "country by country reporting" is verylabour intensive and expensive.

119Preliminary version
Substantial focus is being given to "excessive" payments such as interest deductions and "excessive"royalty payments to low-taxed countries. The only way it seems that a business can prove that apayment is not excessive is through very detailed transfer pricing reports.
In particular our concern relates to how sustainable this is for small businesses who are genuinely
trying to expand their business to another market. Having an abundance of documentation
requirements might not allow that business to be commercially viable. One should be careful thatthe BEPS reports allow for realistic measures and do not fuel an over-kill in terms of documentation
requirements.
Additionally, requiring transfer pricing reporting (only) when a cross-border situation arises (asdomestic transactions do not impact BEPS) could create more burden to companies dealing in crossborder transactions compared those dealing solely in local digital transactions.
With regards to transfers of assets that seem difficult to evaluate, a "post-transfer profitability" issuggested to be taken into account. The uncertainty that this brings, unclarity in the length of time
until when the profitability can be taken into account by a tax authority goes counter to the Ottawa
principles and is in our view unacceptable.
The existing transfer pricing guidelines allow for a recharacterisation or for disregarding the
taxpayer's transactional form in some exceptional circumstances. A clarification allowing taxpayers
to better assess how and when transactions can be recharacterised would be welcome.
Withholding Tax on Digital transactions (3.4)
Although we can understand that the imposition of a withholding tax on the transaction may
potentially solve the problem that in many cases the MNE would have no physical presence
whatsoever in any other State since it is supplying e-products, this brings with it issues such as
identification of the customer and State of residence for withholding tax purposes. Furthermore it is
not clear who should withhold part of the payment: the customer, the provider of the payment
service, or another party.
Consumption Tax Options (3.5)
The discussion draft identifies the opportunities presented by the digital economy to makesignificant sales, cross-border, without creating a taxable presence in the country of consumption.
In our view, indirect taxation seems better fit to provide specific solutions to address the challenges
posed by the digitalisation of the economy. However, looking at the EU, it is clear that the current
VAT system still faces operability concerns.
The EU is currently changing its place of supply rules in relation to telecommunications, broadcastingand electronically supplied services within the EU from 1 January 2015 so that from that date theplace of supply will be the country of the consumer rather than the producer.
We suggest that the OECD awaits the entering into force of the new EU rules and closely monitors
their practicability before deciding on an indirect tax approach to the digital economy.
Impact on business, in particular SMEs
As a general comment, we would like to stress that any solution reached should ensure certainty
while not creating further double taxation. The desired tax compliance should be encouraged,
without raising further complexity or distortions and excessive burden on businesses. In addition,120

Preliminary version
dispute resolution mechanisms should be fostered and mandatory arbitration should be
implemented in order to effectively solve any dispute that may arise from the new framework.
The digitalisation of business has widened the trade horizons for SMEs and therefore, any proposed
amendments need to take into consideration the substantial number of SMEs that operate in thisway. Furthermore, any amendments should pay particular attention to increased tax compliancerequirements in different States which would be a significant compliance requirement particularly
for SMEs.

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Action Item 1- Address the Tax
Challenges of the Digital Economy
A REPRESENTATION

April 2014

© Confederation of Indian Industry
122

0Contents
Background ............................................................................................................................................... 2
Modifying the rules of exemption from Permanent Establishment (PE) ................................................. 3
New Nexus based on Significant Digital Presence .................................................................................... 4
Virtual PE ................................................................................................................................................... 5
Withholding of tax on Digital Transactions............................................................................................... 6
General comments.................................................................................................................................... 7© Confederation of Indian Industry
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1Action Item 1 - ‘Address the Tax Challenges of the Digital Economy’
Background
On March 24, 2014 the Organization for Economic Co-operation and Development (‘OECD’) issued a
discussion draft report on Action Item 1 - ‘Address the Tax Challenges of the Digital Economy’ for public
consultation. This is one of the 15 action plans recognized by OECD for addressing the issue of Base Erosion
and Profit Shifting (‘BEPS’) practices adopted by Multinational Enterprises (‘MNEs’). The concern
regarding BEPS was first highlighted by the G20 nations in 2011 and India being a part of the G20 supports
the OECD work on BEPS.
The discussion draft suggests amendments to the OECD Model Treaty and the Commentary. The digital
economy – through the power of information, communication and technology - has created new businessmodels and advanced the ability to carry on business from various locations without physical presence.
Growth of the digital economy and Information & Communication Technology (‘ICT’) services creates
challenges for taxation as taxation rules of most countries as well as the Tax Treaties are framed to tax
profits from traditional models. Thus, the first issue that needs to be addressed is whether the digital
economy should be segmented from the rest of the Economy? The BEPS action plan concludes thatsegmenting the digital economy from the traditional economy is difficult and would require arbitrary lines
to be drawn between what is digital and what is not. The discussion draft identifies various tax issues
potentially raised by the digital economy and discusses possible actions to address them.
The options provided are primarily aimed at the prevention of the tax leakages in view of the growth ofthe digital economy and ICT services.
We recognize the efforts of G20 along with the OECD towards addressing the issues of tax challenges ofthe digital economy. However, in view of the existing Indian tax system and the legal and economic
environment in India, we foresee certain practical challenges with regard to the digital transactions.
Accordingly, we wish to bring to notice the following challenges and recommendations for your kindconsideration.
1. As per section V of the discussion draft report, various Actions on BEPS are due to be rolled out bySeptember 2015 such as Action 7 (Prevent the Artificial Avoidance of PE Status), Action 4 (Strengthen
controlled foreign company rules), etc. These comprehensive tax measures would eventually takecare of the menace of the taxation of the digital economy. This has been stated in para 208 of thesection VII of the discussion draft report as under:“In addition to the basic framework discussed above, it is expected that as described in section V, thedevelopment of the measures envisaged in the BEPS Action Plan will effectively address the BEPS
concerns that arise in the digital economy, which may substantially impact the scope of the broader
tax challenges raised by the digital economy. The results of the work on the BEPS Action Plan will

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ultimately need to be taken into account when analysing the challenges raised by the digital economy
described in section VI, and will inform decisions regarding the potential options to address themdescribed in this section. In other words, if the BEPS issues outlined in section IV are fully addressed
through the measures envisaged in the BEPS Action Plan, addressing the challenges described in
section VI may become less pressing. On the other hand, if BEPS issues are not addressed fully in thecontext of the digital economy and extremely low effective tax rates continue to be norm, thenaddressing the broader tax challenges of the digital economy becomes a more pressing issue.”
Therefore, it is recommended that first the other Actions of the BEPS should be finalized and rolled
out. Post finalization of the above policies, the tax policies in relation to the digital economy should
be revisited in view the challenges still faced from the digital economy. The same may also be
circulated again for comments.
2. India and China had expressed their opinion before the United Nations that the service PE clause in
the treaty should be modified to the effect that a service PE could be triggered even where there is
no presence in a contracting state of the personnel physically. Since this was rejected by the UN anddoes not feature as a draft action in the OECD we presume that India and China are no longer pursuingthis line of reasoning.
3. Section VII of the discussion draft report has discussed various options to address the tax challengesof the digital economy. These options are discussed as under:

Modifying the rules of exemption from Permanent Establishment (PE)Concerns

The discussion draft report proposes that the exemption contained in para 4 of Article 5 (exempting
certain specific activities from creation of PE) should not be available. The discussion daft contemplates
multiple variations which includes an altogether elimination of paragraph 4.
The prime concern around this proposal is the altogether elimination of para 4. The complete elimination
will certainly have an impact on the business conducted through traditional models. The activities whichwere solely “preparatory” or “auxiliary” in nature would also come under the tax net. Further, there
should be precise rules for distinction between core and non-core activities so as to avoid any hardship tothe existing traditional business models as the intent of the BEPS strategy is to have rules for allocation of
profits between different jurisdictions as the business conducted through digital economy spans acrossregions and each country thereby would seek to exercise right on taxation of profits based on sourcing
principles.

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Recommendations

a)There is a need to assess the impact of complete elimination of para 4 of Article 5 on the
traditional business models which are in operation since long. A complete elimination may
unsettle the settled positions since:- under many tax treaties entered into by India, the maintenance of a fixed place of businesssolely for the purpose of purchasing goods or merchandise, is not considered to be a PE.
Removing this would cause major hardships to the traditional inbound as well as outboundbusinesses and may affect the economy;- genuine activities of a liaison office for collection of information or acting as communication
channel may get hampered.

b)Modifying the rules of exemption from PE – if the exemption relating to preparatory and auxiliary
services in the PE clause is removed to plug tax leakage on account of digital business taking
shelter under this clause, it would have damaging impact on the traditional business.

c)

The distinction between core and non-core activities seems appropriate under the circumstances
and it is essential that precise rules should be framed for this purpose. This will avoid theambiguity in interpreting whether an activity forms part of the core business or not.

d)

Further it should be clarified that a core - non-core distinction is relevant only where a PE exist.

New Nexus based on Significant Digital Presence
Concerns

The discussion draft report proposes that an enterprise engaged in certain “fully dematerialized digital
activities” would have a PE if it maintained a “significant digital presence” in the economy of anothercountry. Thus, this part of the discussion draft report deals with a situation in which businesses are
conducted wholly digitally.
The major concern here is that the present rules on PE are primarily in relation to creation of a PE throughphysical presence and not due to digital presence. For an enterprise engaged in a fully dematerialised
business, a significant digital presence could be deemed to exist in a country when, for example:-

Significant number of contracts for the provision of fully dematerialized goods or services are
remotely signed between the enterprise and a customer that is resident for tax purposes;
Digital goods or services of the enterprises are widely used or consumed in the country;© Confederation of Indian Industry
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-

-

Substantial payments are made from clients in the country to the enterprise in connection with
contractual obligations arising from the provision of digital goods or services as part of the enterprise’score business; orAn existing branch of the enterprise in the country offers secondary functions such as marketing andconsulting functions targeted at clients resident in the country that are strongly related to the corebusiness of the enterprise.

This would require fundamental drastic changes in existing rules of PE under Article 5 and also calls forchanges in rules relating to Attribution of Profits under Article 7. Also, taxing of digitally sold goods due toabove stated factors is discriminatory especially where in similar circumstance, physical goods are nottaxed. Such broad factors/interpretation may also create PE of the MNEs in every country on account ofsignificant advertisers and end-user presence.

Recommendationsa)

The value attributable from digital economy business should be on the basis of functions, assets& risks and not on the basis of users for taxing digital transactions and when no such FAR exist in
India then it should not be taxed in India.

b)

Making separate rules for digital economy would unsettle the settled principles. Even today thesource state cannot tax such payments. In traditional businesses where title in goods istransferred outside India, the same is not taxable. The provision of existence of a PE based on
Significant Digital Presence on the basis that goods are widely used in the country, substantial
payments are made from clients in the country to the enterprise, etc. would unsettle the settled.

c)Rules to tax the profits arising from digital economy should not change, extend or dilute the rules
relating to traditional business. Hence, instead of changing the existing rules, new Article relating
to PE and Attribution of Profits for the tax challenges arising due to digital economy can beconsidered.

Virtual PE
Concerns

The discussion draft report prescribes that a virtual fixed place of business PE would be created when theenterprise maintains a website on a server of another enterprise located in a jurisdiction and carries on
business through that website.

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The prime concern here is that whether a mere hosting of a website on the server outside India would
create a PE of the foreign enterprise in that state where server is located. It may lead to creation ofmultiple PEs across the globe.
The discussion draft report also provides that a “virtual agency PE” would cover circumstances in which
contracts are habitually concluded on behalf of an enterprise with persons located in the jurisdiction
through technological means, rather than through a person.
In case of digital downloads wherein the customer has to accept the standard user license and no
modifications are generally permitted, in those situations, the contracts concluded through digital means
should not pose an agency PE risk.

Recommendations(a)A “virtual fixed place of business PE” should not exist merely because website is hosted in a server
located in a country as the business of the website can be carried out across the globe.

(b)

A “virtual agency PE” wherein contracts are habitually concluded on behalf of an enterprise withpersons located in the jurisdiction through technological means, rather than through a person. In
digital downloads, the customer has to accept the standard user license and no modifications are
generally permitted, thus, there should not be an agency PE as contracts are concluded throughdigital means.

(c)

The methodology of creation of PE and consequent attribution of profits should be more objective
providing clear guidance.

(d)Rules relating to creation of Virtual PE should have exemptions which provides for thesituations/scenarios under which digital transactions/business is not taxable. Exemptions similar
to para 4 of Article 5 should be provided.

Withholding of tax on Digital Transactions
Concerns

The discussion draft report recommends imposing a final withholding tax on certain payments made byresidents of a country for digital goods/ services provided by a foreign e-commerce provider. This type of
proposal is intended to address the concern of the non-taxability of e-commerce services under current
PE rules despite of substantial economic activity due to lack of physical presence in the market.

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The concern in collecting the taxes through withholding is practically challenging. In most of the ecommerce transactions, the payments are done through credit card or online credit. The buyers, in mostof the cases are the individuals. The report suggests that the financial institutions involved with thosepayments would be required to comply with withholding taxes. Keeping a track of these multiple
transactions and to determine their taxability for the purpose of withholding would be extremely
challenging.

Recommendations(a)Though this option may eliminate the subjective test on PE and consequent subjective test on
attribution of profits, this option should be used only as a means of collection of tax in cases
where a primary liability to tax exists on the foreign e-commerce provider.

(b)

Rules relating to Foreign Tax Credit under the treaty and under domestic tax law should be
modified to give effect to WHT on digital transaction.

(c)

Alternatively, taxes may be in the form of an indirect levy (i.e. a transaction tax) as opposed to awithholding tax. This should not be difficult to implement and monitor.

General comments(a)

No new rules required to tap digital economy as Controlled Foreign Corporation rules and antiavoidance rules are likely to take care of most of the existing concerns.

(b)Presumptive taxation regime may be imposed on the foreign companies undertaking e-businessin India. This will simplify the determination of the income chargeable to tax since determinationof income and expenses for arriving at profits chargeable to tax on a net basis could be a difficult
exercise.

(c)

All business have gone digital in some way or the other. Even the brick & mortar businesses are
digital. The traditional businesses also have significant IPRs structured in low/no tax jurisdictionsin the same way as the digital economy. Any artificial demarcation for digital economy would
affect the existing traditional businesses as well.

(d)

The Indian domestic law needs significant modification as taxation of digital economy isdependent on characterization of income, for example, whether income earned with respect tothe use or sale of software is royalty or business income or capital gains, whether data
warehousing could be characterized as royalty, fee for technical service or business income, etc.

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(e)

India treats software sale as royalty and levies withholding tax which is objected by many
countries such as USA. Where other countries levy tax on Indian software businesses under thedigital economy rules it will have to be assessed if India would provide the tax credit for thepayment of such taxes abroad. Also, since many software businesses are under tax holiday
regime, they would not be able to avail the tax credit which may lead to double taxation of theincome.

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The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to thedevelopment of India, partnering industry, Government, and civil society, through advisory and consultative
processes.
CII is a non-government, not-for-profit, industry led and industry managed organization, playing a proactiverole in India's development process. Founded over 118 years ago, India's premier business association
has over 7100 member organizations, from the private as well as public sectors, including SMEs and MNCs,
and an indirect membership of over 90,000 companies from around 257 national and regional sectoral
associations.
CII charts change by working closely with Government on policy issues, interfacing with thought leaders,and enhancing efficiency, competitiveness and business opportunities for industry through a range of
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on diverse issues.
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integrated and inclusive development, in affirmative action, healthcare, education, livelihood, diversity
management, skill development, empowerment of women, and water, to name a few.
The CII Theme for 2013-14 is Accelerating Economic Growth through Innovation, Transformation,
Inclusion and Governance. Towards this, CII advocacy will accord top priority to stepping up the growthtrajectory of the nation, while retaining a strong focus on accountability, transparency and measurement inboth the corporate and social eco-system, building a knowledge economy, and broad-basing development
to help deliver the fruits of progress to many.
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Economic Policy & Taxation
Confederation of Indian Industry

The Mantosh Sondhi Centre
23, Institutional Area, Lodi Road, New Delhi – 110 003 (India)
T: 91 11 45771000 / 24629994-7 • F: 91 11 24626149
E: ecoresearch@cii.in • W: www.cii.in

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CII Helpline Toll free No: 1800-103-1244© Confederation of Indian Industry
131

9OECD Centre on Tax Policy and
Administration
2, rue André Pascal
75775 Paris
FranceSubmitted byemail: CTP.BEPS@oecd.org

Confederation of Swedish Enterprise – Comments on theOECD Public Discussion Draft entitled “BEPS Action 1:
Address the Tax Challenges of the Digital Economy” 24
March 2014 – 14 April 2014
The Confederation of Swedish Enterprise is pleased to provide comments on theOECD Discussion Draft entitled “BEPS Action 1: Address the Tax Challenges of theDigital Economy” 24 March 2014 – 14 April 2014 (hereinafter referred to as theDraft).

General Comments
ACTION 1 – Address the Tax Challenges of the Digital Economy“Identify the main difficulties that the digital economy poses for the application ofexisting international tax rules and develop detailed options to address these
difficulties, taking a holistic approach and considering both direct and indirect taxation.
Issues to be examined include, but are not limited to, the ability of a company to havea significant digital presence in the economy of another country without being liable totaxation due to the lack of nexus under current international rules, the attribution ofvalue created from the generation of marketable location-relevant data through theuse of digital products and services, the characterisation of income derived from new
business models, the application of related source rules, and how to ensure theeffective collection of VAT/GST with respect to the cross-border supply of digital
goods and services. Such work will require a thorough analysis of the various
business models in this sector.”

Issues to be examined include, but are not limited to132

2 (8)

a) the ability of a company to have a significant digital presence in the economy
of another country without being liable to taxation due to the lack of nexus
under current international rulesb) the attribution of value created from the generation of marketable locationrelevant data through the use of digital products and servicesc) the characterisation of income derived from new business modelsd) the application of related source rules, and how to ensure the effective
collection of VAT/GST with respect to the cross-border supply of digital
goods and services
Before going into any specifics, the Confederation of Swedish Enterprise would liketo emphasise the importance of distinguishing between income tax and consumption
taxes (VAT, GST, etc.). In the OECD framework and as a global standard, income
tax is based on residence and source. Consumption taxes on the other hand aim at
taxing consumption. Levied on the supply of goods and services, VAT/GST aretaxes that are self-declared and business serves to collect these taxes for thegovernment. As clearly stated in the BEPS Action Plan, it is not the purpose of the
BEPS project to change existing international standards on the allocation of taxing
rights on cross-border income. Consequently, the place of consumption is not andshould not be a factor when allocating income for income tax purposes. Instead, theplace of consumption is relevant for consumption tax purposes such as VAT/GST.
The combination of origin based income tax and destination based consumption tax
allows for a reasonable allocation of taxation rights between the country of origin
and the country of destination. This way, the income tax and the consumption taxes
complement each other. This of course is not always the case since there arecountries that do not have a consumption tax. That however is not an issue that
requires action on a global level. Rather, this is a national issue to be solved in the
countries in question.
That being said, The Confederation of Swedish Enterprise believes that the Ottawa
taxation framework principles (neutrality, efficiency, certainty, simplicity,
effectiveness, fairness and flexibility) constitute an appropriate framework whenanalysing the tax challenges. While it is clear that technology has rapidly evolved
since 1998, the Ottawa taxation principles for electronic commerce outlined above,and developed under the leadership of the OECD CFA in 1998, remain relevant andvalid.
We share the view presented in the Draft that it is not possible to ring-fence thedigital economy. However, the Draft also tries to identify features that distinguish thedigital economy. In our opinion, the features identified in the Draft are neither
accurate nor limited to the digital economy. They may be relevant for somebusinesses in the digital economy, but they are not likely to be limited to the digital
economy or to cover all aspects of the digitisation of the economy. Considering thecomplexity of this topic and the speed with which business models evolve, thefeatures identified are likely to become obsolete in the near future. Consequently,
we believe that the OECD should not develop any new guidelines,
recommendations or amendments to the OECD Model Convention based on the
Draft. Indirect tax issues referenced in the BEPS Draft are already being reviewed
by the OECD through its existing WP9 efforts related to B2C, and are also being
discussed in OECD work on international VAT/GST guidelines. Business is fully
engaged in that process.

1333 (8)

In fact, it is our firm opinion that no specific rules are required for the digital economy
as a “sector”. Considering that it is not possible to ring-fence the digital economy, we
believe that it would be highly inappropriate to develop separate principles or rules
for taxation of the digital economy from those applied to businesses engaged in the“conventional” economy.

Specific Comments
Nexus
The Draft points out that it is possible to be heavily involved in the economic life ofanother country without having a fixed place of business or dependent agent. In
most cases, neither tax treaties (OECD Model Tax Convention Articles 5 and 7) nor
domestic laws allow a country to tax income from a non-resident if there is not
sufficient nexus. Sales to customers located in that jurisdiction would not constitutea sufficient nexus.
It is also stated in the Draft that the digital technology has had a significant impact
on how activities are carried out, by enhancing the ability to carry out activities
remotely, increasing the speed at which information can be processed, analysed
and utilised, and, because distance forms less of a barrier to trade, expanding thenumber of potential customers that can be targeted and reached. According to theDraft, this increases the flexibility of businesses to choose where substantial
business activities take place, or to move existing functions to a new location, even
if those locations may be removed from both the ultimate market jurisdiction andfrom the jurisdictions in which other related business functions may take place.
In our opinion this is true for all businesses and not only limited to the digital
economy. Globalisation and the reduction of cross border obstacles allow
businesses of all kinds to locate various functions in the most appropriate locations.
Access to natural resources, cost of labour, capital costs, political stability, businessclimate, taxes etc. are all factors that are taken into account in such decisions. Thisis however not a matter of base erosion or profit shifting. This is sound business
management aimed at enhancing economic efficiency and value. The only reason
for countries to prevent this global aspect of modern business would be forprotective reasons, which is contrary to the purpose of the OECD. Taxes must not
be used to prevent trade and investments.
We do not consider the fact that a business can provide customers in a jurisdiction
with goods and services, without a physical presence in that jurisdiction, to be anissue of great concern. Income taxes are not and should not be based on thelocation of customers. In our view this could potentially be an issue in a formularyapportionment situation but not as a BEPS concern. Given the fact that the Draft
does not seem to clearly make this distinction, we would like to make somecomments with respect to the fundamental income tax principles.
As previously stated, income tax is based on residence and source. Clearly, thetraditional division of income based on factors such as functions of R&D, production
and marketing is relevant also for the digital economy. Customers and markets are
obviously necessary for any business, irrespective of whether a product is sold overthe counter, by mail order through a catalogue or by digital means. A market is acondition of doing business but does not constitute functions, assets, risks or134

4 (8)

income by itself. Markets with many customers having disposable incomes may
provide a business opportunity, but that is all it is: an opportunity. In order to turnthose opportunities into income companies must develop products that customers
want to buy, find their customers, and deliver their products. Companies that cannot
perform these functions will not earn income. The income that companies do earn isattributable to the performance of those functions, not the mere existence of themarket. If the only thing that happens in the market jurisdiction is customer activity, it
is difficult to see how, under traditional notions of income taxation, any income (asopposed to other bases of taxation) can be attributable to the market jurisdiction.
This is true both for the digital economy and for the conventional economy.
Thus, the fact that a company provides goods or services to customers in a country
does not by itself constitute a jurisdiction to levy income tax. If there is no need for aphysical footprint, then the infrastructure of that country is not utilised and,
consequently, that country should not have a jurisdiction to tax that income. The
country where consumption takes place may, however, levy a consumption tax.
We understand that it is not the purpose of the BEPS project to alter fundamental
principles of international taxation. Some of the options tabled in the Draft imply
reallocation of income taxation to where the consumption occurs, even though there
is no nexus. This would mean that the jurisdictions claiming the right to tax undercurrent principles (based on function, assets and risks) will have to give up all or partof that right. These are most likely to be small economies with substantial exports
and small markets of their own. Should those countries choose not to give up thatright, double taxation would inevitably be the result. The negative revenue
implications for a large number of countries could be substantial. In fact, many
countries with small domestic markets could experience a considerable erosion of
their national tax base as a consequence of actions taken by the largest economies
represented in G20, taking actions in the name of the BEPS project.
Furthermore, we believe that The Draft contradicts other actions of the BEPS
project. Several of the action points in the BEPS project require more substance inorder to grant taxpayers the allocation of income to a jurisdiction or to grant treaty
benefits. However, in the Draft the OECD seems to search for ways to allocate
income to a jurisdiction where the taxpayers have no or very little substance (assets,function or employees). This is a contradiction in objectives that should be spelled
out and explained. The risk of extra-territorial taxation should also be addressed andits consequences analysed. This has unfortunately not been done in the Draft.
We would furthermore like to make some specific comments with respect to theoptions in Chapter VII of the Draft related to nexus issues.
•

PE Exemptions in para 4 of Article 5 of the OECD Model Convention
The Confederation of Swedish Enterprise strongly opposes any amendmentof para 4 of Article 5 of the OECD Model Convention. Para 4 provides
certainty with respect to the activities listed therein. Should the paragraph beamended or should the paragraph or parts of it be deleted, countries may
consider all activities that currently fall under its scope as constituting apermanent establishment. The impact on conventional businesses would besevere. Businesses would have to re-evaluate all such activities and assess
whether they would constitute a permanent establishment. This would resultin either cost intensive restructuring or in a significant increase in the numberof permanent establishments.

135

5 (8)

We strongly question whether such an extension of the permanentestablishment concept would be feasible. If this would be the case, every
enterprise would be required to file a tax return in every country where thatenterprise has sales. In practice, this would prove to be very difficult, if not
impossible, especially for SMEs. We worry that further BEPS concerns
would emerge as a result of the difficulties to attribute cost deductions,losses etc. to all the countries where an enterprise is considered to have an
permanent establishment.
Furthermore, if this option was adopted, the increase in the number ofpermanent establishments would most likely require businesses to register
for VAT purposes in every country where they would be deemed to have apermanent establishment. Tax administrations tend to require a VAT
registration where a permanent establishment for income tax purposes
exists, even though there is no link between the two. This would further add
to the administrative burden for businesses.
•

Significant Digital Presence Nexus
The Confederation of Swedish Enterprise strongly opposes the option toestablish an alternative nexus for businesses to address situations in whichbusinesses are conducted wholly digitally. This is, in our opinion, contrary to
the conclusion in the Draft that the digital economy cannot be ring-fenced
and would create great uncertainty in practise. Furthermore, an action thatwould differentiate wholly digital activities from other activities would becontrary to the neutrality principle in the Ottawa Framework.

•

Virtual PE
As previously mentioned, there is in our opinion no jurisdiction for a country
to tax income where there is no physical nexus to that country.
Consequently, The Confederation of Swedish Enterprise does not believethat there is justification for and strongly contest a virtual permanentestablishment concept. This is a matter of formulary apportionment or
splitting the cake rather than a BEPS concern. Furthermore, it would be very
difficult to find sound and acceptable rules for allocating profits to a virtualPE.
The concerns in relation to para 4 of Article 5 above are applicable to thevirtual permanent establishment concept as well. A virtual permanentestablishment would also lower the threshold significantly and, as a result,lead to in a significant increase in the administrative burden for businesses
and an increase in double taxation cases worldwide.

VAT Collection
CFA have requested WP9 to develop guidelines for applying the destination
principle to cross-border supplies of services and intangibles to final consumers.
The Confederation of Swedish Enterprise endorses the OECD’s work on VAT
Guidelines, and would like to stress that this is the venue for further work on the
topic at the global (OECD) level. We would recommend that governments take acloser look at the international VAT/GST guidelines.

1366 (8)As previously stated, The Confederation of Swedish Enterprise believes that theappropriate means of taxing consumption is with consumption taxes rather thanincome taxes. VAT and other consumption taxes do not require allocation ofrevenue, costs, losses, etc. This difference from income tax makes consumption
taxes more suitable in this respect.
The Draft identifies two main challenges with respect to VAT collection, namely the
exemptions for import of low valued goods and the remote digital supplies to
consumers.
With respect to the first mentioned challenge, we question whether this is an issue
that warrants attention from the OECD. As stated in the Draft, a low value thresholdexists because the administrative cost associated with collecting the VAT likely
outweighs the potential VAT revenue. The risk of abuse should be taken into
account by countries when calculating the appropriate threshold. If countries findsuch a threshold in their domestic VAT systems problematic, they are free to adjustor remove the threshold in question. It should also be mentioned that the need for a
threshold is reduced with the reduction of the compliance and administrative costs ofcollecting the tax. This being the case, we believe that the best way forward here isfor governments and the OECD to aim at reducing the compliance andadministrative burden for businesses.
With respect to the challenge regarding remote digital supplies to consumers, weunderstand the concern expressed in the Draft. We believe that the appropriate
means of addressing this issue is by enhanced administrative cooperation between
tax administrations. Enhanced administrative cooperation would help the consumer
countries tax administration to enforce and collect the VAT due. However, it should
be noted that the framework with respect to distance selling requires a certain levelof legal certainty and a feasible registration process. Whilst this may be the case for
EU countries, the OECD should take into account that not all the OECD member
countries have well developed VAT or similar systems. It is thus of utmost
importance that the OECD keeps encouraging countries to simplify registration
regimes and administrative and compliance burdens in general.
Finally, there is one very important point to highlight when it comes to supplierregistration as a collection mechanism for VAT/GST purposes. As mentioned in theInternational VAT/GST guidelines, a registration for VAT purposes by itself does notconstitute a permanent establishment. It is the experience of more and morebusinesses that, by acting as VAT/GST collectors for governments, foreign VAT
registrations are misused by governments and are being re-qualified as permanentestablishment for corporate tax purposes. This forces businesses to pay corporate
tax in jurisdictions where, based on international direct tax principles, no corporate
tax should be due. In the long term, and if this continues to happen on a larger
scale, such developments could undermine the efficient collection of VAT/GST by
dissuading businesses from registering for VAT/GST purposes.
Withholding taxes
Another option suggested in the Draft is to impose a withholding tax on certain
payments made by residents of a country for digital goods or services provided byforeign e-commerce providers.

1377 (8)

It is not further specified in the Draft how such a withholding tax would be designed
other than that the financial institutions involved with those payments could be theones to bear the compliance burden.
In theory, levying a withholding tax may sound appealing since it would not require
net income filing and allocations of revenue and costs. However, this option is also
in contradiction with the conclusion that the digital economy cannot be ring-fenced.
In addition, a withholding tax does not stand up to the Ottawa taxation framework
conditions. Furthermore, we question whether it is appropriate for the OECD tosuggest taxes that would be imposed on foreign providers and limited to the digital
economy. The risk of extra-territorial taxation must be addressed and analysed.
The digital economy, or the digitisation of the global economy, continues to evolve.
Generally, there is no special legislative regime preventing small enterprises with
innovative ideas from emerging and becoming successful. In our view, these small
and innovative enterprises are essential in the modern economy. This being thecase, it is neither desirable, nor appropriate to increase the threshold for starting a
digital business. A withholding tax on digital goods and services would discourage
rather than promote cross border trade, investments and economic growth. A broadbased consumption tax, which does not make any difference between foreign anddomestic providers and between digital goods and services and conventional goods
and services, would in our opinion be preferable compared to a withholding tax.

Concluding remarks
To widen the scope of the PE concept would result in a completely new system forallocating international taxation rights across countries. Considering the complexityof this topic and the speed with which business models evolve today, a specific setof rules for the digital economy does not seem warranted or achievable. Taxes mustnot be used as barriers to trade and investment to the detriment of the welfare of
citizens. The digital economy is an area where a more in-depth policy debate on the
merits of direct/indirect tax solutions is needed. It is also essential to analyse the riskof extra-territorial tax situations. Furthermore, making consumption the basis forincome taxation would have significant revenue implications for a large number ofcountries, in particular for small countries with a limited domestic market.
The BEPS Action Plan states that actions are not directly aimed at changing theexisting international standards on the allocation of taxing rights on cross-borderincome. However, several of the action points calls for greater reliance on where
economic activity takes place and in Action 1 the importance of actual sales fortaxable profits is emphasised.
Market jurisdictions argument for sales seems to be that the value attributable to adigital transaction is based solely on a large market, i.e. a large number ofconsumers. Consequently, the income should be considered as derived from thatmarket jurisdiction and taxed therein. The argument that income can be taxed on thebases of the location of sales and irrespective of any substance (presence of assets,functions and employees) is in sharp contrast to the BEPS approach, requiring andcalling for more substance in order for companies to allocate income to low tax
jurisdictions. Although markets are essential to businesses, they provide bythemselves nothing more than a business opportunity to be explored. They do notconstitute a basis for income taxation. However, sales and consumption are138

8 (8)

justifiably important sources of revenue for countries relying on consumption taxes
like the VAT, GST or other consumption based taxes.
For smaller open economies like Sweden, attributing sales an increased importancewhen assessing where profits should be taxed, would result in substantial revenue
losses from the corporate income tax. It would deprive governments in suchjurisdictions with tools, within the framework of the corporate tax system, to keep
parent companies and central functions within the country. In the long run it could
result in the reallocation of production and activity which would further diminish tax
revenues for small open economies. This is simply not acceptable, in particularsince smaller countries are not members of the G20 and therefore have little or no
influence on new rules but would encounter the largest tax revenue losses.
On behalf of the Confederation of Swedish Enterprise
April 11, 2014

Krister Andersson
Head of the Tax Policy Department

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47 – 49 Pearse Street, Dublin 2, IRELAND

OECD BEPS Project2, rue André Pascal
75775 Paris Cedex 16
FranceBy eMail to ctp.beps@oecd.org

14 April 2014
Dear Sirs

COMMENTS ON DISCUSSION DRAFT ON ACTION 1 (THE TAX CHALLENGES OF THE

DIGITAL ECONOMY) OF THE BEPS ACTION PLAN
We refer to the above titled document.

We note the request for comments on page 7 of the Discussion Draft. In the time available, it is
not possible to address all of the issues identified in the request for comments, nor indeed tocomment in adequate detail on all the points raised. It is highly unsatisfactory that such a shorttimeframe be allowed for analysis and comment on a document of this complexity with suchpotentially far-reaching consequences. We are therefore limiting our comments on thisoccasion to certain key observations.

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General Observations
1. It might have been expected that the proposals would seek to address the more
controversial types of tax planning noted in the public domain by some multi-nationals.
However it seems to us that the proposals go much further. If followed through they
could result in a fundamental change to the business model for many companies, major
multinationals and smaller indigenous exporters of digital products and services alike.

2. The most challenging proposals are those which involve a redefinition of the current
Permanent Establishment concept, for example the introduction of a “virtual”
permanent establishment. The consequences would be that for income tax purposes,
the recognition of company profits would move away from where value is actuallycreated to the locations where products are sold or consumed. This is a fundamental
revision which seems at odds with the objectives of other Plan Actions which seek toalign the location of profits with value creating activities. For reasons which are
explored further below, we consider that the better approach for businesses which haveno physical presence in the consumer market would be to retain income tax source
taxation with destination based VAT/consumption taxes. This would seem to us to pose
least risk of developing proposals which cause double taxation and of creating a barrier
to flows of international trade.

3. There are echoes of the thinking described at Point 2. above behind concepts in theOECD discussion draft pursuant to Action 6 (Prevent Treaty Abuse). Such proposals,
when viewed alongside proposals for Limitation of Benefits tests which focus on local
ownership would severely prejudice international trade. Companies operating ineconomies with large volumes of international trade go beyond their geographicalbounds to source both markets and capital. The ownership restriction as described in
the Action 6 discussion draft is only workable with considerable derogations andexclusions so as not to be detrimental to international trade. Similarly, in the case of thedigital economy proposals, care must be taken that any measure does not create abarrier to international trade. This is especially the case for the digital economy which
offers such exciting opportunities for growth in international trade.
4. We are not convinced that digital economy companies should be taxed differently, andwe see this as a departure from the Ottawa principles. Based on the findings presented
in the draft in the report, it seems to us that most businesses are now digital economy
companies at least to some extent, as they advertise and take orders online etc. It can be
anticipated from the trends described in the draft report that the extent of permeationof the digital economy throughout all business sectors will only grow.

5. Many Irish accountants are concerned with commercial issues on an all island of Irelandbasis, dealing with both the Irish and UK tax jurisdictions. Both Ireland and the UK are
major exporters of information and communication technologies. From the figures
published in your discussion draft, the exports by these two countries in the sector
constitute almost 20% of the world market. The proposals in your discussion draft are
therefore of considerable concern to us. In our view, they would of themselves distortand potentially erode the existing tax base of both countries. The proposals would
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similarly prejudice other countries with similar sectoral profiles – a significant export
presence and a relatively small domestic market.

Specific Comments
The discussion draft invited comments on a number of particular issues which it had addressed.

Whether it is possible to ring-fence the digital economy from the rest of the economy, and
if not, whether specific types of digital transactions could be identified and addressed
through specific rules;
taken with

Whether the Ottawa taxation framework principles identified above are an appropriate
framework for analysing options to address the tax challenges, and whether and how theyshould be supplemented.
The discussion draft reflects the emphasis placed by the Task Force on the conclusions of the1998 Ottawa conference:

The Task Force considers that these principles are still relevant today and,supplemented as necessary, can constitute the basis to evaluate options to address thetax challenges of the digital economy.

(at paragraph 7 page 6)

However, there may be an important omission from these principles as quoted in the discussion
draft. The full text of the taxation principles as agreed as Ottawa reads as follows:

The same principles that governments apply to taxation of conventional commerce
should equally apply to e-commerce, namely: [Neutrality, Efficiency etc as recited at Box
1] 1

The Ottawa Ministerial Conference in 1998 therefore seems to have dismissed the drawing ofany distinctions between conventional commerce and e-commerce. As the ministers put it –Government intervention, when required, should be proportionate, transparent,
consistent and predictable, as well as technologically neutral 2

1 Implementing the Ottawa Taxation Framework Conditions 2001, OECD 2001, ISBN 92-64-18595-X atPage 10
2 At page 5 of Ottawa conference conclusions – SG/EC(98)14/FINAL142

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Of course time has elapsed since then. For all the forward thinking evidenced in 1998 by the
Ottawa participants, it is unlikely that they foresaw the extent to which e-commerce would
develop in the following 15 years. We consider that the draft report, having taken as its starting
point the Ottawa principles, should equally reflect the key agreement that there be no
distinction between conventional commerce and e-commerce. We do not think that the findings
set out in the report present a convincing case for drawing a distinction between thosebusinesses that are heavily reliant on the digital economy and other business sectors.
This viewpoint was also expressed by us in our contribution to this process by letter of 19
December 2013. One important facet of the work being undertaken should be to define moreclearly the industries and entities involved when considering digital economy issues. It isapparent that there has been a coherent attempt in the discussion draft to better analyse digital
economy issues, which we acknowledge. However, we also pointed out the importance of thefirst principles of taxation. It seems that this concern was an important outcome of the Ottawa
conference and should be re-emphasised in the final version of the report.
As identified in the discussion draft, there are many ways in which businesses can engage in ecommerce activities. In practice, it is by now unlikely that a sensible distinction can be drawn
between digital economy business and what the Ottawa Conference termed conventionalcommerce. If this distinction is pursued, the inevitable outcome is that many businesses will
suffer a compliance burden under two separate tax regimes – one applicable to their digital
economy activities, and another to everything else. This would surely be inefficient forbusinesses and Revenue Authorities alike and must serve to damage international trade.

The ability of the measures developed in the course of the BEPS Project and the current
work on VAT/GST to address BEPS concerns in the digital economy;
The BEPS Action Plan mandated work “to ensure the effective collection of VAT/GST withrespect to the cross-border supply of digital goods and services.”
VAT and GST are taxes on consumption. For EU VAT purposes, taxes are levied in the country as
specified by the EU VAT directive depending on the nature of the supply, and the nature of the
supplier and the receiver (B2B, B2C etc). Short of relocating its consumers or changing thenature of its goods and services, it is impossible for a business to erode the VAT base. Often
neither such actions are practical. We note in particular the recent EU initiatives in connection
with the Mini One Stop Shop (MOSS) which we are confident should serve to eliminate one of
the last remaining barriers in establishing an efficient mechanism for the collection of VAT at
the point of consumption.
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It is important to recognise the distinction between ineffective consumption tax legislation, andineffective consumption tax collection mechanisms. There can be a risk that overly onerous
direct and indirect tax measures will simply mask, or attempt to make redress for, deficiencies
in collection mechanisms at the point of sale to the consumer.

The options to address these broader tax challenges discussed by the Task Force andsummarised in the discussion draft;
We have considered options advanced at Paragraphs 211, 212 and 217
Paragraph 211
The revision to the exclusions in the definition of permanent establishment would mean thathaving a storage facility for stock, or a purchasing division, or an advertising and research
department in a country would make the company liable for tax in that country.
Paragraph 212

A “dematerialised digital activity” where digital services are provided, contracts are concluded
on-line, payments are made electronically and the customer is indifferent to the location of the
supplier could be deemed taxable in the location of the customer. This is a proposal for little
other than a consumption tax framed as a direct tax. It poses a real risk of double taxation.

Paragraph 217

A “virtual permanent establishment” – where services are provided and contracts concluded
remotely could be deemed taxable in the location of the customer.
All of these proposals are unacceptable as they represent a fundamental change to taxation of
the profits of companies by aligning the taxation of company profits away from where value iscreated to locations where products are sold. We consider that the best model to promote andsupport international trade remains a combination of income source taxation with destination
based sales and consumption taxes. This appears to present the least risk of double taxation andof adding more complexity and uncertainty that could hinder business taking advantage of theopportunities for growth which are afforded by developments in the digital economy.

Closing Comments
You may wish to note that this response is from a representative body. The Consultative
Committee of Accountancy Bodies – Ireland is the representative committee for the main
accountancy bodies in Ireland. It comprises Chartered Accountants Ireland, the Association ofChartered Certified Accountants, the Institute of Certified Public Accountants in Ireland, and the

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Chartered Institute of Management Accountants, which represent a combined membership ofsome 40,000 accountants. Brian Keegan, Director of Taxation at Chartered Accountants Ireland(brian.keegan@charteredaccountants.ie, +353 1 6377 347) may be contacted if any further
details in relation to this letter are required.
We have already offered observations, as noted earlier, in our letter of 19 December 2013, andin our letter to your colleagues of 9 April 2014 in the context of BEPS Action 6.

Yours faithfully

Paul Dillon, Chairman, CCAB-I Tax Committee

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Tax Treaties, Transfer Pricing and
Financial and Transactions Divisions
OECD/CTPA
14 April 2014
Comments on the BEPS Action 1 Draft of 24 March 2014 (digital economy)
By Gaetano Pizzitola, Crowe Horwath Italy - Partner in charge of Cross-Border Tax Services 1

Dear Sirs,
We are pleased for the opportunity to submit our comments on the subject matter (the “Draft”).
The Draft contains a thorough analysis of empirical evidence on the digital life every human being
is increasingly living within, whether in cosmopolitan cities or in the smallest underground village ofthe outback. It is not only the economy yet the entire daily life that is more and more digitally
virtualised.
As a result, it is welcome paragraph 59 of the Draft whereby it acknowledges thatAs digital technology is adopted across the economy, segmenting the digital economy isincreasingly difficult. In other words, because the digital economy is increasingly becoming
the economy itself, it would be difficult, if not impossible, to ring-fence the digital economy.
Attempting to isolate the digital economy as a separate sector would inevitably require
arbitrary lines to be drawn between what is digital and what is not.
The Tax Force has identified three major options to address the tax treatment of digital businesses andtransactions:• The permanent establishment approach (“PE”) with its variations including restrictions to the
PE exemption rules, a new concept of digital PE or a similar virtual PE under the traditionalframework of the fixed place and the agency PE concepts or the otherwise labelled on-site PE;
1

Comments are sent as partner in charge of Cross-border Tax Services of SASPI - Studio Associato Servizi Professionali
Integrati, Italian member firm of Crowe Horwath International providing tax and legal services in Italy, and on behalf ofthe latter Italian firm.
Avvocati: Francesco Accomando, Fabio Ambrosiani, Ettore Bonaccorsi, Annalisa Cappiello, Fabrizio Filì, Elsa Gentile, Patrizia Gozzoli, Francesca Gravili, Thomas Heller,
Giusi Lamicela, Paolo Lisi, Diego Lorenzetti, Giuseppe Francesco Lovetere, Silvia Lucantoni, Carlo Alberto Marchi, Alessandro Mulinacci, Prof. Angelo Pandolfo, Gaetano
Pizzitola, Giuseppe Rigano, Flavia Scarpellini, Sergio Starace, Marialucrezia Turco; Dottori Commercialisti: Roberto Baudino, Emanuele Borgonovo, Flavio Brenna,
Alessandra Cislaghi, Gennaro Di Noia, Daniele Di Paolo, Carlo Dragani, Stefania Fregonese, Barbara Gado, Loredana Genovese, Michele Ghiringhelli, Stefano Luvisutti,
Roberto Munno, Antonio Petrillo, Fausto Piccinini, Stefania Saccone, Francescomaria Serao, Cristina Seregni, Antonio Sgroi, Andrea Turati; Ragionieri: Luciana Barbara Dolci,
Gian Paolo Giannini, John A. Stewart; Of Counsel: Prof. Ben J.M. Terra, Prof. Tiziano Treu, Prof. Armando Tursi

SEDE LEGALE: VIA DELLA MOSCOVA, 3 - 20121 MILANO - CODICE FISCALE E PARTITA I.V.A. 13177810150
UFFICI: MILANO - ROMA - VENEZIA

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Member Crowe Horwath International••

A withholding tax approach imposing a final withholding tax on cross-border digitaltransactions, and/or
The consumption tax approach.

The first two income tax approaches may overlap with the third one, which indeed has perhaps been
the main source of concern by leading to inequality and unfair competition in the local market,
especially in the European Union. It is only from 2015 that one of the main cause of EU tax
shopping unbalance between member States will be addressed with the introduction of new
measures ensuring that consumption taxes such as VAT will result in taxation in the jurisdiction
where consumption takes place.
Consumption Tax
Consumption tax is probably the most urgent area of attention as cross-border B2C transactions,particularly if characterising as supply of services, may distort competition in the local markets if noeffective mechanisms ensuring tax charge in the market of consumption is provided for.
Simplified registration regimes and thresholds as outlined under paragraph 3.5 of the Draft will haveto balance the need of ensuring equal treatment of local and foreign suppliers from a consumption tax
standpoint and the minimization of compliance burden on businesses.
As payments of remote digital supplies to consumers ordinarily take place through credit cards oronline payment mechanisms, wonder whether withholding VAT mechanisms may be provided for.
As online resellers do trade products and services through authorised paying agents, the latter may act
as withholding agents for the payment of any VAT or any further consumption tax embedded in thesale price to consumer.
Use of foreign bank accounts to somehow disguise the place of consumption may be counteracted
through various forms of blocks if the place of delivery does not match with the place of credit card
issuer and/or red flags embedded mandatorily in the software tools authorized for use by online
resellers.
The current level of sophistication and enhancement in the payment systems will guarantee an
effective application of withholding mechanisms to ensure collection of consumption taxes on sales to
end consumers.
If consumption tax enforcement is a critical area for protecting local businesses from unfair
competition through the use of offshore trading, we are sceptical, by contrast, on any attempt to
introduce specific measures in the area of income taxation, particularly both with respect to thenotion of permanent establishment and income withholding taxes.
Income Withholding Tax on Digital Transactions
Paragraph 218 of the Draft mentions that the introduction of a final withholding tax on payments ofdigital goods and services to foreign suppliers has been suggested. Such an income withholding tax
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approach has apparently been perceived by someone as a potential solution addressing BEPS
concerns thatit may be possible to maintain substantial economic activity in a market without being taxable
in that market under current permanent establishment rule due to lack of physical presence inthat market.
The above statement echoes the eternal struggle between source Country vs residence Country forthe taxation of business income and, indeed, it is the underlying BEPS concern, which is clearlytargeting no tax or low tax jurisdictions interposed by multinationals between their
headquarters or main business locations and their market of sales.
Withholding taxes had historically been found as a simple mechanism for capital import Countries,
broadly, to collect a fair share of revenues from foreign companies investing their capital assets into
the local market by extracting cash through forms of passive income such as dividends, interest androyalties and, in certain jurisdictions, on lease of movable assets and/or technical service fees.
OECD Countries have opposed so far any withholding tax at source on any form of active
income. Indeed, the OECD has gradually reduced the scope of withholding taxes on passive income
and the latest OECD Model Treaty, indeed, provides for withholding tax only on dividends, strictly
speaking, although many Countries still apply the older versions of the OECD Model in their tax
policy and treaty negotiations, whether or not consistently with the current development of their local
economy as a capital import or capital export Country.
The introduction of a withholding tax on digital transactions would somehow invert the trend byextending the scope of withholding taxes to transactions deriving from active business, eg, ecommerce of goods or services such as software licenses, cloud computing, etc.
BEPS pursuit is a symptom not only of concerns but also of uncertainty about international tax
policies. New phenomena such as the digital economy raise concerns as it is typical of any new
phenomenon previously unknown to a community. Concerns increase uncertainty about any new
phenomenon.
Withholding taxes at source are tax tools for capital import Countries. As stated, they havehistorically been applied on passive income sources such as dividends, interest and royalties. They
were developed at times where States had full sovereignty on their tax policies and local legislation
also provided for stringent exchange control mechanisms. Capital export Countries haveprogressively removed withholding taxes from their treaty policy by maintaining those mechanisms intheir domestic legislation. The USA have been one of the best examples for consistent policy-driven
application of such a two-layer policy: withholding tax in the domestic legislation vs treaty
exemption.
Countries of the EU have by contrast accepted the elimination of withholding taxes and other taxation
at source on the same sources of income such as dividends, royalties and interest within
multinationals.
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The introduction of a withholding tax on digital transactions may address concerns of the source
Country on the one hand, but it raises a number of key questions such as:• What level of substantial economic activity in the market does trigger the withholding tax
liability;• How to apply it within the EU and/or other free movement zones;• The impact of any foreign withholding tax incurred by domestic company doing businessabroad, ie, the reciprocity principle.
The first question raises what really would be the substantial activity locally that should trigger thewithholding tax liability to the foreign supplier. Such a withholding tax approach looks like an easy
fix to raise revenues. However, what substantive rationale would allow justifying the withholding
tax levy from a jurisdiction to tax standpoint? If the rationale would be that the foreign businesswould benefit from substantial sales in the domestic market, we wonder whether it would de facto
make an income tax a consumption tax. Discussions about digital economy have somehow been
influenced by the political actions against Amazon, Facebook, Google, etc. They are digital giants
nowadays but they are amongst the pioneers of the digital economy, which has benefited largely
consumers all over the world. Would they have been able to grow up to their current level if they had
to suffer withholding taxes on their sales cross-border?
Withholding taxes generally are not creditable when companies are in a loss position, which istypically the case of any start-up. Applying withholding taxes on digital transactions would hamper
the market development with obstacles and barrier entry to newcomers. Paradoxically, theintroduction of a withholding tax nowadays would favour giants such as the usual suspects for
BEPS guillotine by imposing cash flow disadvantages to new players. Rather than favouring local
competition the withholding tax would unfairly restrict market competition and affect consumers
paying higher prices.
Paragraph 119 of Draft states that
corporations operating only in domestic markets or refraining from BEPS activities may face acompetitive disadvantage relative to MNEs that are able to avoid or reduce tax by shifting theirprofits across border.
The above statement is a pillar of the BEPS project as a whole and can be found in several prior
BEPS documents. Withholding taxes cannot be seen as an instrument for levelling the playing field.
By contrast, they are discriminatory in nature and the ECJ has ruled several times that they
infringe the fundamental freedoms if they are not equally levied to domestic taxpayers. By
applying on gross income while domestic business taxpayers qualify for net income basis approach,withholding taxes disadvantage foreign direct investments.
Equal treatment and fair competition cannot be looked at only focusing narrowly on a specific featureof the tax system. Each Country has other mechanisms to favour local businesses. Italy, forexample, has introduced incentives for high-tech start-up businesses and historically subsidises
industrial and commercial activities with tax credits, grants, etc.
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Introducing withholding taxes will not realize any equal treatment of local vs foreign competitors as
they are in a different position and the former may benefit from incentives that the latter do not
qualify for without a local footprint.
Furthermore, as any cross-border tax measure, withholding taxes cannot be looked at only through theopera glass of a capital import Country. Most of the OECD member Countries are indeed capital
exporters. Each OECD Country should look at withholding taxes from both perspectives as acapital import and capital export Country. Imagine any local business doing e-commerce withforeign customers being subject to withholding taxes in all other OECD Countries. Local withholding
taxes may be overwhelmed by non-creditable foreign withholding taxes. Both businesses and the
local Exchequer will lose. Managing withholding taxes in such a framework will become almost
impossible.
In conclusion, withholding taxes on digital transactions may seem an easy fix to perceived abuses bymultinationals. However, each Country has its own policy instruments to favour local businesses.
Rather than introducing withholding taxes that would have a short-focused viewpoint by looking at
taxes only from the perspective of a capital import Country, OECD member Countries and external
partners should also consider that each Country is or will also be a capital export one.
There may be some Countries more advanced than others in the digital economy at this stage.
However, recent history shows that capital import Countries, eg, the BRICS, are more and more
becoming capital export ones. Although they have become big market forces nowadays, the above
may be true for each country, regardless of its size and power in an open digital economy.
Digital economy may dramatically turn capital import Countries into capital export ones
quickly if governments are able to introduce incentives to attract local and foreign investors todevelop digital products and services while the business community invests capital in the field.
As stated earlier, it is the entire life and the entire world being digitalized nowadays and not specificbusinesses, as can be inferred from paragraph 59 of the Draft.
For all the above, we hope that any attempt to justify the introduction of withholding taxes on digitaltransactions will be abandoned.
Permanent Establishment
The expansion of the scope of the PE concept has also been suggested as an alternative to manage thechallenges raised by the digital economy. Three main variations have been identified under paragraph
218 of the Draft:• Restrictions to the PE exception under paragraph 4 of Article 5 of the OECD Model
Convention, which may take different variations as outlined under paragraph 211 of the Draft;• A new nexus based on significant digital presence, ranging from the basic nature of thebusiness if digital web sites as the exclusive means to conclude contracts or residence of thevendor if immaterial for the purchaser, and so forth; and/or
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Member Crowe Horwath International• A third definition of PE, which would add the new concept of Virtual-PE to the ones ofMaterial-PE (par. 1-4 Art. 5) and of Agency-PE (par. 5-6, Art. 5); the concept of Virtual-PE
has been submitted either as a ,variation of the latter two traditional concepts depending onwhether the PE will have basis on servers or contracts execution, or as a novel one based on
the supply of on-site services or other business interface at the customer’s location.
Clearly, the expansion of the concept of PE ties with the BEPS pursuit under Action 7 targeting
prevention of any alleged artificial avoidance of PE status. Paragraphs 151-152 identify two potential
cases that are often perceived as abusive conduct of business:• Online seller of tangible goods or online provider of advertising services through the sales
force of a local subsidiary negotiating and executing sales with prospective clients (par. 151);• Online seller of tangible goods maintaining a local warehouse if proximity to customers andthe need for quick delivery to clients are key components of the business model (par. 152).
Action 7 also targets alleged mismatch between economic activities and contractual allocation ofrisks, the commissionaire contract being deemed as a abusive scheme with a resulting shift of profits
out of the country where the sales take place without a substantive change in the functions performedin that country (BEPS Action Plan, Action 6, page 19).
There is already quite an overwhelming (and, in our view, unnecessary) debate on the oldconcepts of PE that one wonders what the benefits of a third species of PE would be. More
broadly, we wonder if an expansion of the scope of PE to arrangements such as commissionaires or to
traditional exceptions such as the ones under paragraph 4 of Article 5 is strictly necessary to achieve afair allocation of taxable income (and losses) amongst all Countries, including the home Country, themarket or source Country as well as any other low-tax jurisdiction that may be interposed as the odd
man out. Reference to commissionaire and Action 7 is made herein as we believe that the underlying
issues are essentially the same even with respect to digital economy. We had already commented on
the current debate about expansion on the definition of PE with our letter of February 9, 2012 on thefirst OECD PE Draft of October 11, 2011 and remain of the same opinion today.
We believe that most of the PE cases can be handled with transfer pricing approaches. If amultinational is implementing a commissionaire contract and a tax inspector believes that the profits
taxed locally is not enough to compensate the efforts made by the local subsidiary, wonder what
benefit any PE claim may have for the local tax authorities from a revenues collection standpoint.
There is a foreign multinational selling goods to a local subsidiary acting as commissionaire, which isa contract well defined in most jurisdictions from a legal and tax standpoint, especially VAT, at least
within the EU, which treats commissionaire agreements as buy-sell arrangements from a VAT
standpoint.
Whether the transaction between the foreign group supplier and the local commissionaire is treated asa buy-sell or service arrangement from an accounting standpoint (in the practice both approaches arefollowed) and/or from an income tax standpoint, in all circumstances the value attributable to the
products transferred infragroup or the services made by the local subsidiary to its foreign sistercompany will be subject to transfer pricing test by being an intragroup transaction by nature.
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If that is the case, we wonder what level of taxable income may a commissionaire arrangement
subtract to the market Country if not the one, if any, that should not be subject to tax because FRAs
(functions, assets and risks) are not connected with the local market.
The commissionaire example equally applies to the new ways of doing business under digital
economy models. A fair allocation of taxing rights may be achieved even if a multinational isorganised through one or more local subsidiaries doing business as service providers rather
than as buy-sell distributors.
Experience shows that, at least in the Italian practice, service business models by multinationals
are re-characterized as deemed-PE under the Agency-PE doctrine whereby the local subsidiary
acts really as an agent or as a commissionaire by merely managing sales promotion and clients’purchase orders with customer care teams.
If the same balance of tax rights may be achieved under the transfer pricing principles, PEs are often
an irrelevant excess of accounting and tax compliance burden because no additional value can be
attributed to a local branch if the actual management of functions and risks locally is limited to
specific functions such as sales promotion and customer care. In most scenarios, a PE claim or adefensive PE tax filing in advance would not add much value to the split of taxing rights between themarket Country and the foreign one. From that standpoint, PE claims have the same nature of theexcess compliance required for foreign suppliers to register for VAT purposes, which paragraph
3.5 of the Draft identifies as one of the main drawbacks for consumption tax purposes.
If a local subsidiary carries those functions under a service business model, as a commissionaire or as
buy-sell distributor, profits allocation should not change materially under a proper application of
the transfer pricing principles, which indeed merely apply economic practice between independent
parties to intragroup transactions. It is widely spread the use of independent distributors that do notbear inventory or credit risk in the market. Commissionaire and similar low-risk arrangements areneither unique of multinationals nor of BEPS unfair practices.
We believe that in all circumstances whereby an MNE is doing business in a foreign market throughlocal subsidiaries acting as group service providers, tax authorities should refrain from applying PE
claims under the Agency-PE clause. Indeed, we wonder whether such a concept, which is the causeof widespread debate and huge uncertainty, should rather be abolished in the current digital economy
whereby the value attributable to services and all intangibles may have a wider impact on the overallprofit allocation within a group; or, at least, limited to circumstances whereby a foreign group is
trading product and services by escaping source taxation altogether by exploiting the auxiliary
exemption clause under paragraph 4 of Article 5 without any proper remuneration of the local
functions.
Based on the above, as far as digital economy is concerned, we doubt that a third species of PE, thevirtual one under any shape, is strictly necessary to allow the market country to achieve a fair
allocation of income taxes.
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We hope that the Action 6 project will clearly identify and distinguish three main scenarios:• Foreign groups doing digital economy activity in any market Country through one or more
subsidiary or branch acting as service providers for the benefit of their foreign company,
whether or not invoicing the local customers directly, which should not be subject to PE
claims by being subject to transfer pricing scrutiny;• Foreign groups doing digital economy activity in any market Country by managing directly
warehouses or other local functions through their own facilities, which would fall under any of
the PEs under paragraphs 1 and 2 of Article 5;• Foreign groups doing digital economy activity in any market Country without any local
service presence or any facility that may give rise to a material-PE.
The first two scenarios may lead to a fair allocation of income taxes to the market Country either
under the transfer pricing principles or under the material-PE clause, the latter regardless of theintroduction of any new Virtual-PE concept.
The third scenario should not give rise to local income taxation because no function, asset, risk
whatsoever is managed locally by the foreign company, which only has customers therein. From thatstandpoint, there is no difference between old and new economy, traditional and digital one. In allcases, value creation is not in the local market whereby it is only the customer base that will prefer theforeign supplier for its reputation, quality of services, etc., which were developed else where.
Claiming a Virtual-PE under any shape in the latter scenario would somehow distort income
tax concepts to apply income taxes merely because customers purchase online, which would defacto confuses income taxes with consumption tax. Income tax rights should be allocated to theCountry where value is developed and functions managed rather than where customers buy, which is
the rationale of consumption tax.
In reality, anyhow, most if not all digital economy players will need a local presence in the market
Country as service providers facilitating business.
Traditionally, cost-plus has been the basic transfer pricing method to test services arm’s length.
There is an increasingly shift towards profit split or other value creation formulas to test the value ofservices. Based on such developments in the transfer pricing sector, we wonder whether a concept of
Virtual-PE may indeed further protect the tax base of market Countries significantly more than anytransfer pricing approach.
Again, as per the withholding tax approach, each jurisdiction should look at PE claims from a twofold perspective. Not only with the eyes of the market Country but also with the reciprocal onesof the home Country. There is no segregation between home and source Countries within two
blocks. In the current open economy, each Country has a dual role, however different could be todate the level of development of the digital economy in the local market.
Looking at digital economy only from the market Country standpoint may sooner or later have aboomerang effect for any Country with business competing abroad as it is the case of almost if not all
OECD Countries and main partners.
8153Studio Associato Servizi Professionali Integrati
Member Crowe Horwath International

BEPS concerns seem to overstate the market Country loss of revenues by claiming the need, if any,
for a Virtual-PE.
Based on the above, we believe that the two examples under paragraphs 151 and 152 of the Draft may
be managed accordingly from a transfer pricing standpoint as follows:• The sale of tangible goods and of advertising services by online foreign suppliers acting
through the sales force of a local subsidiary negotiating and executing sales with prospective
clients (par. 151) may be managed by attributing to the local sales force a level of profits andrevenues commensurate to their contribution to the value chain;• Similarly, warehousing services and logistics ones may be allocated similar level of profits
based on the enhancement they provide for to the market potential of the foreign online seller(par. 152).
In cases other than the above ones, the market Country should better refrain from claiming any taxing
rights as there is no value creation generated locally by the foreign supplier.
The competitive disadvantage that any local online trader may have compared to any foreign one
should better be managed with public expenditure rather than tax collection. From the development ofa strong digital economy and related infrastructures will depend most of the future of any countrycompeting in a global open economy.
From that standpoint, the Action 1 Draft has a flavour of tax protectionism by seemingly looking
back to the old days when each Country had its own barriers to foreign investors such as custom
duties, exchange controls, regulatory restrictions, etc., which we are and will not be nostalgic about.
Not sure if really the old days where the fairest way of promoting business cross-border andenhancement of business developments or, rather, the result of fiscal protectionism favouring local
businesses that would struggle in the current open economy.
Transfer pricing approach as market Country and effective CFC rules as home Country should
allow any OECD member and peers to maintain a balanced approach by addressing
simultaneously any concern that the G20 and any tax administration may have about BEPS in
the digital economy era in most if not all circumstances with no tax or low tax jurisdiction in
between being able to take most of the pie.
Thank you for the opportunity with our initial contribution on this very controversial topic. The Draft
contains a wide range of concepts and thoughts that will deserve the utmost consideration by dealing
with new fields and tentative actions that will have to balance multiple and sometimes conflicting
general purposes.
SASPI – Studio Associato Servizi Professionali Integrati
Italian member firm of Crowe Horwath International
Tax and Legal Services
Gaetano Pizzitola
9154

Studio Associato Servizi Professionali Integrati
Member Crowe Horwath International

Partner in charge of Cross-Border Tax Services

10

155

Deloitte LLP
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bdodwell@deloitte.co.uk

By email: CTP.BEPS@oecd.org

14 April 2014
Our ref: WJID/AL/LKS
Dear Sirs

Discussion Draft on BEPS Action 1: Address the Tax Challenges of the Digital
EconomyThank you for the opportunity to comment on the non-consensus Discussion Draft – ‘Address the Tax
Challenges of the Digital Economy’ released on 24 March 2014 (the ‘Discussion Draft’).
Digital businesses and models continue to evolve with advances in technology. It is essential that there is
flexibility in taxation (and regulatory) models to accommodate new developments, which bring benefits
through boosting global economic growth. As the Discussion Draft acknowledges, all digital services
include a significant human component. We support the focus on examining whether changes to areas
such as the transfer pricing of intangibles and changes to the definition of permanent establishments can
reduce the potential for BEPS.
However, as the Draft notes, some forms of digital business allow remote sales and delivery of digital
services without a presence in the market country. This is likely to present difficulties in determining theattribution of profit to permanent establishments or the approach to profit splits for digital transactions on
a basis that is consistent with the existing rules. We think it would be helpful for the OECD to set up a
Working Group to continue investigating the broader taxation issues specifically attributable to the digitalmarket, outside the scope of the BEPS project.
Withholding taxes and other revenue-level taxes are unlikely to offer a practical approach. For somebusinesses they will be too high relative to overall margins, and for others may be too low to provide
consistent taxation with other, non-digital, businesses. There is also a risk that high levels of withholding
taxes discourage investment, and become an inhibitor to economic growth. Digital businesses
encompass a wide range of businesses, including many start-ups and small businesses as well as asmall number of very large businesses; any new approach to taxation will need to cater for all.
The European Union will change its rules in 2015 covering ‘place of supply’ for certain digital andtelecoms services. The change will yield VAT for EU Member States where the consumer is based,
instead of in the country where the service provider is based. However, this approach brings significant
compliance challenges, even for 28 countries. Additionally, it will increase irrecoverable VAT borne by

Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 andits registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom.
Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK privatecompany limited by guarantee, whose member firms are legally separate and independent entities. Please see
www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms.

156

Member of Deloitte Touche Tohmatsu Limitedsome sectors, as well as public services of health and education. The change also highlights the different
VAT treatment of physical product and digital product – which is unhelpful. All these practical difficulties
will need to be addressed by the OECD if this type of system is to be workable as a more global
approach.
We welcome the reference to the Ottawa principles for designing international rules in relation to digitaltransactions, and agree that this is a helpful and sensible approach to consideration of the difficult issues
posed by new technologies allowing for remote activity.
Responses to specific questions asked in the Discussion Draft are in the attached appendix.
If you wish to discuss any of the points raised in this letter, please do not hesitate to contact either me(bdodwell@deloitte.co.uk), or Alison Lobb (alobb@deloitte.co.uk).
Yours faithfully

W J I Dodwell
Deloitte LLP

2157

Appendix 1 – Responses to questions raised in the Discussion Draft
Whether it is possible to ring-fence the digital economy from the rest of the economy, and if not,whether specific types of digital transactions could be identified and addressed through specificrules•

Due to the nature of the digital economy, including the rapid pace of change of technology andthe effect these changes have on a wide variety of international businesses in different sectors in
different ways, we do not think it is possible to ring-fence the digital economy. There is not aclearly defined and separate digital economy; instead, there is integration of digital models into
traditional businesses. There is also the evolution of new, digital delivery business models which,whilst anchored in human inputs familiar in the traditional world, operates in a different fashion.
The taxation issues are broader than those arising from base erosion or profit shifting andwarrant a longer study outside the scope of the BEPS project.

•

As noted in the Discussion Draft in paragraph 120, BEPS concerns in relation to digitalbusinesses are similar to the nature of strategies used to achieve BEPS in more traditional
businesses.

•

There are many variations of business model and approach, and it is hard to make generalstatements or comments on how businesses operate within the digital economy. As withtraditional business, there are also many factors influencing how these businesses choose to
structure their operations, such as access to markets, access to skills and resources,
infrastructure, regulation, legal protection, business and tax environment, political stability etc.

•

As with traditional business models, it is important to recognise the effect larger internationalorganisations can have on smaller enterprises including start-ups and developing businesses.
These impacts may be both positive and negative. For example, positive impacts may include
support through providing a web platform, facilities or shared services.

•

It may be possible to introduce more specific rules when addressing the other areas of the BEPS
Action Plan that reflect the nature of some types of digital transactions; but there is a need forconsistency with the levels of taxation imposed on traditional businesses.

The ability of the measures developed in the course of the BEPS project and the current work on
VAT/GST to address BEPS concerns in the digital economy•

Many BEPS concerns apply equally to digital and traditional businesses and we anticipate thatthe development of the other Actions in the BEPS Action Plan will go a considerable way toaddressing the BEPS concerns that arise in relation to the digital economy.

•

However, some of the key issues identified arise from an international tax system that does notalways reflect modern business models and technologies.

•

The Discussion Draft highlights some areas within the digital economy that may need to beaddressed as part of the BEPS Action Plan. The key areas are Action 7, which will consider thedefinition of permanent establishments for the digital economy and Action 8-10, relating totransfer pricing and value creation

3
158

•

For these, it is relevant for the appropriate Working Parties and the Digital Task Force to consider
the functions that may be carried out in each jurisdiction alongside the value of those functions.
There are qualities of some forms of digital business that allow remote sales and delivery ofdigital products without people or a presence in the market country, and this may necessitate achange of approach. It would be entirely inappropriate for a system of taxation to be based onwhere the customer is located, which does not adequately remunerate the country in whichpeople are undertaking activities, including services and/or the creation or maintenance ofintangible assets. Multinationals will have intangibles, people and/or infrastructure in different
countries for many reasons, including at the request of key personnel, access to financing andinvestors and for more technological reasons, such as servers being located near customers.

•

The ongoing work on International VAT/GST Guidelines (‘the Guidelines’) is looking to set
international standards for VAT/GST. We welcome this work and agree that consistentinternational rules are needed.

•

A proper and consistent implementation of the agreed business-to-business ‘place of supply’
Guidelines would reduce the current distortions. However, this is not the only VAT/GST issue.
Consideration needs to be given to potential differences between the VAT/GST treatment oftraditional goods and their digital equivalents. For example, within the EU physical books are
subject to VAT at low, or zero rates. The digital equivalent – eBooks – is taxed at standard rates(although this is the subject of litigation before the European Court of Justice). Consideration also
needs to be given to the inability of businesses in some sectors and some public services torecover input VAT.

Whether other measures should be developed during the course of the work on other aspects of
the BEPS Action Plan to address BEPS concerns in the digital economy and if so which ones•

The key issue in relation to digital business is the effective modernisation of the rules that allocate
taxing rights between countries. Other aspects of the BEPS Action Plan that are concerned with
providing recommendations for domestic anti-avoidance rules or treaty solutions to counter abuse
are equally relevant to traditional and digital businesses.

The broader tax challenges raised by the digital economy which have been identified by the Task
Force and how these challenges should be addressed, taking into account both direct andindirect taxation•

We agree with the broader tax challenges identified by the Task Force. We also agree that thefundamental nature of core business activities has not changed, for example, in relation toadvertising and customer support, but that digital technology has had a significant impact on how
these activities are carried out by some businesses. It is important not to overstate the issue ofnexus, although it is currently possible to generate a large quantity of sales without a taxable
presence.

•

The key VAT/GST challenges raised by the digital economy are noted above. Some of thesechallenges will be addressed in the ongoing work on the business to consumer VAT/GST
Guidelines. We think the other issues also need to be addressed.

4
159

The options to address these broader tax challenges discussed by the Task Force andsummarised in the discussion draft•

Withholding tax on digital transactions would be a very blunt tool to address the broader tax
challenges raised by the digital economy, and it is difficult to see this being implemented in aconsistent and equitable way. Gross level taxation (as opposed to the net profit level) is
problematic in terms of setting an appropriate rate given significant differences in profit levels
across the spectrum of digital businesses. In particular, withholding taxes can be a barrier tointernational expansion and to investment into new markets (especially, but not solely, by small
and medium sized enterprises). There are further significant practical considerations in terms of
how this could be applied to consumer sales.

•

To the extent that there are any changes to the permanent establishment definition and any new
nexus based on some criteria for ‘significant digital presence’, there should be a clear de minimis
threshold in each country below which no permanent establishment would be created. Without
such a minimum threshold, a business model may create a scenario where, under the proposed
options, there are numerous very small permanent establishments across multiple countries.
This will create a significant compliance burden for taxpayers and tax administrations - and will be
costly relative to the tax raised in local countries. In addition, as identified in the Discussion Draft
administrative challenges, it may not be straightforward to identify if a business has a significant
digital presence in a country or where its customers are located.

•

Any changes to the international model in relation to permanent establishment will need to becapable of being put into practice on a principled and consistent basis, including in relation tovaluation, to avoid lengthy and complex disputes between governments. In particular,
mechanisms involving consumer data are impossible to measure and value in a meaningful way
and are thus currently impracticable.
The VAT/GST Guidelines, once finalised, will deal with remote digital supplies. In relation to theoptions suggested to address concerns on the import of low value goods, minimising theadministrative costs of compliance is an important priority.

•

The Discussion Draft highlights the direct and indirect tax challenges and options for addressingthese on a separate basis (except a brief mention in paragraph 210). The report should include
clear guidelines on the differences and interaction between direct and indirect tax measures. For
example, a review of the definition of a permanent establishment for direct tax purposes could
have significant indirect tax consequences regarding the application of place of supply rules andnew VAT registration obligations which might be incorrectly considered as creating a direct tax
permanent establishment.

The potential cost of compliance arising from the options proposed to address the tax challengesof the digital economy and suggestions for more cost efficient alternatives•

Any changes will incur administration and compliance costs for businesses, and also perhaps
systems changes, and we would recommend a lead-time is built in for businesses to adapt .

•The level of potential administrative cost of compliance is the key concern of businesses
regarding any options considered for addressing the VAT/GST collection challenges within thedigital economy. It is essential for the recommendations by the Task Force to emphasise that any

5160new registration or declaration obligations for non-established businesses need to be
implemented in the least burdensome way (e.g. applying thresholds, enabling electronic
registrations and declarations and optional use of third party intermediaries, setting reasonableproxies for identification of customer location). If not, it may result in widespread non-complianceor businesses withdrawing from national markets due to unreasonable compliance costs.
Whether the Ottawa taxation framework principles identified above are an appropriate framework
for analysing options to address to address the tax challenges, and whether and how they should
be supplemented•

We agree the Ottawa taxation framework principles identified are an appropriate framework foranalysing options. As mentioned, in a fast-paced, changing environment, it is imperative that asensible framework is used to address new business models when they arise and to give somelevel of consistency between traditional and digital businesses for investors.

•

It is important that all countries involved agree to the proposed framework. This may establish
consistency and provide businesses with a reasonable level of certainty on an international level.

•

The VAT/GST Guidelines will be based on the Ottawa taxation framework principles. These
principles are relevant and provide a reasonable basis for international VAT/GST standards.

6161

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April 13, 2014
Submitted by E-Mail: CTP.BEPS@oecd.org
Mr. Jesse Eggert
Senior Advisor, BEPS ProjectCentre for Tax Policy and Administration
Organisation for Economic Co-operation and Development
Re:

Comments on the Public Discussion Draft on BEPS Action 1: Address the Tax
Challenges of the Digital Economy

Dear Mr. Eggert:
On March 24, 2014, the Task Force on the Digital Economy (the “Task Force”) releaseda Public Discussion Draft on BEPS Action 1: Address the Tax Challenges of the Digital
Economy (the “Discussion Draft”). We are writing to provide the comments of theDigital Economy Group (the “DEG”), an informal coalition of leading U.S. and non-U.S.
software, information / content, social networking, and e-commerce companies thatprovide goods or services through digital and nondigital means.
I.

Executive Summary

The DEG commends the Task Force for preparing a draft report that is both thorough andthoughtful. The Discussion Draft follows the best OECD traditions of being factuallybased and analytically oriented while remaining alert to administrative challenges. The
DEG also commends the Task Force for seeking input from business on the factual
elements of the Discussion Draft, the potential options to address the broader tax
challenges raised by the digital economy (the “Options”), and the framework foranalyzing the Options. We applaud the decision to release the Discussion Draft eventhough it does not represent a consensus view of the Task Force, as that allows informed
public comment at a very appropriate point in the deliberative process.
The DEG agrees with the Task Force that:•••ring-fencing the digital economy as a separate sector and applying tax rules onthat basis would be neither appropriate nor feasible.
the principles established by the 1998 Ottawa Ministerial Conference on
Electronic Commerce (the “Ottawa framework principles”) and appliedconsistently by the OECD since then constitute the proper framework forevaluating any tax proposals that affect the digital economy.
any assessment of the need for additional special rules to address the tax
challenges of the digital economy should follow completion of the work on

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162

Actions 2 - 15 of the BEPS Action Plan because these Actions are expected toaddress BEPS issues generally, including the phenomenon of stateless income, inways which will significantly affect digital economy enterprises.
With respect to the Options:
•

•
•
•
•

•

•

II.

The DEG believes that the consumption tax Option relating to digital supplies to
consumers is the Option which most appropriately addresses the tax challengesof the digital economy, as it can be seen to level the playing field between
resident and nonresident suppliers of digital goods and services.
This Option is more consistent with the Ottawa framework principles than any of
the other Options and is the only Option that proposes a tax which is properly
imposed by reference to the location of consumption.
As this Option imposes an extraterritorial obligation, further work would be
required to achieve reasonable compliance mechanisms to balance theadministrative burden with the amount of tax collected.
None of the Options, however, is better suited to deal with opportunities for
BEPS in the digital economy than the proposals to be developed under Actions 2- 15.
Those Options which depart from the fundamental principle of direct tax nexus
based on the actual business substance of personnel and assets in the taxing stateor which specifically target digital / internet companies are inconsistent with the
Ottawa framework principles.
Those Options which define a set of transactions by reference to on-line activity
are in essence proposing a separate tax regime for the digital economy, despite
the Discussion Draft conclusion that ring-fencing the digital economy is not
feasible.
Further policy discussion of the Options should take into account the increasing
global reciprocal trade in the digital economy, as many digital economy
enterprises are emerging outside the United States.
Information and Communication Technology and Its Impact on the
EconomyThe DEG commends the Task Force for producing a detailed analysis that shows how
Information and Communication Technology (“ICT”) is shaping the modern economy.
III.

The Digital Economy, Its Key Features and the Emergence of New Business
ModelsThe DEG strongly agrees with the Task Force that, “because the digital economy isincreasingly becoming the economy itself, it would be difficult, if not impossible, to ringfence the digital economy from the rest of the economy.” 1 The DEG also considers it
1

See Discussion Draft ¶ 59.

2163

“difficult, if not impossible, to ring-fence” “pure play” digital / internet companies 2 fromother companies because the internet of things, virtual currencies, and 3D printing all blurthe line between digital / internet service providers and providers of manufacturing,
design, development, and financial services.3
A. Refining the Understanding of the Digital Economy
As noted above, the DEG commends the Task Force for producing a thorough descriptionof the evolution of ICT, and of the digital economy, its key features, and the emergenceof new business models in Chapters II and III of the Discussion Draft. In someparticulars, however, the Discussion Draft’s generalizations about all enterprises
operating in the digital economy paints with a very broad brush. Those broad
descriptions perhaps have been inspired by press reports of successful start-ups, but may
not be an accurate generalization when applied to mature businesses. We offer below a
few observations which might be considered in revising Chapters II and III.
1. Observations on Statements in Chapters II and III
The Discussion Draft notes that the “digital economy has given rise to a number of new
business models.” 4 The DEG agrees that some of the business models of digital / internetcompanies are new but notes that most of the business models which are commonlydescribed as part of the “digital economy” are traditional business activities that areenhanced through the use of ICT. For example, online payment, media, auction, andlogistics solutions have offline analogues in the form of money transfer services,publishing and broadcasting, auction services, and logistics services.
The Discussion Draft acknowledges that many digital economy business models “haveparallels in traditional business” but considers these business models to be “new” on thetheory that “modern advances in ICT have made it possible to conduct many types ofbusiness at substantially greater scale and over longer distances than was previously
possible.” 5 The progressive improvement of manufacturing and distribution capabilities
of enterprises is responsible for much of the efficiency gains in the global economy formany years. Outsourced manufacturing to low-cost environments, other communicationand transportation revolutions in areas other than digital communications, the ability toaccess human capital across borders, and other similar developments have all
revolutionized commerce by giving enterprises the ability to produce, deliver, andsupport their goods and services to customers in remote markets at lower cost. These2“Pure play” digital / internet companies use the internet as their principal method to deliver goods andservices, including communicating with users and suppliers through hosted web pages.
3

See Discussion Draft ¶¶ 30 - 34, 38 (describing the internet of things, virtual currencies, and 3D printing aspart of the emerging and potential future developments in the digital economy).

4

See Discussion Draft ¶ 60.

5

See Discussion Draft ¶ 60.

3164

efficiency gains are not unique to the digital economy, and many enterprises notconsidered part of the “digital economy” achieve these gains through ICT investments.
2. Enterprises Normally Cannot Scale Without Substance
It is a common misperception that digital economy enterprises as a general matter areable to operate with significantly fewer personnel than other enterprises. For most digital/ internet companies, the ability to scale is not attributable to an ability to “carry on
economic activity with minimal need for personnel to be present,” 6 although there arecertainly some digital / internet companies, principally some in their start-up phase, forwhich this statement is true. Most digital / internet companies maintain significant
personnel in their development, marketing, logistics, customer support, IT, and otherfunctions, which are essential to the companies’ financial and operational success, andthus have large numbers of employees who are generally resident in the various
jurisdictions in which they live and work.
In a similar vein, the DEG respectfully questions whether Figure 8, which appears below
paragraph 98 of the Discussion Draft and shows the “[a]verage revenue per employee of[the] top 250 ICT Firms,” provides an accurate depiction of the profitability of employeesof the majority of digital / internet companies. First, many digital / internet companies
are low-margin companies, which have high revenues but low profits. Without thenames of the “top 250 ICT Firms,” it is impossible to determine whether the digital /internet companies with high revenues per employee also have high profits per employee.
Second, a fair assessment of the relative profitability per employee of digital / internetcompanies requires comparative information about enterprises in high-margin industries
that are absent from Figure 8, such as financial services enterprises.
3. Operating Costs Arise in Areas Outside Supply Chains
The Discussion Draft also suggests that, as a rule, digital / internet companies enjoy
lower operating costs as a percentage of revenue compared to other enterprises because“B2C e-commerce can in many cases dramatically shorten supply chains by eliminating
the need for many of the wholesalers, distributors, retailers, and other intermediaries thatwere traditionally used in businesses involving tangible goods.” 7 Apart from the costs ofphysical stores, e-retailers of tangible goods generally bear the same supply chain costs as
traditional enterprises dealing in tangible goods. Moreover, although some digital /internet companies may enjoy lower operating costs in some functional areas than their
non-digital counterparts, developing, hosting, and operating the technologies thatcharacterize many digital / internet companies give rise to costs in those functional areasthat more traditional enterprises may not bear. For example, many digital / internetcompanies bear significant costs associated with product development, marketing, and6

See Discussion Draft ¶ 98.

7

See Discussion Draft ¶ 64.

4165

customer support because high-technology product cycles are rapid, the life oftechnology is very short, and high-technology / data-intensive businesses have specificlegal compliance costs. Moreover, many digital / internet companies incur significant
start-up losses, which are funded through risk capital provided either by the companies’
founders or equity investors. As a result, some digital / internet companies become
profitable only after a long period of time.
4. Mobility Concerns Are Overstated
In addition, the DEG respectfully suggests that the Discussion Draft’s concerns withrespect to the mobility of users, functions, and intangibles are overstated. 8 Users are notinherently mobile because users generally live and work in a single location, from which
they purchase goods and services and access applications.
The Discussion Draft suggests that digital enterprises have an exceptional ability to locate
business functions in advantageous locations. It is certainly true that many enterprises ofall sorts have sought to create operational efficiencies by centralizing many business
functions. This point therefore does not distinguish digital economy enterprises fromothers. In any event, enterprises are able to centralize functions only in those locations
where appropriate personnel can be found, at which point the functions and the personnel
who perform them normally remain in a single, central location. Finally, the fact that
income is allocated to jurisdictions where personnel in fact are located is not a BEPS
issue, as the BEPS Action Plan addresses only artificial base erosion.
The most significant concern, undoubtedly, is over the mobility of intangible assets.
Multinational enterprises inevitably engage in intercompany transactions with respect tomany of their assets, including intangible ones. The transfer of intangible property
between affiliated enterprises, however, requires compensation under the arm’s lengthprinciple, just as does the transfer of tangible assets. The transfer of an intangible asset
thus comes with a cost equal to the cost of transferring any other appreciated asset.
Therefore, any issues arising from the fact that intangible assets can be transferred within
multinational groups should be addressed by Actions 8 - 10.
5. Value in Data Lies in the Enterprise’s Analytical Tools
The Discussion Draft suggests that “[i]t is common in the digital economy for businesses
to collect data about their customers, suppliers, and operations.” 9 All enterprises,
including digital / internet companies, use data in their businesses to tailor offerings tocustomers, improve supply chain efficiency, and assess the success of their operations.
These practices are not new, although the volume of data is greater, and moresophisticated tools are available today for aggregating and analyzing data. For decades,
enterprises that engage in customer-facing activities have used focus groups, surveys,
8

See Discussion Draft ¶¶ 91, 93 - 95.

9

See Discussion Draft ¶ 103.

5
166

contests, and other, similar data collection methods to better tailor their offerings to
consumers. Likewise, advertisers have used data on television viewing practices to bettertarget their advertisements to the proper audience.
6. Volatility Is a Common Feature of the Digital Economy
The DEG agrees with the Task Force that volatility is a key feature of the digital
economy since “in short periods of time, [digital / internet] companies that appeared tocontrol a substantial part of the market have found themselves rapidly losing market
share to challengers that built their businesses on more powerful technology, a more
attractive value proposal, or a more sustainable business model.” 10 Accordingly, theDEG respectfully disagrees with the Discussion Draft’s suggestion that digital markets
more commonly “end[] up being dominated by a few major players” than is the case in
any other industry sector. 11 Few digital / internet companies enjoy a large share of the
global market undisturbed for long periods of time, as the Discussion Draft
acknowledges. Volatility is thus a far more common feature of digital / internetcompanies, since more than 90 percent of digital / internet start-ups ultimately fail, 12 andeven the most successful digital / internet companies can be unseated by new rivals in asingle product cycle. 13
IV.

Identifying Opportunities for BEPS in the Digital Economy

Chapter IV of the Discussion Draft correctly identifies facts that may result in theminimization of direct tax in a market jurisdiction. Some of these facts relate to tax
planning practices that are common among enterprises across business sectors, such as
minimizing functions, assets, and risks located in a jurisdiction to minimize taxable
income arising in that jurisdiction. 14 In itself, such actions do not raise BEPS concerns
to the extent that income is allocated to those jurisdictions where such functions are, infact, located. Other facts relate to structures which rely on the normal operation of thecurrent rules, which apply to all enterprises, including digital / internet companies, suchas treaty exemptions from or reductions in withholding tax15 and CFC rules. 16
Once the Discussion Draft has noted how these rules apply in practice, the groundwork
has been set for a principled policy discussion of whether these existing rules remain
10

See Discussion Draft ¶ 118.

11

See Discussion Draft ¶ 117.

12

See Startup Genome Report Extra on Premature Scaling at 4 (2011).

13

One clear example of this statement is the rapid switch by business users from BlackBerry devices toiPhones.
14

See Discussion Draft ¶ 125.

15

See Discussion Draft ¶ 129.

16

See Discussion Draft ¶¶ 134 - 135.

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appropriate today. We respectfully express disappointment that instead of setting theparameters for the policy discussion, Chapter IV contains many disparaging assertions ofnoncompliance by, or aggressive direct tax positions of, digital / internet companies.
This perhaps is an encouragement for increased enforcement efforts, but it is not anappropriate foundation on which to make policy choices. Accordingly, the DEG
respectfully recommends that the Task Force reorient Chapter IV towards a policy
discussion of whether the provisions of existing law which have been identified as giving
rise to BEPS warrant change on the merits, and remove generalized statements about thecompliance of digital economy enterprises.
We set forth below examples of pejorative statements in Chapter IV. As expressed in the
Discussion Draft, the Task Force suggests that digital / internet companies as a group:
•
•
•
•
•
•
•

“artificially fragment their operations among multiple group entities” to qualify
for the exceptions to permanent establishment (“PE”) status under Article 5(4).17
engage in the practice of “allocat[ing] . . . functions for tax purposes in ways that
may not correspond to actual business functions performed.” 18
achieve BEPS by “undervalu[ing] intangibles” that are transferred to affiliates in
low-tax jurisdictions and by “allegedly stripp[ing] of risk” operations of affiliates
in high-tax jurisdictions. 19
avoid a PE in a jurisdiction by using in-country personnel with the “effective
authority” to conclude contracts on behalf of a nonresident enterprise.20
avoid withholding tax through “treaty shopping by interposing shell companies
located in countries with favourable treaty networks.” 21
reduce tax “by generating excessive deductible payments,” such as royalties, toentities located in low- or no-tax jurisdictions. 22
minimize tax by “undercompensat[ing]” functions in HQ jurisdictions.23

The direct tax section of Chapter IV thus stands in contrast to the VAT section of this
Chapter, which properly identifies a statutory gap in the current indirect tax rules that
may lead to an unintended result as a matter of policy.

17
See Discussion Draft ¶ 124. Unless otherwise specified, references to “Article” or “Art.” are to Articles ofthe 2010 version of the OECD Model Tax Convention.
18

See Discussion Draft ¶ 125.

19
See Discussion Draft ¶ 126; see also Discussion Draft ¶ 132 (noting that intangibles are “sometimes”
transferred for a “less-than-arm’s length price”).
20

See Discussion Draft ¶ 127.

21

See Discussion Draft ¶ 129.

22

See Discussion Draft ¶ 133.

23

See Discussion Draft ¶ 134.

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We note that many of the assertions in the list above relate to transfer pricing matters. In
that regard, the DEG supports the OECD’s efforts to prevent the separation of income
from the activities that generate the income. The current work on Chapter VI of theTransfer Pricing Guidelines plus Actions 8 - 10 provide the appropriate platform foraddressing transfer pricing practices. We also note, however, that allocating income to a
jurisdiction other than a market jurisdiction should not be regarded as a BEPS concern if
significant people functions, assets, and risks are absent from the market jurisdiction andpresent in other jurisdictions. This result is not the reflection of policy choices, like CFC
or PE rules or withholding tax exemptions, because the arm’s length principle simply
allocates less income to those locations in which fewer functions, assets, and risks of anenterprise are present.
V.

Tackling BEPS in the Digital Economy

The DEG appreciates that much of the concern regarding the tax challenges of the digital
economy arises from the phenomenon of stateless income. This phenomenon, of course,
is not unique to the digital economy. Stateless income arises through the interaction ofdomestic tax rules and tax treaties as applied to many enterprises in many industries.
Other BEPS issues identified in the Action Plan also are not unique to the digital
economy.
The DEG agrees with the Task Force that Actions 2 - 15 of the BEPS Action Plan willaddress BEPS issues in all sectors, including the digital economy. A recent report fromHM Treasury and HM Revenue & Customs, entitled, “Tackling Aggressive Tax Planningin the Global Economy: UK Priorities for the G20 - OECD Project for Countering Base
Erosion and Profit Shifting” (the “UK Report”), reaches the same conclusion. 24
For that reason, it is prudent that the mandate of the Task Force is only to produce
Options for further consideration in due course. The future work to assess these Options
should be undertaken only after the implementation of the other BEPS Actions has been
completed. 25 Thus, for example, any further consideration of the Discussion Draft’s
Options on direct tax nexus should be undertaken only after the work on Action 7 iscomplete.

24
See UK Report ¶ 2.6 (acknowledging that many BEPS challenges that appear in the digital economy “canbe addressed through work that is already within the scope of the BEPS Project” - e.g., work on Actions thatspecifically address PE and transfer pricing issues).
25
The UK Report suggests supplementary rules for the digital economy only “if progress on updating theexisting international tax framework fails to materialise.” See UK Report ¶ 2.8.

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The DEG agrees with the Task Force that “the development of the measures envisioned
in the BEPS Action Plan,” including work on the following Actions, “will effectively
address the BEPS concerns that arise in the digital economy”: 26
•
•
•
•
•
•

•

VI.

Action 2 will prevent digital / internet companies from using hybrid instruments
to obtain deductions without corresponding income inclusions.
Action 3 will prevent digital / internet companies from sheltering income from
intangible assets from tax through the use of no-taxed or low-taxed passive
CFCs. 27
Actions 4 and 9 will limit the ability of digital / internet companies to reducetaxable income through the use of certain deductible payments.
Action 5 will prevent digital / internet companies from enjoying the benefits ofpreferential regimes without engaging in substantial business activities.28
Action 6 will prevent digital / internet companies from using treaties to achieve
double non-taxation.
Action 7 will prevent digital / internet companies from avoiding PEs byfragmenting activities to take advantage of Article 5(4), treating core activities as
excepted activities under Article 5(4),29 or disregarding contract-concluding
activities of local salespeople.
Actions 8 - 10 will ensure that digital / internet companies align intangiblerelated returns with the creation of value, make arm’s length intangible-related
payments, and value intangibles appropriately.
Broader Tax Challenges Raised by the Digital Economy

The DEG agrees with the Task Force that the principal policy considerations associatedwith the taxation of the digital economy relate to questions of direct tax nexus, thecharacterization of payments, and indirect tax collection obligations. As discussed
26

See Discussion Draft ¶ 208.

27

See UK Report ¶ 3.4 (noting that the UK CFC rules “do not tax businesses on profits arising from genuine
activity outside the UK”). The DEG nevertheless respectfully suggests that there is no good policy
foundation for any CFC rule that is specific to the digital economy, such as a rule that targets “income fromthe remote sale of digital goods and services,” since such a rule is divorced from any further requirement
relating to how such income is generated. See Discussion Draft ¶ 169. For example, such a rule could not bejustified on the same basis applicable to the inclusion of passive income in a CFC regime, as income as
described above arises from active business activities.
28

See UK Report ¶ 3.24 (encouraging the development of a “better understanding of what constitutes
substance . . . so as to effectively address those instances where preferential regimes do present an
opportunity to shift profits”).
29
The DEG nevertheless does not consider the maintenance of a local warehouse to constitute a “coreactivity” of an on-line seller of physical products because the core activity of an on-line seller is selling goods
and providing services to customers. See Discussion Draft ¶ 152. In addition, the DEG notes that themaintenance of local warehouses for logistical advantages is not unique to digital / internet companies
because logistics and proximity to customers are crucial across many industries, from computer hardware to
consumer goods.

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further below, the DEG respectfully submits that data does not fall into the same category
as direct tax nexus, characterization, and indirect tax collection obligations because
possession and use of data do not properly represent a policy consideration associatedwith the determination of when or how a defined category of income should be taxed.
The DEG further agrees with the Task Force that “spill-over effects from economic
activity spurred by the digital economy, both in terms of overall economic growth and tax
revenues, may have an offsetting effect to the tax revenue loss” that is perceived to flowfrom the application of the current tax rules to transactions of digital / internet companies
with consumers in market jurisdictions.30 The reference to “spill-over effects” echoes the
DEG’s submission in its response to the OECD’s Request for Input Regarding Work on
Tax Challenges of the Digital Economy of the beneficial “multiplier effect” that digital /internet companies have on the local service sectors of the economies in which they arebased and on the economies of the jurisdictions of their consumers and suppliers.31
Similar benefits will arise in many economies in the future as digital enterprises continue
to emerge in greater numbers outside the United States. 32
A. Nexus
The Discussion Draft suggests that the digital economy presents a challenge for nexus
rules that are based on the concept of physical presence because pre-digital enterprises
maintained “high-value” in-country operations, “such as procurement, inventory
management, local marketing, branding, and other activities that earned a local returnsubject to tax in the market country.” 33 The Discussion Draft also notes that ICT permits
digital / internet companies “to choose where substantial business activities take place, or
to move existing functions to a new location” even if such locations are remote from one
or more market jurisdictions. 34 The Discussion Draft thus questions whether the “current
rules are fit for purpose in the digital economy” where “it is possible to generate a large
quantity of sales without a taxable presence.” 35
In essence, the Discussion Draft raises the issue of whether nexus rules should bechanged so that direct tax is imposed solely by reference to the fact that purchasers exist
in a market jurisdiction. It is clear that such a nexus rule would be a radical departure30

See Discussion Draft ¶ 173 n.18.

31

See DEG, Response to Request for Input Regarding Work on Tax Challenges of the Digital Economy at 8,
10 (Dec. 23, 2013); see also Enrico Moretti & Per Thulin, Local Multipliers and Human Capital in the
United States and Sweden, 22 INDUSTRIAL AND CORPORATE CHANGE 339 (2013); Enrico Moretti, Local
Multipliers, 100 AMERICAN ECONOMIC REVIEW: PAPERS & PROCEEDINGS 373 (May 2010).
32
See DEG, Response to Request for Input Regarding Work on Tax Challenges of the Digital Economy at 3 5 (Dec. 23, 2013).
33

See Discussion Draft ¶ 175.

34

See Discussion Draft ¶ 179.

35

See Discussion Draft ¶ 180.

10
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from the current international tax system. In raising this possibility as an Option forfurther discussion under Action 1, the Discussion Draft implicitly raises the separate
questions of whether such a rule is appropriate under international tax norms at all, andsecond, if it is, whether it should be applied separately to the digital economy or equallyto all enterprises.
On the question of whether such a nexus rule could be supported in principle, we notethat the Discussion Draft does not endeavor to articulate policy reasons why direct tax
nexus should be imposed solely by reference to consumer location. The policy
justification for allocating income only to the jurisdictions where the enterprise actuallyconducts its activities is fully consistent with the BEPS project principle that tax bases
should not be artificially shifted. As noted above, these Options may be further
considered after the implementation of the rest of the BEPS Action Plan. At that time thepolicy framework will need to be more completely elaborated on the question of whether
the right to impose direct tax should be reallocated to recognize nexus based solely on
access to a market.
On the subsidiary question of whether such a rule, even if justified as a policy matter,should be applied separately to digital economy enterprises, we respectfully submit that
there is no justification for a separate and unique application of such a rule to a single setof business enterprises. This is particularly true if the basis for the separate application is
an assumption that digital economy enterprises are able to produce their goods andservices without significant human and other inputs located outside the market
jurisdiction. As discussed above, digital economy enterprises produce their goods andservices through personnel and other inputs in the same way as other enterprises. Allsuch activities take place somewhere, even if that location is not a market jurisdiction.
We believe that the jurisdiction in which such activities take place has the right to impose
direct tax on income attributable to those activities, regardless of whether the enterprise
operates in the digital economy or not.
The Discussion Draft further acknowledges that the domestic laws of many jurisdictions
are consistent with the principle that income follows activities that generate the income.
To achieve direct taxation based on access to a market, countries would first be required
to change their domestic laws to impose direct tax nexus on this basis. Treaty law
changes would follow thereafter. A wholesale transition to a new nexus regime would
thus be a two-step process that would require global consensus.
B. Data
The Discussion Draft identifies the collection, storage, and use of data as a feature of thedigital economy. The DEG emphasizes that all enterprises, including digital / internetcompanies, use, and have long used, data to enhance their product and service offerings.
Examples of such enterprises include grocery stores that print coupons based on
customers’ purchasing behavior and financial institutions that offer services based on

11172customers’ financial profiles. Any taxation Option based on data collection would needto take into account these similar business models.
The DEG further emphasizes that the acquisition of data alone does not create value forsuch enterprises. Rather, value creation lies in the development and use of new andsophisticated tools to structure and analyze this data. The development and use of thesetools may or may not take place in one or more of the jurisdictions from which the data
originates.
The DEG considers data to be one input into the process of value creation, in the natureof a commodity. Thus, the fact that an enterprise may be able to deploy “massive
computing power and broadband connection” has no bearing on the value of data itself
and instead relates to the process of creating value through the process of structuring andanalyzing data. 36 The Discussion Draft acknowledges this point by observing that “itmay be challenging . . . to assign an objective value to the raw data itself.” 37 The DEG
strongly agrees with the Discussion Draft’s observation and reiterates its belief that therelative value of raw data is minimal as compared to the value of aggregated andanalyzed data.
The DEG also agrees with the Task Force that it is “challeng[ing]” to characterizetransactions in which users receive free products and services in exchange for providing
data. 38 If such transactions are properly characterized as barter transactions, users
recognize income in connection with these transactions and are subject to direct tax on
this income. Users currently do not consider the receipt of free products and services inexchange for data to be a taxable transaction and would undoubtedly be opposed to any
change in treatment that limits, or imposes a tax cost on, their access to such freeproducts and services.
C. Characterization
The Discussion Draft notes that questions may arise concerning the appropriate
characterization of some products and services provided through digital technology. In
particular, the Discussion Draft refers to the absence of guidance regarding cloudcomputing transactions.
The DEG agrees that the OECD could provide some useful clarification in this area. On
this point, the guidance of the Technical Advisory Group on Treaty Characterisation ofElectronic Commerce Payments (the “Treaty Characterisation TAG”) remains relevant tothe characterization of income streams from the activities of digital / internet companies.
In a 2001 report (the “Treaty Characterisation TAG Report”), the Treaty Characterisation

36

See Discussion Draft ¶ 176.

37

See Discussion Draft ¶ 184.

38

See Discussion Draft ¶ 185.

12
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TAG discussed approaches to characterizing common e-commerce transactions, severalof which fall within the scope of “cloud computing” transactions. The Treaty
Characterisation TAG determined that section 7701(e) of the U.S. Internal Revenue
Code, which provides factors to distinguish lease contracts from services contracts, wasuseful for this purpose. 39 The Treaty Characterisation TAG then applied the section
7701(e) factors to payments for application and data warehousing services and concluded
that such payments should be characterized as services income, not rental income. 40
The Treaty Characterisation TAG reached this conclusion in part because providers ofapplication and data warehousing services normally own the equipment through which
they provide services, provide services to many customers using this equipment, and do
not allow service recipients to obtain exclusive possession of or control over theequipment. In addition, recipients of application services access software concurrently
with other customers and may not have possession or control over the software. The
Treaty Characterisation TAG’s characterization of payments for application and data
warehousing services as services income is consistent with the OECD’s characterizationof payments in transponder leasing arrangements as business profits rather thanequipment royalty income on the grounds that such arrangements provide access totransmission capacity as opposed to physical possession of a transponder. 41
Accordingly, the DEG respectfully recommends that the Task Force endorse the priorextensive and thorough work by the Treaty Characterisation TAG and the OECD incharacterizing payments, including in cloud computing transactions, for purposes of any
further consideration of Options regarding creating a withholding tax on digitaltransactions.
D. VATThe Discussion Draft identifies two scenarios in which a nonresident supplier may beable to supply goods and services to a consumer without VAT, in contrast to a local
supplier of the same goods or services. 42 While the two examples given are not specificto digital economy transactions, we understand the concern expressed by many
commentators that the current VAT rules do not create a level playing field, including in
the provision of digital goods and services. While sound policy arguments certainly exist
39
See Treaty Characterisation TAG Report ¶ 28 (2001). The section 7701(e) factors are: “whether or not . . .
(A) the service recipient is in physical possession of the property; (B) the service recipient controls theproperty; (C) the service recipient has a significant economic or possessory interest in the property; (D) theservice provider does not bear any risk of substantially diminished receipts or substantially increased
expenditures if there is nonperformance under the contract; (E) the service provider does not use the property
concurrently to provide significant services to entities unrelated to the service recipient; and (F) the total
contract price does not substantially exceed the rental value of the property for the contract period.”40

See Treaty Characterisation TAG Report ¶ 30 (2001).

41

See OECD Model Tax Convention, Commentary, Art. 12 ¶ 9.1.

42

See Discussion Draft ¶¶ 136-142.

13
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to support the position that a jurisdiction should not impose a tax collection obligation on
an enterprise over which it has no direct legal jurisdiction, we appreciate that the unevenplaying field phenomenon can exist in the absence of reciprocal trade with jurisdictions
which also do not impose an extraterritorial indirect tax collection obligation.
As a policy matter, the DEG believes that an indirect tax is the proper tax to be levied byreference solely to the place of consumption. Accordingly, the DEG views theextraterritorial obligation to register for, charge, collect, and remit indirect tax on B2Ctransactions as the Option which is most responsive to the policy challenge of digital
economy enterprises being able to engage in remote selling into a jurisdiction.
VII.

Potential Options to Address the Broader Tax Challenges Raised by the
Digital Economy

The DEG welcomes the opportunity to comment on the Options and respectfully asks the
Task Force to continue to seek input from stakeholders on the Options through theremainder of the BEPS project. The DEG strongly agrees with the Task Force that the
Ottawa framework principles of neutrality, efficiency, certainty and simplicity,
effectiveness and fairness, and flexibility provide the appropriate framework forevaluating the Options. The Ottawa framework principles are inherently compelling. For
example, governments should not fashion tax rules that favor one form of economic
activity over another (the “neutrality” principle) and should tailor reasonable tax laws toensure that taxes are collectible in light of limited enforcement resources (the“effectiveness” principle).
The OECD has consistently applied the Ottawa framework principles in evaluating
proposals for taxing digital / internet companies, including in the 2004 report of theTechnical Advisory Group on Monitoring the Application of Existing Treaty Norms for
Taxing Business Profits (the “Business Profits TAG”). 43 In addition, the Ottawa
framework principles have found wide acceptance outside of the OECD. In a 2001
report, the G7 Finance Ministers welcomed the progress of the OECD with respect to thetaxation of e-commerce and urged the OECD to continue to work towards implementing
the Ottawa framework principles in this regard. 44 Likewise, in 2001, the Indian HighPowered Committee on Electronic Commerce and Taxation issued a report that endorsed
the Ottawa framework principles as guidelines for developing tax policy in the arena of e-

43See, e.g., Business Profits TAG, “Are the Current Treaty Rules for Taxing Business Profits Appropriate for
E-Commerce?” (“Business Profits TAG Report”) ¶¶ 60 - 98 (2004); Working Party No. 9 on Consumption
Taxes, “Consumption Tax Aspects of Electronic Commerce” ¶ 4 (2001).
44
Report of the G7 Finance Ministers to the Heads of State and Government, “Fighting the Abuses of the
Global Financial System” (2001).

14
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commerce. 45 Scholarship takes an equally positive view of the Ottawa framework
principles. 46
The DEG also agrees that the Ottawa framework principles are not the exclusive factors
to consider when evaluating the Options. Policymakers should also consider whether an
Option reflects a fundamental shift in tax policy that must first be the subject of a broadand open debate. One example of a fundamental shift is where an Option abandons theestablished principle that direct tax is imposed only where income is created, for the
principle that merely trading with a jurisdiction constitutes a basis for being subject todirect tax. Another example is the elimination of Article 5(4), which represents morethan 50 years of international consensus that certain activities contribute to the
productivity of an enterprise but are sufficiently remote from the actual realization of
profit so as not to justify a PE. 47 Similarly, policymakers should consider whether any
Option could be characterized as a special rule for the digital economy and should reject
any sector-specific rule that singles out and discriminates against a form of businessactivity.
The following sections of this comment letter assess the “pros and cons” of the Options
and then analyze the Options using the Ottawa framework principles.

45

High Powered Committee on Electronic Commerce and Taxation, Report, Ch. 2, pp. 55 - 56 (2001).

46

See, e.g., Arthur J. Cockfield, The Rise of the OECD as Informal ‘World Tax Organization’ ThroughNational Responses to E-Commerce Challenges, 8 YALE J. L. & TECH. 136, 170 (2006) (acknowledging that
the Ottawa framework principles are the “better approach” to addressing the taxation of e-commerce).
47
See The Elimination of Double Taxation, Report of the Fiscal Committee of the O.E.E.C., at 49 (Sept.
1958); Working Party No. 1, Committee on Fiscal Affairs (OECD), Revised Commentary of the 1963 Draft
Convention, at 20 (Nov. 5, 1976); Working Party No. 1, Fiscal Committee (OEEC), Report on the Concept ofPermanent Establishment, at 10 (Aug. 29, 1957).

15
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A. Modifications to the Exemptions from Permanent Establishment Status
1. Eliminate Article 5(4)
Pros

Cons

Achieves clarity because all business activities
that a nonresident enterprise conducts througha fixed place at its disposal or a dependent
agent with authority to conclude contracts giverise to a PE.
Affects all enterprises, not only digital /internet companies.
Results in some modest additional direct tax
for market jurisdictions from all enterprises,
not only digital / internet companies, that
conduct Article 5(4) activities in thosejurisdictions.

Departs from more than 50 years of international consensus
that certain activities do not justify PE status.

Large majority of additional tax revenue will be collectedfrom enterprises other than digital economy enterprises.
Deters enterprises from performing supportive functions inmarket jurisdictions, thereby imposing a financial
impediment to international trade.
Increased administrative and compliance costs arising fromlocal tax return obligation for low-value activities,
including disputes over profit attribution.
Additional tax revenue likely to be small as Article 5(4)activities in fact normally are low value-add activities, andmany groups choose to structure such activities inseparately taxable entities in any event.

This Option satisfies:••

the neutrality principle because it applies to all enterprises.
the certainty and simplicity principle because all business activities that anonresident enterprise conducts through a fixed place at its disposal or adependent agent with contract-concluding authority give rise to a PE.

This Option does not satisfy:•••

the efficiency principle because it will increase compliance and administrative
costs significantly, including the need to determine profit attribution for a large
number of low-value activities, without an equivalent direct tax benefit.
the effectiveness and fairness principle because it will impose significant
compliance and administrative burdens on nonresident enterprises with minimal
activities in a jurisdiction.
the flexibility principle because it represents an overbroad response to the narrowconcern that Article 5(4)(a)-(d) activities of a few nonresident enterprises are notpreparatory or auxiliary for those enterprises.

16
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A. Modifications to the Exemptions from Permanent Establishment Status
2. Eliminate Article 5(4)(a)-(d) / Require Article 5(4)(a)-(d) to be Preparatory
or Auxiliary
Pros
Affects all enterprises, not only digital /internet companies.
Results in some modest additional direct tax
for market jurisdictions from all enterprises,
not only digital / internet companies, that
conduct Article 5(4) activities in thosejurisdictions.

Cons
Departs from clear international consensus that theactivities in Article 5(4)(a)-(d) are by definition preparatory
or auxiliary.
Additional disputes as to whether typically low-value
activities are preparatory or auxiliary activities for aparticular enterprise.
Existing Article 5(4)(f) already provides a rule requiring
combined Article 5(4)(a)-(e) activities to be preparatory or
auxiliary.
Existing Article 5 Commentary already includes antifragmentation rule.
Deters enterprises from performing supportive functions inmarket jurisdictions, thereby imposing a financial
impediment to international trade.
Increased administrative and compliance costs arising fromlocal tax return obligation for low-value activities,
including profit attribution issues for typically modest
activities.

This Option satisfies:••

the neutrality principle because it applies to all enterprises.
the flexibility principle because it allows treaty partners to determine whether
activities are preparatory or auxiliary on a case by case basis as business models
evolve in tandem with technology.

This Option does not satisfy:•••

the efficiency principle because it will increase compliance and administrative
costs significantly without an equivalent direct tax benefit.
the certainty and simplicity principle because it will require taxpayers and tax
authorities to make a subjective determination on a case by case basis whether
activities are preparatory or auxiliary.
the effectiveness and fairness principle because it will give rise to disputes overwhether activities are preparatory or auxiliary.

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178

B. A New Nexus Based on Significant Digital Presence
Pros

Cons

Yields additional direct tax for market jurisdictions bycreating a PE for certain nonresident digital / internetcompanies with no functions, assets, or risks in ajurisdiction.
Responds to public pressure regarding perceived baseerosion by digital / internet companies.

Applies only to a subset of digital / internet companies,
effectively creating a special rule for the digital economy.
Directly conflicts with Discussion Draft conclusion that it
is not possible to separately define the digital economy.
A radical departure from the fundamental principle that anonresident enterprise must be physically present in ajurisdiction to be subject to direct tax in the jurisdiction.
No or minimal profit could be attributable to a PE under
this Option:• No profit attributable under the current rules
because no people functions, assets, or risks arepresent in the relevant jurisdiction.
• No profit attributable under rules that may emerge
under the OECD’s work on Chapter VI of theTransfer Pricing Guidelines because attributing
profit to a PE under this Option is inconsistent withthat work.
Proposed description of targeted enterprises as having no
physical elements in the value chain other than websites
and servers is an unrealistic description of any active
business.
Definition includes many subjective standards that arelikely to give rise to disputes between taxpayers and tax
authorities.
Extraterritorial tax liability results in significant
administrative, compliance, and dispute resolution costs.
Significant impediment to international trade in digital
goods and services.

This Option does not satisfy:•••

the neutrality principle because it targets only “pure play” digital / internetcompanies.
the efficiency principle because it will result in significant administrative andcompliance costs while yielding at best a modest direct tax benefit.
the certainty and simplicity principle because it is uncertain how to attributeprofits to a location from which people functions, assets, and risks are absent.

18
179

•
•

the effectiveness and fairness principle because it imposes tax in locations where
value is not created and changes settled law for a single sector of the economy inresponse to concerns about remote sales.
the flexibility principle because it focuses on factors intended to define a certain
set of “pure play” digital / internet company characteristics that may quickly
become ineffective or obsolete.

19180

C. Virtual Permanent Establishment
Pros

Cons

Yields modest additional direct tax for market jurisdictions
Applies only to a subset of companies, although notby creating taxable nexus for nonresident enterprises with no limited to digital / internet companies, by virtue of very
functions, assets, or risks in a jurisdiction.
broad scope of website hosting and on-line contracting
rules.
Responds to public pressure regarding perceived base
Conflicts with Discussion Draft conclusion that it is not
erosion by digital / internet companies.
possible to separately define the digital economy,
although the criteria selected cover large scope ofbusiness activity.
All the virtual PE alternatives - the “virtual fixed place ofA radical departure from the fundamental principle that abusiness PE” in particular - impose direct tax on a muchnonresident enterprise must be physically present in a
wider swath of enterprises than “pure play” digital / internet jurisdiction to be subject to direct tax.
companies.
“Virtual fixed place of business PE” applies to any
enterprise that uses a local web hosting provider,including unrelated providers.
“Virtual agency PE” applies to any enterprise that
conducts internet sales, thus creating a very wide scopeof application.
“On-site business presence PE” apparently is redundant
to prior OECD work on the “services PE” alternative
now expressed in the Article 5 Commentary.
“Virtual fixed place of business PE” rule would eliminate
any local independent web hosting industry, if using a
web hosting provider results in a PE.
No or minimal profit could be attributable to a PE under
this Option:• No profit attributable under the current rules
because no people functions, assets, or risks arepresent in the relevant jurisdiction.
• No profit attributable under rules that may
emerge under the OECD’s work on Chapter VIof the Transfer Pricing Guidelines because
attributing profit to a PE under this Option isinconsistent with that work.
Results in significant administrative, compliance, anddispute resolution costs, which will be particularly
burdensome to emerging enterprises.
Significant impediment to international trade in digital
goods and services.

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181

This Option does not satisfy:
•
•
•
•

•

the neutrality principle because the virtual PE alternatives are intended to resultin different tax outcomes for e-commerce and conventional forms of commerce.
the efficiency principle because PEs in all customer jurisdictions will result insignificant compliance and administrative costs for taxpayers and tax authorities
which outweigh the amount of tax to be collected.
the certainty and simplicity principle because the amount of profit attributable to,and thus the amount of direct tax on, a virtual PE is uncertain.
the effectiveness and fairness principle because the amount of any profit
attributable to a virtual PE will likely be modest but will still be subject todisputes, and thus outweighed by the significant administrative and compliancecosts of this PE, and because a “virtual fixed place of business PE” essentially
imposes a tariff on any enterprise that uses a local web hosting provider.
the flexibility principle because it generally applies by reference to technologicalfeatures of ICT that enterprises employ in current commercial practice and thus
runs the risk of becoming ineffective or obsolete.

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D. Creation of a Withholding Tax on Digital Transactions
Pros

Cons

Allows market jurisdictions to impose
substantial direct tax on nonresident ecommerce providers.
Responds to public pressure regarding perceived
base erosion by digital / internet companies.

Specifically targets certain digital / internet companies, thereby
creating a special rule for the digital economy.
Conflicts with Discussion Draft conclusion that it is not possible
to separately define the digital economy.
Deviates from settled conclusions regarding the characterizationof e-commerce payments as business profits not subject towithholding tax. 48
Definition of targeted digital goods and services likely to create
significant disputes over characterization of transactions if notbased on principles developed in prior OECD work.
Withholding tax is a poor proxy for a tax on net income because
gross revenues do not account for allocable deductions.
Places low-margin digital / internet companies at a competitive
disadvantage vis-à-vis their high-margin counterparts.
Increases the risk of double taxation due to characterization
disputes and inability to claim full foreign tax credits inresidence states for gross-based taxes.
Will need to consider in light of EU fundamental freedom
principles if intent is to discriminate against nonresident
suppliers. 49
Will need to consider compatibility with World Trade
Organization rules if intention is to discriminate against
imports. 50
Deters e-commerce companies from providing goods andservices to consumers in jurisdictions that implement thisOption.

This Option satisfies:••

the efficiency principle because corporate payors subject to local audit will act as
tax collectors.
the certainty and simplicity principle in part because a withholding tax eliminates
uncertainty associated with a tax on the net income of a PE, if the categories ofincome subject to tax are clear.

48

See Treaty Characterisation TAG Report ¶¶ 13 - 31 (2001).

49

See UK Report ¶ 1.20.

50

See UK Report ¶ 1.25.

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This Option does not satisfy:
•
•
•

•

the neutrality principle because it specifically targets e-commerce enterprises.
the certainty and simplicity principle in part if the definition of categories ofincome subject to tax is subjective and amenable to dispute.
the effectiveness and fairness principle because a withholding tax is an imperfectproxy for an income tax, which is imposed on net income, not gross income;gives rise to a risk of double taxation; discriminates against low-margin
taxpayers; and presents significant implementation challenges in B2Ctransactions as no obvious withholding agent exists.
the flexibility principle because it represents a draconian solution in response toperceived base erosion in some cases.

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E. Consumption Tax Option
Pros
Levels the playing field between resident andnonresident suppliers.
As a policy matter is the appropriate tax to impose byreference to the location of consumption and a
consumer base.
Responds to public pressure regarding perceived baseerosion by digital / internet companies.
Does not change the balance between source andresidence taxation.
Low-value good exception amendments apply to all
supplies of goods, regardless of the medium of supply.
Compliance challenges of extraterritorial obligation
imposed on nonresident digital service suppliers havebeen addressed in EU.

Cons
Reduction of low value goods limit creates additional
compliance costs for transactions by definition notproducing significant VAT.
Significant administrative burden required to register andreport, potentially in many jurisdictions in which enterprise
conducts no business activities.
Mechanisms to identify user location may be imprecise,creating need for reasonable approach to demonstrating
location.
Extraterritorial compliance obligations generally notfavored in international law.
Practical limits on ability of smaller enterprises to comply
with complex registration and reporting requirements for
digital supplies.

This Option satisfies:•••

the certainty and simplicity principle in part because imposing tax at the locationof consumption allows suppliers and consumers to anticipate the tax
consequences of transactions.
the effectiveness and fairness principle in part because a consumption tax falls at
the time of and in the location of all consumption and does not have a distortive
effect on commerce.
the flexibility principle because a tax that applies purely by reference toconsumption focuses solely on whether a consumer acquires a good or a service
and is thus best positioned to adapt to technological and commercial
developments with respect to the medium of supply.

This Option does not satisfy:••••

the neutrality principle because it applies only to digital supplies by nonresident
enterprises.
the certainty and simplicity principle in part because any extraterritorial tax
regime will necessarily entail some noncompliance.
the effectiveness and fairness principle in part because it allows jurisdictions toimpose extraterritorial tax obligations on enterprises that may conduct nobusiness activities in the jurisdictions.
the efficiency principle because the administrative burden for many suppliers will
be disproportionate to the amount of tax collected.
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F. Summary
The DEG believes that of the several Options, the consumption tax Option applying toremote digital supplies to consumers is the most appropriate Option as a matter of tax
policy. It addresses directly the challenges of the digital economy, as it can be seen asleveling the playing field between resident and nonresident suppliers.
The DEG nevertheless notes that extraterritorial compliance obligations are rarely
imposed, for policy, equity, and administrative reasons. The proposed consumption tax
Option will present compliance and administrative challenges for both tax authorities andnonresident suppliers. The DEG also notes, however, that an extraterritorial consumption
tax solution is gaining some acceptance outside the EU, as developments in South Africashow.
The DEG believes that the Consumption Tax Technical Advisory Group and Working
Party No. 9 on Consumption Taxes are the appropriate bodies to engage in the further
work necessary to resolve compliance and administrative challenges. To allay concerns
about compliance and administrative burdens, the DEG respectfully recommends that thisOption be revised to include the following components: (i) online registration for
nonresident enterprises in both the consumer jurisdiction’s native language and English;(ii) reasonable registration thresholds; (iii) online filing in the consumer jurisdiction; (iv)reasonable methods to prove customer location and other relevant attributes necessary to
determine the applicable tax; and (v) reasonable means of collecting and remitting theapplicable tax. A global equivalent of the EU’s Mini One-Stop Shop may also facilitate
consumption tax registration.

*

*

*

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Yours sincerely,

Gary D. Sprague

Mary C. Bennett

Ethan S. Kroll

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BEPS-New vision for Taxation in the 21 Century
By Djelloul Omari, CPA, CGA, D.Fisc.
2014-04-14
Introduction
It is no secret for the Tax community that several principles used for a long time in taxation are
now obsolete. For example, Internet rendered the physical nexus of a Permanent
Establishment, (PE), obsolete. When a customer can buy online a product or a service
everywhere in the world, server location as a PE does not really give a fair picture where thecompany is conducting its business. It is simply everywhere where there is a customer and weneed to rethink the idea where a company is doing business.
Corporate groups, although spreads around the world through subsidiaries, are acting like one
single enterprise, either because that is cost effective to maximize profit or to reduce theoverall Tax burden, which it a legitimate purpose from a business point of view. The problem
has to be within Tax rules as they stand now.
In this globalisation, corporations were way ahead of tax authorities to optimize their risk
management at all levels. So, Governments are losing billions of Taxes, through Aggressive Tax
Planning, Transfer Pricing and all kind of schemes facilitated by the differences in Tax rules
between countries, incentives from Tax havens and bank secrets. In different forums like the
OCDE and the G20, governments are suddenly aware of the urgent need to quarantine Tax
havens, put the pressure to get rid of bank secrets, promote the exchange of information
between Tax authorities and to rethink major principles and rules of Taxation to seek someharmonization for fairness between the parties.
This is a humble contribution to the collective effort.
Basic rules
Permanent Establishment, (PE)
There is a wide understanding that the PE notion is no longer a physical nexus for a fix place ofbusiness and the need to have the same definition for E-Commerce and for the traditional
business. So, what is manifestation of doing business in general for both? We suggest that isbuying and selling goods or services. Therefore, a customer is the base for having a businessthrough the internet or elsewhere. Businesses earn income only when they sale their products
or services. It seems then that the location of the customer is the common thread to lean on
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and we can free ourselves from the fix place of business, mind and management or the server
location to focus on the customer’s location.
We just linked sales tax to income tax. As there is already a big effort to secure sales tax
because of the sizable Cash Flow involved, we think that there is a good opportunity to parallel
the income tax and save resources.
Registration
This is the punch line where we have a technical challenge that needs world conventions andcollaboration to function: let’s imagine that a business registration everywhere in the world
requires an online unique number, initiated by a local authority and that only differentiated bycountry and of possible subdivisions for federations. This means, that for doing business in any
country after its own jurisdiction, a company will produce that same number for validation byother authorities where it seeks doing business.
Of course local authorities may think of a threshold for smaller businesses of a single working
person for example. The General public is largely aware of the issue of tax evasion or avoidance
and its impact on the erosion of public services. It is willing to do its part to support publicauthorities by systematically say asking for a bill of sale. Public campaigns is always an option
to stimulate good citizenship.
Even some small businesses with local scope, like restaurant or a pub’s cahier can very well behooked to the internet.
Billing sales online will take into account the customer location ( final shipping destination) for
sale’s tax to be paid by the customer and an income tax instalment through a percentage of thebill before sale tax will to be paid by the company. The purpose here is to secure an income tax
amount, as close as possible to actual, from every single sale that will be adjusted later uponregular Tax filing. Past filings may be used to determine a rate for these installments. All selling
entities, regardless of their legal status: company, partnership, trust or other are subject to thesame rule when a sale is done. The adjustment will take into account the legal status, if andwhen warranted, of the entity on filing.
A local authority still has the same possibility as before to promote job creation or support a
weak sector through tax incentives that will be considered also when filing.
This kind of registration should be secured by the authorities who should retain a direct and, ofcourse, confidential access to make sure that the billing does not shift a company income tax tocustomers, but customers pay only sales tax and company pays its own instalment on theincome tax.
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The company has the regular fiduciary duty to collect and remit those taxes to every jurisdictionin which it is doing business.
Needless to say that local authority should intervene to prevent a company from doing businesswithout a valid registration and/or giving online access to its sales.
Tax Filing
Financial Statements
Here, there is an obvious and natural trend to refer to International GAAPs for standard andeasy comparison. There is no real need for more explanations.
Consolidation
As we know corporate groups, guided by optimization and through subsidiaries in different
locations aim to locate income in low tax jurisdictions and expenses in high tax ones, regardlessof where business is actually done or where value is created. This is making it difficult for local
tax authorities to see the global and real picture to correct it when it is abusive. So, for Tax
purpose we suggest that the norm for filing would be a full consolidation of a group withadditional information for business done country-by country: Gross sales, Sales Tax, income
Tax……whatever needed information. The share of income that will not qualify under GAAP for
consolidation, like from a non-controlling interest in a partnership, will be added to theconsolidated income of a group where an entity of the group has that interest.
That Audited Financial Statements and country-by-country information has be the same for all
and produced to every concerned jurisdiction.
The overall result for tax purpose, is that all inter group exchanges are eliminated and we neednot to worry about the arm length principle (that attempts to avoid Income shift throughtransfer pricing), economic substance or beneficial ownership.
Taxable income may vary from one jurisdiction to another according to rate of inclusion for
taxability of different items, tax credits and other local incentives, but every jurisdiction has afull and global picture of the group and adjusts its income Tax according to international
agreements and local needs to introduce fair and acceptable incentives.
A jurisdiction will tax its fraction of the overall income at its own rate and after its own
incentives.
The only deductible cost within a group will be from transactions with third parties that meetnecessarily the economic substance, and reasonable provisions under GAAP, like amortization,
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and reserves that are monitored by specific and generally accepted rules and validated byindependent professionals.
No more Daylight loan’s pretext to generate artificial interest expense in one jurisdiction to thedetriment of another.
Special Industries
Customer location may be not fit for special industries, like ships, trains, air planes, where thecompany is earning its income through a distance and the customer is paying to reach or havegoods reach a final destination.
But what Taxes do recover for a jurisdiction? Is it a fraction of the cost of infrastructure andpublic facilities for use and a permission to pass through? We suggest that a simple answer isprobably close to those lines.
From the customer point of view the payment is made to reach the final destination, but eachcrossed jurisdiction has a legitimate claim to tax a fraction of the income generated in its
territory as its infrastructure is solicited and needs to provide for its maintenance.
So, we think that when these special industries are filing their Tax returns, the distance criteria
are more suitable to consider.
Conclusion
We hope this approach, where the main lines were presented very briefly, has some merit toretain attention for further possible development.
In the other hand, in a just and a fair world, the active help of developed countries todeveloping ones to hook them to such a worldwide network will assist them build their own Tax
administrations and collect their right share of taxes. This will improve developing countries
infrastructure and supplying needed public services to their communities with less assistancefrom developed countries.
This will have also the merit to close uncontrolled holes in the system that will ultimately
promote avoidance in those jurisdictions.

Thank you for your time and attention
Djelloul Omari
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ETNO-GSMA Tax Policy Committee Response to the OECD’s Discussion Draft on the Tax
Challenges of the Digital Economy

The ETNO-GSMA Tax Policy Committee (The Committee) appreciates the opportunity to provide
its input at this stage of the process and provides the following comments.
The Committee welcomes and supports the purpose of the Task Force and is willing and available
to provide its contribution in this or future phase of this complex work.
The Committee strongly supports the principle that the possibly complex tax challenges that are
posed by an evolving economic environment should be addressed in a comprehensive way atOECD level. The Committee anyhow acknowledges that some European Union countries have
tried to unilaterally deal with the problem: this is not the way. The lack of coordination could be very
harmful: double taxation (or even double deduction) situations might arise.
Businesses operating in the field of digital economy are aware of the urgency to find a solution to
the BEPS issue. In this perspective, it seems appropriate to establish a set of common rules; suchrules should be:oCompliant with EU fundamental principles, Directives and RegulationsoCapable to ensure a fair level of taxation, in accordance with some agreed drivers
and guidelines referring to some key questions (e.g., the appropriate place oftaxation both for direct and indirect taxes; the appropriate compensation in case ofintergroup transactions);oCapable to ensure a level playing field (as far as taxation is concerned) in thecompetitive scenariooWorkable from a business point of view (even in a cross-border scenario, which isoften the rule for the digital economy transactions) and easily auditable from the tax
administrations’ point of view

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•

According to this set of rules, there should be no room for any case of double taxation (norfor any case of zero/close to nil taxation as a result of wholly artificial arrangements orunintended consequences of legislative mismatches), since such cases could be very
harmful for the definition of a fair competition environment, and a co-operative relationshipwith the tax authorities.

•

A last, but not least, fundamental principle of the digital economy (future) taxation
guidelines, should be the neutrality in the tax treatment of operations and supplies, incomparison with the corresponding physical products; lack in neutrality might result in alowering of digital economy huge potential.

•

The same neutrality should be applied to the telecommunications services and the various
business arising from the digital economy; it’s clear that the relationship between them issignificant, and shall become even more. Taxation principles have surely to consider thisperspective, in order to avoid discriminations and lack of workability.

•

Currently clear distortion exists between services being offered by nationally regulated
telecoms operators and trans-national Internet service providers which offer services
across borders which can offer clear advantages in terms of industry specific taxes or evencorporate income taxes.

•

Specifically the negative impact of mobile-specific taxes on consumers, the operators andthe country economic development should be considered and assessed carefully in order totry and avoid as far as possible the introduction of distortive measures which heavily affectthe creation of even playing field.

A. General comments on the Discussion Draft.
1. The Committee fully endorses the Task Force’s view that the "Ottawa Taxation Framework
Conditions", i.e. Neutrality, Efficiency, Certainty, Simplicity, Effectiveness, Fairness,
Flexibility are still relevant today. The Committee considers that the above principles shouldbe the basis to evaluate any options to address the tax challenges of the digital economy.

2193

2. The Committee fully supports the Task Force’s decision that ring-fencing the Digital
Economy as a separate sector and applying ad hoc tax rules is neither appropriate nor
feasible. The Committee is of the opinion that the Digital Economy is not characterized by
the presence of new business models, instead ‘digital’ is really just a means of delivery andany concerns should be addressed by the appropriate application of transfer pricing rules,
tax treaties and challenges to artificial arrangements. If BEPS Action Points 6-10 are
appropriately addressed then there should be little need to focus on special measures for
digital goods and services, data analytics, IP, and other intangibles.

3. The Committee does not share the Task Force’s statements in some paragraph of theDiscussion Paper (e.g. 126, 127, 128, 129) where it is somehow envisaged thatmultinational systematically misrepresent to tax authorities the actual functions, assets andrisks located in a jurisdiction. Reference to words like "alleged", "purported" etc. does nothelp in creating a cooperative environment to find an effective solution to the BEPS issue.
The Committee thinks that current rules do already exist in most jurisdictions to effectively
target these alleged behaviors which are not typical anyhow of the Digital Economy. The
Committee considers that there is no need to introduce new rules, options, taxing models tothis purpose.

4. The Committee considers that ways to improve the current dispute resolution mechanism
are a necessary part of the BEPS initiative in the Digital Economy (actually not just in the
Digital Economy). The Committee has noted that no reference to this very critical issue
exists in the Discussion Paper and would very much welcome its inclusion.

5. The Committee is particularly concerned that formulary approaches are considered indifferent parts of the Discussion Draft where the Task Force deals with interest deductions(Para 157) or business risks (para 163) or base eroding payments (Para 165). The
Committee considers this potentially disruptive as it could erode the Arm’s Length Principle.

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6. The Discussion Draft deals with the topic of Cloud Computing Taxation (para 187 and 188):
this is a highly complex topic which requires careful consideration of the consequences ofany possible option. The Committee is of the opinion that any attempt to qualify the relevant
payments requires an in-depth analysis of the very complex technical implication of Cloud
Computing and is available to support in this field, if required.

B. Potential Options to address the broader tax challenges raised by the digital economy.

7.

Modification to the exemptions from PE status: the Task Force is considering several
variation, included the elimination of the paragraph 4 of article 5 of the OECD Model Tax
Convention. This needs to be carefully managed and its consequences assessed in order toavoid to trigger undue taxation in jurisdiction where mere preparatory and auxiliary activities
are carried out.

8. The Committee noted that the Discussion Draft defines a "fully dematerialized digital
activity" by means of a list of qualifying elements (para 213). Starting from that, theDiscussion Draft tries to identify a “significant digital presence” in a jurisdiction byconsidering a number of features. The Committee considers that this is exactly the way of
ring-fencing the digital economy which the Task Force itself has stated to be neither
appropriate nor feasible.

9. The whole concept of "Virtual PE" is also seen as potentially creating some real challenges
to operators merely wanting to transact across borders.

419510. Creating a WHT on digital transactions: in general terms, revenue is a poor proxy for net
income and in any case, the principle of introducing a wht on digital transactions stems,
once again, from the ring-fencing of the digital economy.

11. The Committee acknowledges that the Discussion Draft deals with the potential challenges
of collection of VAT in the Digital Economy. The Committee appreciates that remote digital
supplies to consumers are currently being dealt with by WP9 through the OECD VAT/GST
TAG process (to which The Committee contributes). The Committee is of the opinion that
the TAG process is the most effective and appropriate considering the highly technicalsubject. The Committee here wants anyhow to highlight two comments:o

The Committee welcomes the Task Force’s statement at paragraph 223 that
registration thresholds should be used to alleviate burdens on business and to make
VAT systems workable in practice. This is important to ensure that businesses are
not forced to register for VAT and to deal with all the complexities of a different VAT
system in relation to a small number of supplies. The use of thresholds is therefore
important in order to ensure that the cost of compliance is proportionate forbusiness. In this respect, it is important to note that simplified registration proceduresis only part of the answer to alleviating the burden of business of having to register
for VAT remotely – it must be coupled with registration thresholds in order to ensurethat businesses are only required to register for VAT where there is a sufficient levelof supplies in order to make this worthwhile for both the business and the tax
authority.

o

The Committee considers that it is extremely important that the VAT place oftaxation/registration rules remain separate and distinct from the rules which apply tothe determination of a PE in a corporate tax context.

5196

We look forward to continued dialogue on this important topic.

Best regards.
Brussels, 14th April 2014

Daniel Pataki, Director, ETNO

Martin Whitehead, Director, GSMA Europe

6197European BusinessInitiative on Taxation(EBIT)

Comments on the OECD's Discussion Draft on
BEPS ACTION 1:
ADDRESS THE TAX CHALLENGES OF THE DIGITAL ECONOMY

At the time of writing this submission, EBIT Members included: AIRBUS, BP, CATERPILLAR,
DEUTSCHE LUFTHANSA, INFORMA, JTI, LDC, MTU, NUTRECO, REED ELSEVIER, ROLLS-ROYCE,SAMSUNG ELECTRONICS, SCA, SCHRODERS and TUPPERWARE.

198

EBIT Comments on the OECD's Discussion Draft on BEPS Action 1: TAX CHALLENGES
OF THE DIGITAL ECONOMY

Pascal Saint-Amans
Director Centre for Tax Policy and AdministrationOECD
2, rue André Pascal
75016 Paris
FRANCE

Brussels, April 2014
Dear Pascal,
EBIT welcomes this opportunity to provide comments to the OECD on the Discussion Draft
on BEPS ACTION 1: Address the Tax Challenges of the Digital Economy (hereinafter:“Discussion Draft”).
General Comments
EBIT agrees with the OECD in its Discussion Draft that “ring-fencing the digital economy as aseparate sector and applying tax rules on that basis would be neither appropriate nor feasible”
and that it will therefore be important for business that the neutrality principle is satisfied forany of the OECD’s proposed potential solutions.
V. TACKLING BEPS IN THE DIGITAL ECONOMY
2. Restoring Taxation on Stateless Income
We note that the Discussion Draft in relation to direct tax is focused heavily on restoring
taxation on “stateless income” and that this is expected to be delivered by various measures
including on treaty abuse, hybrids, PEs, CFC rules etc. Indeed, EBIT believes that the answers
to the difficulties with BEPS in relation to the digital economy lie in addressing the otheraction items rather than special measures for the digital economy.
VII. POTENTIAL OPTIONS TO ADDRESS THE BROADER TAX CHALLENGES
RAISED BY THE DIGITAL ECONOMY
3. Options Proposed to the Task Force
3.1. Modifications to the Exemptions from Permanent Establishment Status
EBIT believes that it may be reasonable to revisit the borderline between what is to count as
crossing the PE threshold rule and what is treated as not creating tax nexus for the purposesof the rule given the potential to operate in the market of another state without or with hardly
any physical presence. However, EBIT considers that the variations of the proposed changes
by the OECD to the exemptions of PE status for various items of a preparatory or auxiliary
nature (Article 5, paragraph 4 of the Model Convention) suggested, are relevant to some (butprobably a limited number of) digital businesses, but may potentially have a more significant
impact on wider businesses, which does not seem an even-handed approach to the issue.

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EBIT Comments on the OECD's Discussion Draft on BEPS Action 1: TAX CHALLENGES
OF THE DIGITAL ECONOMY

3.2. A New Nexus based on Significant Digital Presence
EBIT notes that the OECD is effectively presenting a new nexus band / PE threshold concept
but leaves open the difficult related and contentious questions pertaining to how to attributeprofits to a PE and value to data.
EBIT is of the opinion that these proposals are not helpful and should be rejected on the
grounds that they are not practical. It will be extremely difficult to measure the tax base andextremely difficult to appropriately allocate either revenues or costs. There is a high risk ofmultiple double taxation as countries will not agree on the allocations.
3.4. Creation of a Withholding Tax on Digital Transactions
This option moves away from the trend in previous years in international taxation which was
based on an international consensus to minimise or eliminate withholding taxes because
taxes imposed on gross income do not take into account profitability and making crossborder expansion unprofitable. Imposing a new withholding tax could also mean that many
non-digital or conventional businesses would become subject to withholding tax on digitalproducts designed for a specifically targeted industry. EBIT would like to know which
payments would become subject to tax and which rates would apply, and whether thesedecisions would be taken at local or international level?
EBIT is also concerned about the collection and enforcement issues for tax authorities related
to the possible introduction of a myriad of domestic withholding taxes.
3.5. Consumption Tax Options
EBIT believes that consumption taxes will not provide a solution to the problem posed by
BEPS. This is because the subject of consumption taxes is consumption whereas the issue
with BEPS is the erosion or shifting of the tax base applicable to the business activities which
generate the profits.
EBIT trusts that the above comments are helpful and will be taken into account by the OECDin finalising its work in this area. We are happy to discuss with and remain committed to a
constructive dialogue with the OECD.
Yours sincerely,
The European Business Initiative on Taxation – April 2014
For further information on EBIT, please contact its Secretariat via Bob van der Made, Tel: +31 6 130 96 296; Email: bob.van.der.made@nl.pwc.com).

Disclaimer / Copyright: This document contains the collective views of the EBIT business working group and isprovided to you courtesy of EBIT. PwC acts as EBIT’s secretariat but PwC is not a Member of EBIT. Nothing in thisdocument can be construed as an opinion or point of view of any individual member of EBIT or of PwC. Any
reproduction, in part or in total, of this document, in any form whatsoever, is subject to prior written authorisation of
EBIT. Such authorisation can be obtained by EBIT’s Secretariat via: bob.van.der.made@nl.pwc.com

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Paris, le 14 avril 2014

Commentaires de la Fédération Française des Télécoms
sur le document de discussion sur l’action 1« Relever les défis fiscaux de l’économie numérique »du plan d’actions BEPS de l’OCDE
La Fédération Française des Télécoms (FFTélécoms) approuve la décision du groupe de travail« économie numérique » du plan d’actions BEPS de l’OCDE de ne pas isoler le secteur de l’économie
numérique des autres secteurs économiques et de ne pas lui appliquer par conséquent une fiscalité
spécifique.
En effet la Fédération considère que l’isolement de l’économie numérique n’est pas envisageable
aujourd’hui et encore moins demain, tant le numérique est en train de diffuser dans tous les secteurséconomiques, et alors qu’en matière de fiscalité, les acteurs économiques ont besoin de stabilité, deprévisibilité et de non-singularité d’un pays à un autre pour éviter les optimisations.
Elle considère par conséquent, comme le groupe de travail de l’OCDE, que les principes decadrage dégagés lors de la conférence ministérielle d’Ottawa de 1998 sur le commerce électronique
doivent être conservés :- la fiscalité s’appliquant aux échanges de biens et services numériques doit être neutre et équitable
par rapport au commerce conventionnel - pour ne pas créer de déséquilibre profitable à un moded’activité plutôt qu’un autre - et aussi entre les entreprises du numérique ;- elle doit être claire et simple, efficace et juste, flexible et dynamique tels que ces termes sontdéfinis pages 63 et 6 4 de la consultation de l’OCDE. Compte tenu de la volatilité des activités
numériques et de leur évolution extraordinairement rapide, la FFTélécoms est en effet favorable à ladéfinition d’un corpus de règles « intangibles », mais de critères d’application structurellement
adaptables au fil du temps pour tenir compte, régulièrement, de la déformation des échangeséconomiques sous l’impulsion des évolutions technologiques et de la transformation des modèleséconomiques des acteurs du marché.
La Fédération félicite le groupe de travail de l’OCDE de l’effort de recensement des options
envisageables et appelle son attention sur la nécessité de mettre rapidement en œuvre lesmesures d’équité entre acteurs et entre pays pour arrêter la concurrence déloyale qui sévit
actuellement au profit de quelques entreprises qui captent dans des paradis fiscaux la valeur crééedans et par les pays de consommation, au détriment des finances publiques de très nombreux pays,
y compris celles des pays complaisants se prêtant au jeux de techniques fiscales permettant une
double non-imposition. Cette exigence d’un calendrier court nous semble indispensable dans uneéconomie mondiale dont la dématérialisation des échanges s’accélère et déforme profondément ou
détruit des pans entiers de l’économie des pays qui sont en butte à ces optimisations fiscales
agressives.
Enfin, la FFTélécoms salue le travail positif de redéfinition des critères de l’établissement stable
pour les entreprises à « activité numérique dématérialisée » introduisant la notion de « présence
numérique significative » dans les pays de consommation, mais aussi la tentative de définition de« l’établissement stable virtuel ». Mais, que l’on mette en place la notion d’établissement virtuel, ou
la redéfinition des critères de « l’établissement stable » ou tout autre solution progressiste, il nous
semble essentiel que les critères de définition de ces notions soient simples, particulièrement
robustes et testés dans de multiples configurations (faire des test cases) pour vérifier qu’ils
s’appliquent à toutes les entreprises et permettent ainsi d’atteindre l’objectif de rétablir une
concurrence loyale et parfaite, fondement même du système d’échanges et condition de croissancede l’économie mondiale.

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English Translation of Fédération Française des Télécoms. These comments were translated from French by
OECD; the original French version will be the official one.
The “Fédération Francaise des Telecoms” approves the decision of the Task Force on the Digital Economy of
the OECD BEPS Action Plan not isolate the sector of the digital economy from the other economic sectors andnot subject it to a specific tax regime.
Indeed, the federation considers that the isolation of the digital economy is not envisageable currently, andwill not be possible in the future as the digital is spreading to all sectors. In tax matters, economic actors
require stability, predictability and a uniform system across countries in order to avoid optimisation.
As a result, the Federation considers, as the Task Force of the OECD, that the Ottawa framework conditions on
the taxation of electronic commerce must be followed :The tax treatment of digital goods and services must be neutral and equitable with regard to conventional
activities in order to avoid creating an imbalance that would be advantageous to one activity over another.
It must be clear and simple, efficient and fair, flexible and dynamic as defined in pages 63 and 64 of theDiscussion Draft of the OECD. Considering the volatility and the extraordinary speed of the evolution of thedigital activities, the FFTélécoms is in favour of defining a body of ‘intangible’ rules, but with application
criteria that would adapt with time, in order to take into account the transformation of economic exchanges
triggered by technological evolutions and the transformation of economic models.
The Federation would like to congratulate the Task Force on its overview of the potential options and recalls
the need for the Task Force to rapidly put in place measures in order to put an end to the unfair competition
currently taking place to the advantage of some businesses that locate the value created in and by countries
where consumption takes place in tax havens. This occurs to the detriment of public finances, including incountries that contribute to the aggressive tax planning allowing double non-taxation. This short time-frame
appears to us to be essential in a global economy where dematerialisation of exchanges is accelerating andprofoundly distorting or destroying entire segments of countries’ economies that are confronted withaggressive tax optimisation practices.
Finally, the FFTélécoms welcomes the positive work on the redefining of the permanent establishment criteria
for “fully dematerialised digital activity” introducing the concept of “significant digital presence” in the
countries where consumption takes place, as well as the tentative definition of “virtual permanentestablishment”. Whether a new concept of virtual permanent establishment is introduced or whether thecriteria of a permanent establishment are defined or any other progressive solution, it appears essential to us
that the criteria for defining these concepts be simple, and particularly robust and tested in multiple
configurations (by conducting test cases). This will ensure that the criteria apply to all business and attain theobjective of re-establishing fair competition, the foundation of economic growth and exchange in the global
economy.

205Federation of German Industries ∙ 11053 Berlin, GermanyOECD
2 rue André Pascal
75016 Paris
FRANCE

Berthold WellingManaging Director

14th April 2014
Page
1 of 3

Via E-Mail: CTP.BEPS@oecd.org
Dear Sir or Madam,
BDI 1* refers to the OECD Discussion Draft “Address the Tax Challengesof the Digital Economy”, issued on 24th March 2014 and likes to thankyou for the possibility to provide our comments and input at this stage ofthe process as this allows us to engage with you on this important issue.
Action item 1 of the Action Plan aims to “identify the main difficulties
that the digital economy poses for the application of existing internationaltax rules and develop detailed options to address these difficulties, taking
a holistic approach and considering both direct and indirect taxation”.
Before commenting on specific measures, we first of all would like toprovide our views regarding some of the issues the OECD in particular
asked for on page 7 of the draft.
• Possibility to ring-fence the digital economy from the rest of theeconomy, and if not, whether specific types of digital transactions
could be identified and addressed through specific rules
We believe that the separation of rules relating to the right to tax forthe digital economy from other industry sectors is not a forwardlooking approach as offerings in the digital economy are alreadyembedded into many traditional businesses models and new businessmodels in the digital economy evolve rapidly. There still is acustomer/supplier relationship with a delivery of (valuable) content,
whether in a digital or a physical manner.
Consequently, we reject any attempts to introduce a tax regime which
is limited to MNEs of the digital economy and fully endorse the*BDI (Federation of German Industries) is the umbrella organization of German industry
and industry-related service providers. It speaks on behalf of 38 sector associations andrepresents over 100,000 large, medium-sized and small enterprises with more than eight
million employees. A third of German gross domestic product (GDP) is generated byGerman industry and industry-related service.
206

Federationof German Industries
Member Association of
BUSINESSEUROPE

Address
Breite Straße 29
10178 Berlin
Postal Address11053 Berlin
Germany
Phone Contacts
Tel.: +49 030 2028-1410
Fax: +49 030 2028-2410
Internetwww.bdi.eu
E-Mail
B.Welling@bdi.eu

conclusion drawn by the Task Force that “it would be difficult, if not
impossible, to ring-fence the digital economy from the rest of theeconomy”.
In addition, a separation of tax rules for digital economy from otherindustry sectors would particularly discriminate IT-companies anddiscourage them from investing in research and development (R&D)
activities. Thus, a separate digital tax regime would, for example, conflict with one of the “Europe-2020-targets”, namely that 3% of the
EU's Gross Domestic Product should be invested in R&D/innovationby the year 2020. Contrary, it needs to be ensured, that there are no
constraints for the digital economy – or single business models –compared to the traditional business by introducing new tax regimes.
Only this would ensure the tax neutrality among different businessmodels.
• Key features of the digital economy identified by the Task Force andwhether there are other key features that should be taken into
account
Nevertheless, the draft attempts to identify key-features – including
mobility, reliance on data, network effects, use of multi-sided businessmodels, tendency towards monopoly or oligopoly and volatility – that
distinguish the digital economy from others and elaborates on measures
especially designed to fit businesses of the “digital economy”.
In our view, the features identified in the draft are neither accurate norlimited to the digital economy. They may be relevant for somebusinesses in the digital economy, but they are not likely to be limited tothe digital economy and to cover all aspects of the digitalization of theeconomy.
• Examples of new business models in the digital economy andwhether (and if so which) other business models should beconsidered
When looking at the business models emerging due to the IT
development, we again would like to emphasize that the boundary
between “traditional” versus “digital” economy is blurred. In mostcases, multinational enterprises (MNEs) emerging in the digital
economy do not establish completely new business models, but rather
look for more efficient ways to deliver goods and services.
• Potential cost of compliance arising from the options proposed toaddress the tax challenges of the digital economy and suggestions formore cost efficient alternatives
We strongly reject the proposed modifications to the exemptions fromthe permanent establishment status as well as any attempts to introduce
a – whatever defined – “virtual permanent establishment” status. We
are concerned that the discussed options in the draft would lead to
additional administrative and compliance burden for businesses and
207

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substantially increase the risk for double taxation. To widen the scope of
the permanent establishment concept would result in a completely new
system for allocating international taxation rights across countries.
Furthermore, we would like to provide our comments on some specificissues proposed in the draft as follows.
• Creation of a withholding tax on digital transactions
An option which is discussed in the discussion draft is to impose afinal withholding tax (WHT) on certain payments for digital goods orservices provided by a foreign e-commerce provider. This would run
counter to the principle not to grant the taxing right for royalties to thesource country. The underlying reason for this principle, i.e. that theresidence country had the burden of R&D costs and thus shall have thebenefit of R&D income, is also valid in the case of digital economy
transactions. There are various aspects which do not support imposing
WHT. First of all, it would raise neutrality issues when treatingtransactions in digital services different from other transactions. There
would be particularly the question how to define digital transactions,e.g. is music or software a digital product if downloaded but not if
provided on a physical instrument like a CD. Most importantly,
however, levying WHT could lead to a double taxation of the digital
activities as the withholding tax will easily exceed the tax due on the
net profits. Unless all taxes withheld in the source country would befully creditable in the residence country, thus fully avoiding excess tax
credits, WHT would result in an over-taxation. As a full tax credit
would not be a realistic approach, the amounts of excess tax credits
would substantially rise under a new source taxation regime. We
therefore strongly recommend abandoning the idea to imposing WHT
on interest and royalties.
• Consumption tax options
We acknowledge that consumption taxes might be the better option to
tackle the issue that market jurisdictions do not obtain their desired
share of revenue from digital providers. For instance, the new rules
concerning the supply of electronic services entering into force in 2015
in the EU will extend the destination based principle totelecommunication, broadcasting and electronically provided services.
This will ensure a fair and reliable procedure within the EU and will
be combined with a Mini One Stop Shop (MOSS) to facilitateadministration for businesses.
Yours faithfully,

Berthold Welling

Katja Kallert
208

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Finfacts.ie - - www.finfacts.ie -- an Irish business & finance portal; online since 1997
Michael Hennigan, founder and editor; previously in financial management, in US and European
multinational firms. finfacts@finfacts.ie
April, 2014: Discussion draft on the OECD's 'Tax Challenges of the Digital Economy'
We welcome the BEPS (Base Erosion Profit Shifting) project of the Organisation for Economic Cooperation and Development because it’s not in Ireland’s economic interest to be a facilitator of
massive corporate tax avoidance while in these uncertain times, “tax is all about trust” 1 in the wordsof Pascal Saint-Amans, director, OECD Centre for Tax Policy and Administration.
Ireland has gained massively from globalisation in the last fifty years and besides international
corporate tax avoidance being a beggar-my-neighbour practice, it also contributes to growing
inequality and the imbalance between the rewards for capital and labour. 2
There is also an inequity when the Irish Revenue aggressively investigates avoidance and evasion bydomestic firms while a blind eye appears to be turned to multi-billion euro charges, used to mask
profit transfers, in the accounts of foreign firms.
Ireland should not fear a transparent and integrity-based tax system.
In the following, we set out a) how Ireland facilitates corporate tax avoidance; b) we argue why it’sin Ireland’s economic interest to support reform - - in 2013, jobs in the Irish internationallytradeable goods and services sectors were below the level in 2000 despite a real (inflationadjusted) rise in exports in the period of 59% and an increase of 22% in the size of the workforce; 3c) we comment on issues raised in the discussion document.
Simply, in a decade of escalating corporate tax avoidance, net job numbers in foreign firms in
Ireland were almost static.
US companies reported that profits reflecting activities in Irish affiliates doubled between 1999 and2002 from $13.4bn to $26.8bn, while profits in most of the rest of Europe fell. 4 In the period since,
services exports surged and by 2013 we estimate that at least €45bn ($57bn) or 48% of Ireland’sreported services exports of €94bn in 2013 are tax-related - - arising from diversions of global
revenues to Ireland that are unrelated to economic activity in Ireland - - and are effectively fakeexports. 5
The escalation of US corporate tax avoidance over the past decade masked realities that while theforeign-owned sector had ceased being a jobs engine in 2000, the indigenous exporting sector had
been performing below its potential for many decades.
1
2
3
4
5

Tax is all about trust - - Pascal Saint-Amans, director, OECD Centre for Tax Policy and Administration
US corporate profits rise to record in 2013; Real wages flat at Zero - - Finfacts
Irish Economy 2014: Jobless exports boom 2000-2013; What will change to 2020?- - Finfacts
Ireland top location for US Multinational Profits - - Finfacts, 2004

Irish Medium-Term Economic Strategy 2014-2020: Exports to plunge by €50bn - Part 1

1
209Ireland facilitates corporate tax avoidance by:
1) Providing foreign firms with offshore non-tax resident Irish companies that are usually
domiciled in Bermuda or the Cayman Islands where there are no corporate taxes - - thetransactions of these mailbox holding companies, including the details of intellectual
property (IP) assets and “Double Irish Dutch Sandwich” scheme 6 receipts, can be shieldedfrom the public via unlimited status under Irish company law. The revelation in May 2013 by
the US Senate’s Permanent Subcommittee on Investigations 7 that Apple Inc. had for decades
treated the Irish companies as having no tax domiciles or in effect being “stateless,” showedthat the Irish authorities did not have any regulation of these entities. The domicile
loophole was closed via the Finance (No. 2) Act 2013 and it stipulates that an Irish
incorporated company must be considered tax-resident somewhere and cannot remain“stateless.”2) While the Irish Government has stressed in recent times that the country isn’t a tax haven,an increasingly popular tax haven activity is for big firms, mainly American-based, to switch
their domiciles to Ireland to avail of the low headline corporate tax rate of 12.5% and theonly Irish activity of a firm of 100,000 staff maybe a small head office or even zero staff.
Shares of King Digital Entertainment Plc, the maker of the hugely successful mobile video
game ‘Candy Crush Saga’ began trading on the New York Stock Exchange on March 26, 2014.
Last July in preparation for the initial public offering (IPO), King registered a holding
company in Dublin. 8 The registered office is at the address of the William Fry, a Dublin law
firm; the shares are held by 7 nominee companies with addresses at the law firm’s office andthe directors appear to be staff of William Fry. The company was founded in Sweden in 2002
and has game studios Stockholm, Barcelona, Bucharest, Malmö and London, with offices in
San Francisco and Malta. On its US Securities and Exchange Commission regulatory filing 9 it
has the Fitzwilton House, Wilton Place, Dublin 2 address and the contact phone number
has a London code. None of the real directors are Irish and the company has no staff in
Ireland but it has become an Irish company and its activities are reflected in the Irish
national accounts. 10

Massive tax avoidance is good capitalism?
Eric Schmidt, Google chairman, in December 2012 defended Google's schemes to avoid tax and hesaid such schemes were legitimate and the company paid taxes “in the legally prescribed ways.” 11“I am very proud of the structure that we set up. We did it based on the incentives that the
governments offered us to operate,” he said.
678
9IMF explains “Double Irish Dutch Sandwich” tax avoidance - - Finfacts
http://levin.senate.gov/download/exhibit1a_profitshiftingmemo_apple
King Digital Entertainment application to incorporate a company and Annual Return
http://www.sec.gov/Archives/edgar/data/1580732/000119312514056089/d564433df1.htm

10
11

The Effect of Redomiciled Plcs on GNP and the Irish Balance of Payments - - John FitzGerald, ESRI 2013

http://www.independent.co.uk/news/uk/home-news/google-boss-im-very-proud-of-our-tax-avoidance-scheme-8411974.html

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He went on to suggest that Google would not turn down the opportunity to draw on the big savings
allowed under the law in the countries it operates in: “It’s called capitalism. We are proudly
capitalistic. I’m not confused about this.”
Last year Prof John Kay wrote in his column 12 in The Financial Times that "avoidance is facilitatedand enhanced by corporate manipulation of the prices at which capital, goods and services aretransferred across borders. The resulting accounts show profit being earned in low-tax jurisdictions
in which little or no real business takes place. It is disingenuous for companies to claim they pay the
tax legally due when their assessments are based on accounts that defy economic and businessrealities.
In the main, however, tax authorities have preferred to cut deals with big corporations rather thanpursue costly legal action. They will not do the same for you and me. It makes no sense for a small
company to pay an accountant to do anything but calculate the amount of tax that is properly due,or to incur legal fees resisting a challenge. The unacceptable outcome is an entirely correct
perception that there is one law for the little guy and another for the big battalions. The potential
effect of that perception on tax compliance is one that it is well worth spending millions of pounds
to avoid.
A serious reform agenda would involve a principled reappraisal of the basis for taxing corporations
both nationally and globally, and a strategy for effective enforcement of existing rules. Such a
strategy would make clear that executives of companies which present accounts to tax authorities
that are essentially false, and the accountants who support them, will in future run serious risks.
The door they hear closing behind them might be the door of a prison cell rather than the door of 10
Downing Street."
Philip Stephens, an associate editor of The Financial Times, wrote 13 that "As the Google boss (Eric
Schmidt) will be well aware from his personal as well as his professional life thriving societies
depend on more than strict adherence to the letter of the law. Communities work because
citizens, institutions and, yes, even companies observe norms, conventions and mutual obligations
that are nowhere on the statute book.
There is nothing new about this. If Mr Schmidt has any doubts, he should read the excellent new
biography of the 18th-century philosopher Edmund Burke written by Jesse Norman, theConservative MP.
To suggest that each and every responsibility and duty must be codified in statute is to invite a lurch
towards totalitarianism - - the micromanagement by an over mighty state of every dimension of our
myriad relationships.
There is no law (in Britain at least) that obliges me to join the back of a queue for, say, theatre
tickets or a restaurant table rather than infiltrate myself at the front. I suspect, though, that Mr
Schmidt would agree that queue-jumping is pretty antisocial.
To be legal, in this instance, is not to be right. Or would he suggest that the government should
legislate?
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http://www.ft.com/intl/cms/s/0/9bb6f2ec-d785-11e2-a26a-00144feab7de.html#axzz2xMApXsRG
http://www.ft.com/intl/cms/s/0/28b783de-c857-11e2-acc6-00144feab7de.html#axzz2xMApXsRG

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Then there is that fiduciary duty. Of course, companies should not pay ‘voluntary’ tax.
But they do not face the binary choice posited by Mr Schmidt. Somewhere between charitablegiving to the tax authorities and the setting up of Byzantine pyramids of shell companies in every
tax haven known to man and womankind, there is what my lawyer friends call the wholly
justifiable use of the tax code to protect shareholders.
The odd thing is that, at times, Google seems to understand that it ought to look beyond the letterof the law. The company boasts about its many ‘good works’ in local communities. Presumably these
are consistent with its fiduciary duty?
Yet when the company says that the billions in revenues garnered every year by its sales force in
Britain are not liable to local tax because technically, the business is ‘closed’ in Dublin, it frankly
looks sleazy. Someone, somewhere at Google headquarters would do well to apply the ‘what would
any reasonable person’ think test?"

Why Ireland should revert to a sleaze-free system
Massive corporate tax avoidance has added to distortions in Ireland’s national accounts and masks
the poor performance of the indigenous sector.
Like its predecessors, the current Irish Government had banked on the status quo being protectedby a) the EU veto on tax harmonisation b) political gridlock in Washington DC. However, it has beenleft flat-footed by the sudden prospect of reform of international tax rules and it has beenfloundering with the help of the siren voices of professional services vested interests and others.
It’s not credible to claim that US Bureau of Economic Analysis data 14 on profitability of US firms with
Irish affiliates is invalid because it includes untaxed profits in Irish offshore companies in “otherjurisdictions” that are usually routed through Ireland. 15
Claims that the effective corporate tax rate is close to the headline rate of 12.5% are also bogus 16 asis the claim of tax transparency when companies can shield all their Irish financial data from public
view. 17
Whether it’s King Digital Entertainment Plc with its headquarters in Ireland and based and theoffices of a Dublin law firm or Microsoft Inc.’s Round Island One Unlimited, an Irish company,
based at the Hamilton, Bermuda, offices of a local law firm, 18 they are both engaged in exploiting
loopholes to deprive other jurisdictions of lawful tax revenues.
In May 2013, Joe Nocera, New York Times columnist wrote:19

14
15
16
17
18
19

US company profits per Irish employee at $970,000; Tax paid in Ireland at $25,000 -- Finfacts
Corporate Tax 2014: Irish Government's "flawed premise" on Apple's avoidance -- Finfacts
Corporate Tax 2014: Ireland's effective rate for US companies in 2011 was 2.2% and Kenny's bogus Irish effective tax rate claim - - Finfacts
Apple, Anglo Irish Bank and Irish company law -- Finfacts

Foreign government requests Bermuda to investigate Microsoft's Irish subsidiaries - - Finfacts
Here comes the sun -- New York Times

4
212

“Question for the government of Ireland: Do you really want your country to be known as anoffshore tax haven? Indeed, at a time when your citizens are dealing with the pain of an austerity
program, how can you justify allowing Apple to pay virtually no taxes on a subsidiary establishedsolely to avoid taxes in the United States? Just wondering.”
Ireland can prosper with the lowest national corporate tax rate of 12.5% among developed
countries and with a half century of experience as a host for FDI (foreign direct investment) firms.
Ireland also has low non-wage labour costs and with the exception of the UK, hourly pay compares
favourably with most of Europe’s developed economies. 20
In contrast, with the FDI sector, the indigenous internationally trading sector with similar low
corporate and social security taxes including no obligation to provide staff with occupational
pensions, has performed poorly over the period since Ireland first embraced globalisation in the
1950s.
FDI firms are responsible for about 90% of headline exports by the internationally tradeable goods
and services sectors but the chart below shows that the indigenous sector provides as many jobs
as the FDI sector - - it has the potential to provide many more.

20

Hourly labour costs ranged from €3.7 to €40.1 across the EU28 Member States in 2013 - - Eurostat 2014

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If total exports of €177bn in 2013 were discounted to €100bn to account for excess transfer pricing
and fake services exports, total indigenous exports (including tourism and transport) would only
amount to 24% of the resultant total.
Two-thirds of Irish private sector workers are in non-exporting sectors with “a huge amount”
working in traditional sectors - - in Hotels and Restaurants, Wholesale and Retail, Business andProfessional Services. 21
Food and drink exports now account for two thirds of total indigenous exports 22 and about 50% of
total indigenous exports are to the UK market (including Northern Ireland). 23
In 1973 when Ireland joined the then European Economic Community, 55% of total Irish exports
went to the UK. 24
In 2012, 18% of total headline exports from FDI and indigenous firms went to the UK and 79% went
to Europe and the US. 25
The total export intensity of Irish-owned industry has increased from 37% in 2003 to 52% in 2012. In
the period 2008 to 2012, domestic sales fell from €20.4bn to €13.3bn while exports have increased
from €11.3bn to €14.2bn. 26
In the peak years of the property bubble 2001-2007, despite the workforce growing by 384,000
people or 22%, indigenous internationally trading firms added only 10,000 jobs, which was offset
by a similar decline in job numbers in FDI firms.
The issue of distortions in the national accounts, including the impact of tax avoidance, not only
exaggerates the performance of the economy but it also reduces pressure on policy makers toseriously address the challenges that face the indigenous sector - - which has the potential to havethe highest impact in terms of employment.
Decisions on the destination of most exports from Ireland are not made locally but when
government ministers speak of export opportunities in emerging markets, they invariably conflatedata on exports by the FDI and indigenous sectors for public relations impact.
Eamon Gilmore, minister of foreign affairs and trade, and tánaiste (deputy prime minister), was in
China in June 2013 leading a trade mission and he said in an interview in Beijing that China was key
to Irish economic recovery. The claim was absurd as exports to China in 2012 accounted for about
2% of the headline value of total exports in 2012. 27
21
22
23
24
25
26

27

Irish SMEs: Stylised facts from the real economy and credit market - - Central Bank presentation
Export Performance & Prospects: Irish Food, drink and horticulture – 2013/14 - - Bord Bia, Irish food &drinks agency
Cost Competitiveness and Export Performance of the Irish Economy - - Derry O’Brien and John Scally, Central Bank 2012
Ireland and the EU 1973-2003 - - Central Statistics Office (CSO) 2004
Geographic locations of Irish merchandise and services export in 2012 - - CSO 2013
Annual Business Survey of Economic Impact 2012 - - Forfás, 2014
Gilmore says China key to Irish recovery; Exports at 2% of total - - Finfacts

6214Last February a government report noted: “Computer Services: accounting for 40% of total services
exports in 2012, realising a 49% growth over a five year period." 28
In February 2013, Michael Noonan, finance minister, at a Bloomberg event in London, attributed
the jump in services exports to “the significant price and cost adjustments that have taken place inrecent years.” 29
The facts were that in 2012 two firms, Google and Microsoft, with less than 3,000 employees in
Dublin, accounted for about 80% of what were classified as ‘computer services’ exports.
On labour competitiveness, while the headline data suggest that unit labour costs (productivity), willshow a 21% relative improvement against the Eurozone average in 2008-2015, 30 Eurostat, the EU’s
statistics office, says Irish labour costs grew by 0.5% in 2008-2013 31 - - the difference is mainly
explained by a jump in tax-related virtual output.
Irish GNP (gross national product) until recent times has been viewed as a better measure of Irish
economic performance compared with GDP (gross domestic product) because the metric excludes
the inflated profits of the FDI sector that are included in GDP. In 2011, the value of GDP exceeded
GNP by 23% and by 18% in 2013, according to the CSO. In the early 1970s for example, GNP
exceeded GDP because of emigrant remittances.
In 2013 while GDP growth fell 0.3%, GNP rose 3.4% but Finfacts has estimated that GNP growth may
have been as low as 1%.
GNP is no longer a reliable metric and recent research has shown that the redomiciling of foreign
firms in Ireland for tax purposes had boosted GNP growth by 2.9% in 2010 and by 1.1% in 2012. 32
The official result was 3.4% - - the same level in 2013.
The European Commission noted in its 2013 EU Industrial R&D Scoreboard 33 that Seagate
Technology (12.6 %), Covidien (12.5%) and Accenture (11.2%), accounted for 60% of the R&D ofcompanies based in Ireland. These are American companies that have their headquarters in Irelandand most of the sixteen entries for Ireland are in fact American.
The Global Innovation Index (GII) co-published by Cornell University, INSEAD, the French businessschool, and the World Intellectual Property Organization (WIPO, an agency of the United Nations)has also been misled by surging ICT services and Ireland was ranked the world’s 10th most innovative
country in 2013 34 - - despite the dominant FDI sector not doing significant research and less than athird of firms spending on R&D. 35
28
29
30
31
32
33
34
35

Irish Economy 2014: Gilmore launches Lilliputian wish-list on trade and tourism - - Finfacts
Speech by Michael Noonan, finance minister, London, February 2013 -- Department of Finance
Ireland's continuing progress, March 2014 - - Department of Finance (page 12)
Hourly labour costs ranged from €3.7 to €40.1 across the EU28 Member States in 2013 - - Eurostat 2014
Irish adjusted GNP in 2013 estimated at 1% compared with official level of 3.4% - - Finfacts
The 2013 EU Industrial R&D Investment Scoreboard - - European Commission
The Global Innovation Index 2013
IDA Ireland Annual Report 2012 - - Page 6, client firms engaging in R&D at about 28% of total

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Ireland should embrace corporate tax reform and have a national accounting system that presents
the economic realities not a fantasy image, which provides bragging material for politicians.
If the current G20-OECD project fails, it would be foolish to bank on continued political gridlock in
Washington DC.
In recent years the Obama Administration has proposed a minimum foreign profits tax to clamp
down on the flow of profits to low-tax or no-tax jurisdictions. A rate wasn’t specified but if it was tobe higher than the Irish headline corporate tax rate of 12.5%, the incentive would be maderedundant for US firms. 36
With the exception of independent members, it’s almost a taboo to raise the issue of corporate tax
avoidance in the Oireachtas (the Houses of the Irish Parliament) because of fears that job creation
would be put at risk.
In a speech at the US Chamber of Commerce headquarters in Washington DC on March 13, 2014, 37
Enda Kenny, taoiseach/ prime minister, told a group of business persons: “If you got a problem, youhave an issue or anxiety or concern or a proposition or a proposal I want to hear it. My number is a
public number you can call me anytime.”
The taoiseach’s assurance was consistent with a common belief, that with the exception of large
indigenous firms, American firms, which are responsible for about two-thirds of FDI, always getpriority attention compared with local SMEs.
The Irish Government ostensibly supports the BEPS project but it is undoubtedly sympathetic to
the intense private lobbying from various vested interests that is currently underway.
The Clearing House Group is a forum chaired by the secretary general to the Government andcomprises public officials, representatives of financial services companies that operate in theInternational Financial Services Centre (IFSC), Dublin’s offshore centre, and representatives of the
Big 4 accounting firms. 38
The group has a positive role in ensuring that the IFSC responds with speed to changes/ newopportunities in international financial services but it also has a key lobbying role and according to
The Financial Times, “before the 2012 budget, this group… recommended a series of 21 taxation andlegal incentives sought by the finance industry, according to documents released under a freedom of
information by an Irish MEP (Nessa Childers). Virtually all the changes were introduced in thesubsequent budget.”
IFSC Ireland, which represents firms at the IFSC claims that it is “non-lobby and a-political.”John Bruton, a former taoiseach/prime minister, is the president and in the common use of words
it’s a lobbying organisation.
36
37
38

Corporate Tax 2014: US proposal of 17% rate for foreign profits -- Finfacts
Enda Kenny: 'Call me anytime ' - - Irish Independent
Minutes of an October 2013 meeting of the Clearing House Group at Government Buildings

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The most important lobby group is the American Chamber of Commerce in Ireland, a unit of thepowerful US Chamber of Commerce, and the FT report says that the Irish Government “amended its
tax code following lobbying by US industry, reducing the tax burden on multinationals that funnel
royalty payments to offshore tax havens.
The changes enabled some multinational companies to make royalty payments from their Irishbased operations directly to subsidiaries based in tax havens such as Bermuda or the Cayman
Islands, without having to pay a 20% withholding tax on the royalties.” 39
Pascal Saint-Amans, the director of the OECD’s tax centre, confirmed in a briefing on April 02, 2014
that "Double Irish Dutch Sandwich" 40 type tax schemes, which involve global revenues of services
giants being routed through Ireland and transferred via the Netherlands to Irish offshore companies
in Bermuda and the Cayman Islands, will be axed. 41
On April 07, 2014, Ireland's Department of Finance issued a technical paper 42 on methodologies fordetermining the effective corporation tax rate in Ireland.
The paper gives a 'tour d'horizon' on several ways of calculating effective corporate tax rates but thepolitical purpose is to undermine the argument that US firms pay low single digit tax rates in
Ireland.
Questions are raised about the reliability of US Bureau of Economic Analysis data which includes
Irish affiliate income in West Atlantic tax havens including large amounts from equity investments.
What is missing from this narrative is that when Google booked 41% of its 2012 global revenues in
Ireland; Facebook booked 48% and in 2011/12, Microsoft diverted 24% of its global revenues, thetax due in Ireland was calculated after the booking of big charges to shift most of the profits taxfree to Irish offshore mailbox companies in Bermuda and the Cayman Islands.
The offshore companies are protected from public scrutiny through unlimited status under Irish
company law.
Apple Inc. booked about $100bn in sales through Irish subsidiaries in 2013 but the Irish Government
is bizarrely claiming that the Irish incorporated offshore affiliates are not Ireland's concern because
they do not trade in Ireland.
It does not make the same argument about the large redomiciled foreign companies that move to
Ireland to avail of the low tax rate without having trading operations in the economy.
Apple Inc. makes clear in its Form 10-K filing with the US Securities and Exchange Commission foryear ending September 28, 2013, that most of the international revenues and profits were booked
through Irish subsidiaries.
39
40
41
42

Dublin cut tax burden on multinationals after US lobbying - - Financial Times 2013
IMF explains “Double Irish Dutch Sandwich” tax avoidance - - Finfacts 2013
Corporate Tax: OECD's Saint-Amans says "Double Irish Dutch" sandwich tax scheme will be axed - - Finfacts 2014
Effective Rates of Corporation Tax in Ireland: Technical Paper, April 2014 -- Department of Finance9217

Apple said: “During 2013, the Company’s domestic and international net sales accounted for 39%
and 61%, respectively, of total net sales...The Company is subject to taxes in the US and numerous
foreign jurisdictions, including Ireland, where a number of the Company’s subsidiaries areorganized...The foreign provision for income taxes is based on foreign pre-tax earnings of $30.5bn,$36.8bn and $24.0bn in 2013, 2012 and 2011, respectively...Substantially all of the Company’s
undistributed international earnings intended to be indefinitely reinvested in operations outside
the US were generated by subsidiaries organized in Ireland, which has a statutory tax rate of
12.5%." 43
The foreign earnings tax rate was 1.9% in 2012 and 3.8% in 2013.
The tax rate in Apple’s big foreign markets is a multiple of the Irish 12.5%.
In 2013, the average OECD rate weighted for GDP was 32.5% and a simple average of 25.5%. 44
In 2012 Google Ireland paid €17m tax on €137m profit - - a 12.4% rate.
However the total Google Inc. net income was at a ratio of 22% of revenues and Irish reported
revenues of €15.5bn should have produced €3.4bn in income using a ratio of 22% but big charges
from Irish affiliates in Bermuda ensured that most of the profit was transferred tax-free.
Apple Inc. did not have to use the Double Irish Dutch Sandwich scheme because it classified the
Irish subsidiaries as “stateless” with no tax residency anywhere. That loophole was closed by achange in Irish company law late last year.
The BEPS also provides for reform of transfer pricing which may impact profit shifting bypharmaceutical firms to Ireland.
Looking ahead, a reduction in employment by big service giants that currently centralise European
services in Ireland can be offset by development of the indigenous sector.
As Ireland is unable to meet the demand for multilingual staff, a company such as Google has about
2,500 employed in Dublin and about 70% are from overseas. 45
Intel, the US chip giant, is twenty five years in Ireland this year 46 and its decision to open a plant in
Ireland was a crucial trigger for the best decade for FDI - - the 1990s.
It disclosed in March that it had invested $5bn in upgrading its Leixlip campus in the past three
years, which underlines its commitment to Ireland.
Craig Barrett, the former Intel CEO, was asked in a newspaper interview earlier this year if Ireland
could attract the really valuable Google and Twitter type R&D and innovation functions as well as
supplying hewers of wood and drawers of water?
43
44
45
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Apple Inc. Form 10-K year end September 28, 2013 - - Page 64
OECD Corporate Income Tax Rates, 1981-2013 - - Download Excel spreadsheet
Google was never meant to be this big in Ireland – but plans change - - Sunday Independent 2014
Intel 25 years in Ireland: Employs 2,800 not 4,500 - - Finfacts 201410
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"No," Barrett replied. "I think to a degree it's a matter of numbers. You can have an Intel invested
here as a creator of jobs but it's primarily a manufacturing investment.""Those are good paying jobs and I think the Irish are very happy to have them and Intel is happy to
be here. Intel also has engineering applications here with 300 employed in Shannon. But that's small
compared to the engineering base it has in Santa Clara or Portland or Arizona, for example, andthat's just a matter of numbers.
"The multinationals are going to go where the resources are. And the bulk of resources are not in
Ireland because it's a small country of four or five million people. Look at it on the positive side atleast they're putting their HQs here." 47
This highlights the serious flaw in the flagship enterprise policy, which was first launched in 2006
with the goal that Ireland by 2013 would be recognised as a "world-class knowledge economy."
When that wasn't achievable it was replaced with the more audacious target "in which Ireland in2020 is the best country in the world for scientific research excellence and impact." 48
The universities were to produce the research and while the private sector lead by foreign firms
would raise the level of innovation done in the Irish economy. 49
Following public spending of an inflation-adjusted €24bn on science policy in a decade, publication
citations have risen, patent filings are at a 30-year low while science and technology educational
output has improved.
The current policy objectives will not be met despite the number of business claims for the 25% R&D
tax credit and it remains unrealistic for Ireland to expect to emulate Israel's success in creating a
research base over 60 years. 50
Nevertheless, there will always be durable demand for food and drink - - sectors where Ireland hassustainable strengths.
In 2013 Ireland's agri-food exports were valued at €8.7bn, compared with €16bn in Denmark(population 5.5m) and €79bn in the Netherlands (population 17m).
As a ratio of total merchandise exports, Ireland was at 11%, Denmark 20% and the Netherlands ratio
excluding re-exports was at 25%.
The trade surplus as a ratio of exports in the sector was lowest in Ireland at 19%; it was 37% in
Denmark and 32% in the Netherlands.
The Netherlands in particular is a leader in agri-food innovation and during the April 2014 state visitof Xi Jinping, China's president, an agreement was signed on helping China to boost milk production.
47
48
49
50

Irish Innovation: Craig Barrett says triple R&D spending; Public welfare? - - Finfacts 2014
Irish Science Policy: 2020 replaces 2013 as target to be 'best country in...world for scientific research' - - Finfacts 2012
Irish Innovation: Evidence of science policy failure mounts - - Finfacts 2013
Irish Innovation: Israel as Startup Nation, why not Ireland? - - Finfacts 2014

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With as many workers in the indigenous exporting sector as in FDI firms despite the huge gap in extax avoidance output, there is significant potential for job creation with improved policy making.

The OECD's 'Tax Challenges of the Digital Economy'
Ideally, there should be a balance between compliance and regulation but it's crucial to be awarethat high-paid tax accountants and lawyers will exploit flexibility in rules while politicians in many
countries will continue to lean on revenue authorities.
It's well to remember recent history that massive tax avoidance by US companies was triggered by
the unintended consequences of a well-meaning goal of the US Treasury Department in 1996 to easeregulatory compliance.
The “check-the-box” loophole introduced by the Treasury enables US companies to strip profits fromoperations in high-tax countries simply by marking an Internal Revenue Service form that transforms
subsidiaries into what the agency terms a “disregarded entity.”
A Congressional Research Service report 51 says that on average very little tax is paid on the foreignsource income of US firms while the cost of check-the-box to the US alone has been estimated from$10 to $60bn per year.
In 2011 a joint report by ProPublica, a US public interest media organisation and the financial
Times 52 said:"within days of its announcement in 1996, tax lawyers were on the phone saying the Treasury
Department had overlooked the international ramifications. Inadvertently, the government
had provided a way for companies to move profits from subsidiaries in high-tax countries like
Germany to Luxembourg, the Caymans or other jurisdictions with lower or no taxes on certain
kinds of income. Often, this is done by making royalty or interest payments between
operations in different countries.
For decades, the IRS has had anti-abuse rules to make sure such payments could be subject totaxes. However, these rules generally don’t apply to payments made within a corporation.
Check-the-box made it simple for a company to designate a subsidiary as a branch, with no
U.S. tax consequences for the income unless it is repatriated.
Joseph Guttentag, international tax counsel at Treasury when check-the-box was introduced,
said the government may not have understood, but tax lawyers quickly “saw all the avoidance
goodies they could do.”Countries like the UK and Germany quickly raised concerns that the rule was stripping
earnings from their tax bases. By early 1998, the US said check-the-box was being used to“circumvent” anti-abuse rules.
Treasury proposed new regulations—and corporate America erupted.
51
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Tax Havens: International Tax Avoidance and Evasion - - US Congressional Research Service 2013
Corporations couldn’t wait to ‘check the box’ on huge tax break - - ProPublica/The Financial Times 201112220

General Electric, PepsiCo, Morgan Stanley, Merrill Lynch, Monsanto and other major
companies urged Congress to resist the change. The US, they said, was trying to be ‘the tax
policeman for the world.’ Allies in Congress dug in and Treasury quickly rescinded the
proposal.
What followed was a check-the-box boom as multinationals and tax advisers around the globe
embraced its benefits."
In 1998, Ireland's Department of Finance in response to pressure from the European Union
acknowledged that Irish registered non-resident (IRNR) companies "are regularly advertised 'for sale'in international magazines, often alongside companies which are incorporated in tax havens andjurisdictions with relaxed regulatory regimes. Many IRNR companies have little or no connection
with the country and some may be used for tax evasion, money laundering and fraud." 53
In 1999 the Irish Government planned to have all Irish incorporated companies tax resident.
However, with corporate America in control of a valuable Pandora's Box that would bring hugeshort-term gains, Ireland agreed to an exemption under pressure from the American Chamber ofCommerce in Ireland to maintain the offshore facility for US companies. So the Finance Bill of thatyear provided that an offshore company which was tax resident in a double-tax agreement country
could maintain its status while a new non-tax resident company could be setup if it was related to an
existing firm with Irish operations - - in practice this latter provision was easy to abuse.
Permanent Establishment: On Page 2 we provided an example of how a holding company with just a
mailbox registered office in Dublin can impact Ireland’s national accounts while providing little ofvalue to the local economy.
On April 2nd, the European Parliament supported the European Commission’s Parent Subsidiary
Directive, 54 which is designed to prevent the double taxation of same-group companies in Europe.
The existing general anti-abuse rule is replaced and a new rule which provides that a transaction isconsidered to be artificial if it does not reflect economic reality. The benefits under the Parent
Subsidiary Directive will not apply if “an artificial arrangement or an artificial series of arrangements
which have been put into place for the essential purpose of obtaining an improper tax advantage
under the Directive and which defeats the object, spirit and purpose of the tax provisions invoked.”
Five examples that qualify transactions as artificial have been included in the rule.
a) Businesses should have a choice between local incorporation and a withholding tax while
operations with a "significant presence" should be required to incorporate. So a giant likeAmazon.com would not be able to treat its biggest European markets as depots for its Luxembourg
operation 55;b) A withholding tax via transactions with credit card companies regulated in a jurisdiction would benecessary to foreclose on ecommerce companies using a multiplicity of companies that would

53
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Irish Registered Non-Resident Companies - - Department of Finance Ireland 1998
Parent Subsidiary Directive proposal - - European Commission 2013
UK MPs to question Google, Amazon and Starbucks on corporate tax strategies - - Finfacts 201213
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receive payments from different customers, to make it difficult for tax authorities to tracktransactions;C) On thresholds for VAT, low-value consignment relief, and the requirements on digital products
and services suppliers, the draft document has two options i) to reduce or eliminate the generally
available exemptions for imports of low valued goods ii) require a non-resident supplier to registerand account for the VAT on supplies sold in the jurisdiction of the consumer. The draft acknowledges
the compliance burden involved and recommends simplified registration regimes and registrationthresholds. In addition, the draft says enhanced governmental enforcement activities related to nonresident suppliers would likely be required, involving exchange of information, assistance in recovery
and simultaneous audits.
The proposal that suppliers of digital products and services register and account for VAT in the
countries in which their consumers are located would be the more preferable solution and EU
member countries support this model.
From January 1, 2015, EU suppliers of digital products and services will be subject to the same rules
as non-EU suppliers. To minimise administration, the EU is working on a “one-stop shop” whereby abusiness registers for VAT in only one EU member state, and accounts for all the VAT arising in otherEU member states to that home state for onward payment.
d) While acknowledging that the some businesses always have been able to sell products andservices into a country without having a physical presence, The OECD says ICT has significantly
increased the scope for businesses to do so. The think-tank makes clear that it is not ring-fencing thedigital economy as a separate sector and applying specific tax rules.
So other BEPS initiatives such as Action 6 (Prevent Treaty Abuse) and Action 7 (Prevent the Artificial
Avoidance of PE Status) will also bolster source taxation and compliance.
e) Artificial transactions such as allocating intellectual property (IP) to island tax havens or
jurisdictions that did not produce it, have no place in a credible tax system.

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Accountants & Tax Advisors

April 6, 2014
To:
The Task Force on the Digital Economy
Committee of Fiscal Affairs
OECD Paris
Email: CTP.BEPS@oecd.org

Re: Comments on Public Discussion Draft - BEPS Action 1: Address The Tax Challenges of
the Digital Economy 24 March – April 14, 2014
On March 24, 2014, the OECD published draft proposals for tightening the taxation ofmultinational concerns that operate internationally in the digital economy.
The problem is that some of the well-known big ones pay little or no tax anywhere under
existing rules.
But the OECD proposals, if adopted, will be bad for many high tech firms and a better, fairer
approach exists, as explained below.
We are an accountancy firm with much experience of international taxation of high techfirms.
Background:
According to the OECD proposals, the digital economy has changed the way companies dobusiness and it is now far easier to supply services via e-commerce to consumers withminimal physical presence in the consumer countries. And if the multinational uses anoffshore supply company to hold intellectual property and accept commercial risks, theprofits may accrue offshore tax free. Consequently, the OECD was asked by onshore
member countries to look into ways of tackling so-called "Base Erosion Profit Shifting"(BEPS) and the digital economy is one area the OECD is looking into as part of its BEPS action
plan. The plan should be fully developed by the end of 2015.
All this is due to the development of information and communication technology (ICT) of
many types, including personal computing devices, cloud computing, software development,
use of data regarding consumers, the internet of things (putting your fridge and otherdevices on the internet), advanced robotics, 3D printing, online and credit card payments
and much more. Not only large multinationals have adapted their business models, so havemost businesses and "the digital economy is becoming the economy itself" according to the

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OECD. Also there is a move to providing digital products as an online service for a monthly
subscription fee or similar – this is referred to as Xaas (X as a service).
The proposals include some interesting statistics. In 2012, business to consumer (B2C) ecommerce sales were estimated to exceed USD 1 trillion, and business-to-business (B2B) ecommerce was estimated at USD 12.4 trillion. And the major OECD exporters of "ICTservices" in 2012 were: India (USD 13.5bn), Ireland (USD 12.7bn), USA (USD 8.0bn), Germany(USD 7.3bn), UK (USD 7.0 bn). Israel is in tenth place at USD 2.7bn.
The Problem:
The OECD proposals are couched in diplomatic language and replete with jargon. It was
rumored the OECD task force had trouble reaching a consensus. But all had in mind
statements by various politicians.
For example, In May 2013, in a memo to the Permanent Subcommittee on Investigations of
the US Senate Homeland Security and Government Affairs Committee, US Senators Carl
Levin and John McCain wrote: “For example, Apple Inc. established an offshore subsidiary,Apple Operations International, which from 2009 to 2012 reported net income of $30 billion,
but declined to declare any tax residence, filed no corporate income tax return, and paid nocorporate income taxes to any national government for five years. A second Irish affiliate,Apple Sales International, received $74 billion in sales income over four years, but due inpart to its alleged status as a nontax resident, paid taxes on only a tiny fraction of that
income.”Strong remarks were made in the UK House of Commons about other well-known
companies, not all in the digital sector (e.g. coffee, books, etc). On December 3, 2012,
Margaret Hodge MP, Chair of the Committee of Public Accounts, said: "Global companies
with huge operations in the UK generating significant amounts of income are getting awaywith paying little or no corporation tax here. This is outrageous and an insult to British
businesses and individuals who pay their fair share."Aims of the OECD Proposals?
Actually there are no proposals or recommendations. The report refers to "options".
The stated aims of the OECD proposals (or options) are: neutrality, efficiency, certainty andsimplicity, effectiveness and fairness, and flexibility. These aims were adopted by OECD
ministers in Ottawa in 1998 at after reviewing an earlier OECD report "Electronic Commerce:
Taxation Framework Conditions".
What is proposed?
First, the OECD Task Force proposes as a "potential option" that an enterprise engaged in"fully dematerialized activities" would have a taxable permanent establishment if itmaintained a "significant digital presence" in the economy of another country.
A "fully dematerialized activity" would include: digital goods or service core activity; nophysical element other than servers and websites and commercialization of location relevant
data; contracts concluded exclusively by internet or phone; online electronic or credit card
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payments; relationships only via websites; vast majority of profits from digital goods orservices; residence and location disregarded by the customer; use via computer, mobile
device or other IT tools.
A "significant digital presence" in a country would include "for example": Significant numberof customer contracts signed remotely; digital goods or services widely used or consumed in
the country; substantial payments from clients for digital goods or services; or an existing
branch offers related functions such as marketing and consulting.
Second, the OECD task force a proposes to treat as a permanent establishment a significant
business in a country using personal data obtained by regular and systematic monitoring ofInternet users in that country using "multi-sided business models" (which link different
activities).
Third, the OECD Task Force mentions the possibility of a "virtual permanent establishment"
in a country. There are several variations: (1) a virtual fixed place of business - a website in acountry, (2) a virtual agency – contracts habitually concluded through technological means
in a country (3) on-site business presence – at the customer's location.
Fourth, it is proposed to stipulate that financial institutions could become required towithhold tax from credit card and electronic payments.
Fifth, it is proposed to scrap VAT exemptions for imports of low value goods.
Sixth, it is proposed to simplify VAT registration procedures
Our Comments:
The Task Force is clearly hesitant. In our opinion, based on practical experience, theproposed "options" won't work and fresh options are called for (see below).
First, initiative and innovation will be stifled. High tech firms from Alabama to Zimbabwe
may have to register and pay VAT and income tax in every country where they happen tohave "significant" users, even if they have nothing physical in those countries. It is unclear
how many is "significant".
If the internet makes it easy to reach overseas markets from the home country, why
penalize those companies with tax and bureaucracy?
Second, there is no mention of extending the rules for avoiding double taxation (foreign tax
credit or exemption). Not every multinational avoids tax everywhere.
Third, the rules discriminate against companies in the digital sector. No mention is made ofother sectors.
Fourth, this will be little more than a cat and mouse game. It will be easy to change a few
things in the business model of a multinational to avoid meeting the new taxation "options",
for example by adding a small physical element.
Fifth, we note there is no estimate of the expected improvement in tax revenues.
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Sixth, the "options" appear to contravene free trade principles as administered by the World
Trade Organization. These principles essentially provide that customs duty and other taxes
should not be used to impede exports from one country to another, to protect businesses in
the importing country. Instead, exporters with a competitive advantage in each country
should be allowed to flourish without tax impediment in order to increase overall prosperity.
Seventh, the tried and tested principle is that a company from one country should only pay
tax in another country if it does business IN that other country not WITH that other country.
The case for breaking that principle is not clearly stated. It is not enough to say that businessis conducted differently, that was also the case when the fax machine and PC were first
introduced.
Eighth, it is unclear how much income should be allocated to a particular country. Whatabout the value of technology provided and management time and resources devoted
outside that country? Further proposals are apparently still in the pipeline.
Our Recommendations:
The secret of success is in Paragraph 102 of the draft proposals: "First, skills and talentremain a critical resource in the digital economy….managers, developers, software architects
and designers…remain instrumental".
Instead of seeking to impose tax on machines, tax should be imposed where "mind andmanagement" is exercised by humans.
U

This is generally referred to as "effective management" and should be easy to apply.
This is because "effective management" is an existing accepted principle for determining
fiscal residency of a company in cases of doubt, according to the OECD model tax
convention.
Moreover, many countries around the world apply similar related principle known as"central management and control", including the UK, Canada and Australia, and the USA is
said to be considering following suit.
How would it work? The existing effective "management test" would be combined withexisting transfer pricing principles (which have regard to functions, assets and risks) toallocate fairly profits and taxing rights between supply and demand countries for digital
services and goods. The focus should simply be on the human element, not the machinery.
This should avoid the need for start-ups and others to register for income tax purposes inevery country where they have users.
U

What about VAT? If the OECD is smart enough to propose recently an international one-stop
information exchange facility between banks of different countries, it should also be
possible to devise an international one-stop VAT reporting facility for international businessconcerns.
Since VAT is ultimately a tax on consumers, a dispensation might be granted for paying VAT
on B2B transactions as in the EU in most cases.
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This should avoid the need for start-ups and others to register for VAT purposes in every
country where they have users.
U

We would be happy to answer any questions arising.

Yours Truly,

Leon Harris, CPA (Israel), FCA(UK)
HCAT - Harris Consulting & Tax Ltd
35 Jabotinsky Street, Ramat Gan 5251108, Israel.
Tel: +972-3-6123153
Cell: +972-54-6449398
Email: hcat@hcat.cowww.hcat.co

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Submission on theOECD Discussion Draft
on addressing the tax
challenges of the digital
economy14 April 2014

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Tax Treaty, Transfer Pricing and Financial Transactions Division
OECD Centre for Tax Policy and Administration
2, rue André Pascal
75775 Paris Cedex 16
By e-mail:CTP.BEPS@oecd.org

CC:

BIAC
BusinessEurope

14 April 2014
Ref:

OECD public discussion draft on addressing the tax challenges of the digital economy(BEPS Action 1)

Dear Sir/Madam,
Ibec thanks the OECD for the opportunity to comment on opinions outlined in the OECD draft
discussion on ‘addressing the tax challenges of the digital economy’ (BEPS Action 1). Ibec represents
the interests of Irish business including indigenous and multinational enterprises, and SMEs,
spanning all sectors of the Irish economy. Ibec and its sector associations, which include ICT Irelandand the Irish Software Association, work with government and policy makers at national andinternational level to shape business conditions and drive economic growth. Ibec is also a member of
BIAC and Business Europe and broadly supports the views communicated by these partners in theirwritten submissions on the OECD discussion draft.
General comments
Work on the BEPS digital economy action is intrinsically linked with consultations currently
underway across OECD Working Groups on other BEPS actions. Ibec looks forward to reviewing theoutcomes and recommendations of ongoing work on specific actions, and assessing the implicationsof these for the digital economy.
Ibec welcomes the conclusion in the discussion draft that there should not be a separate taxation
regime for the digital economy. Establishing a separate framework for taxation to be levied on thedigital economy would not only be unfair but would become increasingly unworkable as growing
numbers of ‘pre-digital’ businesses diversify their activities to offer more choice and better services
to consumers.
Ibec considers that the digital economy has become an intrinsic element of the broader global
economy and of many businesses driven by business and consumer activity. Many of the previous
boundaries that existed between digital and ‘traditional’ or ‘bricks and mortar’ service providers are
rapidly dissolving as enterprises across all sectors increase their online presence/services togenerate more business by reaching new customers and markets but also to reduce costs.
It is also important to highlight a number of key points about the scope and reach of the digital
economy;• the digital economy delivers greater choice, competitiveness/price benefits andconvenience to consumers, particularly in remote locations or to groups of customers who
may face difficulty in physically accessing ‘traditional’ services;

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•
•
•
•
•

digital and e-commerce services provide more and more users across the world with easy
and cost-effective access to information services and to key resources in areas including
education and health which can make a real and positive difference;for many young people, the consumption of online and related services exceeds that of nondigital services (but usage of digital services across all population sectors is growing);
the digital economy gives many young people an opportunity to start their own business or
secure skilled employment in a dynamic and growing sector of the economy at a time whenyouth unemployment levels in many EU and OECD states remain stubbornly high;the digital economy promotes cross-border trade and contributes to more sustainablegrowth and competition in a globalised economy;
the sector has enormous potential to grow further

It is therefore of critical importance that tax rules do not discourage businesses to trade, grow anddeliver services to customers and markets by complicating or amending regulation that would
specifically target digital enterprises.
The discussion draft contains references to the taxation of sales into markets where a digitalbusiness has no physical presence. Ibec believes that the best way to allocate tax income between
states where income-producing activities take place and states where the sale/consumption ofservices occurs is through a combination of origin-based income tax and destination-based VAT.
The application of other types of hybrid tax systems would generate complexity and uncertainty forbusiness, consumers and tax authorities and could lead to double taxation.
II.
Information and Communication Technology and its impact on the economy
Ibec notes the detailed summary in Chapter II of the draft discussion document which traces theevolution of ICT in recent decades, paving the way for today’s dynamic digital economy. In ongoing
discussions about the digital economy, it is important to look to the future and ensure that tax policy
facilitates and supports continued future growth.
III.

The Digital Economy, its key features and the emergence of new businessmodelsIbec supports the assertion in the discussion draft that ‘…the digital economy is increasingly
becoming the economy itself’, and considers that it would be therefore impossible/unworkable toseparate it from the broader economy for taxation purposes. But in many sections of the discussion
draft, including Section III, proposals are outlined that seek to identify features of the digital
economy that might differentiate it from the ‘traditional’ economy for taxation purposes. Theseassertions are, often over-stated and/or are applicable to approaches taken by many other ‘non
digital’ business sectors.
The business models prevalent in today’s digital economy are neither radical nor new (as suggested
in Section III), but are, in many instances, traditional business practices that have been modified tosupport the growth and development of the digital economy, just as other core business practices
have historically been adapted or evolved to take account of factors including new technologies,changing social and demographic trends etc.
The discussion draft should have placed a greater emphasis on issues such as the considerable R&D
and innovation investment necessary to survive and thrive in the digital economy, the high levels offinancial investment and risk involved in starting many new e-commerce enterprises, and the level ofvolatility in the sector driven by new and constantly evolving technology advances.
Some of the specific points made in this chapter of the discussion draft also tend to be too narrowly
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focussed, including a suggestion that most digital/ICT/e-commerce companies operating in thedigital economy have lower costs than ‘traditional’ service providers. Internet and e-commercebusinesses may have lower costs in some areas than non-digital business peers, but expenditure inother areas including developing, designing and hosting online services/platforms and on research,innovation and related and associated costs tend to be substantially higher in the digital economy.
The six key features of the digital economy listed from paragraph 91 of the discussion draft are notspecific to the digital economy. Ibec also disagrees with the generalised assertion that manybusinesses operating in the digital economy maintain commercial activity with ‘minimal need for
personnel present’; internet and e-commerce companies employ large numbers of highly
skilled/skill-specialised personnel. The levels of revenue per employee figures included in thediscussion draft (figure 8) do not automatically translate into high levels of profit.
The reference (paragraph 101) to ICT/e-commerce companies selecting the best locations toestablish productive activities and assets which may be distant from the location of customers or
production is valid, but such choices are normally made by any business seeking to expand
internationally and are not limited to the digital economy.
Those engaged in digital business, like all businesspeople, consider a broad range of factors to
inform decisions on the location of bases including local tax regimes and incentives, ease of doing
business, availability and costs of skilled personnel, quality of infrastructure, political stability andother issues.
In summary, Ibec disagrees with the points in Section III which, taken together, suggest that digitalenterprises are distinctly different to other sectors of the economy and can grow for low cost withminimal personnel, particularly outside bases where the company has its main operations.
IV.
Identifying opportunities for BEPS in the Digital Economy
Ibec supports the need for fair tax strategies including to avoid tax compliant companies being put at
an unfair competitive disadvantage. Ibec also notes the comment in the discussion draft thatstrategies used to achieve BEPS by some digital businesses are similar to the nature of strategies
used by some ‘traditional’ businesses. But the references in paragraph 126 suggest that there issystematic abuse by enterprises in relation to the provision of information for tax assessment; Ibec
does not believe that this is the case.
Ibec considers that the issue of a business providing customers with goods/services (digital orotherwise) in a market/jurisdiction without a physical presence is not unusual (particularly forsmaller destination markets) and should not be an issue that requires any major deviations fromcurrent international tax policy. Income tax should not be based on the customer’s location(although the country where the customer is located may choose to impose a consumption tax).
Any moves which would alter current taxation rights away from a country which, under existing tax
principles, can levy tax based on the function, assets and risks of a business, to other jurisdictions
based on where consumption occurs, would have serious implications. Economies such as Ireland’s
and many other European states of similar size with strong export bases but small domestic markets
would face major difficulties. For business, the danger of double taxation would increase.
V.
Tackling BEPS in the Digital Economy
Work and consultations currently underway on other BEPS actions must be concluded before
definitive decisions are taken in relation to taxation and the digital economy. In this regard, Ibec
looks forward to continuing to engage with the OECD on other BEPS-related actions. Ibec and its
members would, however, call for the conclusion of early decisions on improved resolution
4
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mechanisms and processes which will ensure that disputes are addressed swiftly to promote greatercertainty and clarity for business and avoid problems that could negatively impact on international
trade.
Limit base erosion via interest deductions and other financial payments
Ibec questions the emphasis placed on assertions in the discussion draft that suggest that certain
activities are more prevalent in the digital economy; the examples cited in paragraphs 155/156 on
intra-group financing take place in all parts of the economy, not just in the digital economy. The
proposal in paragraph 157 indicates a move towards formulary apportionment which runs counterto the OECD’s core principles in relation to the BEPS process.
Counter harmful tax practises more effectively
With reference to the points made in paragraphs 158/159, if countries develop specific tax
incentives to attract investment, then taxpayers should be free to avail of these incentives. If thepolicies and regimes operated by a country are judged to be harmful, the countries should take
immediate corrective action to tackle problematic elements.
Global value chains and profit methods
Ibec is concerned that the proposal outlined in paragraph 166 could contribute to an erosion of thearms length principle and potentially result in the risk of double taxation, damaging international
trade.
Measures that will restore taxation in the jurisdiction of the ultimate parent
Paragraphs 167-169 refer to CFC rules in relation to the taxation of mobile income generated by thedigital economy. Given the continuing rise of remote sales of goods and services by ecommerce/digital enterprises, and the fact that this type of business is neither new nor limited tothe digital economy, it would seem unfair to ring-fence income from digital economy remote sales
transactions for new CFC rules.
VI.
Broader tax challenges raised by the digital economy
The assertion in paragraph 173 that ‘the development of digital technologies has the potential toenable economic actors to operate in ways that avoid, remove, or significantly reduce, their tax
liability within these bases’ is over-exaggerated. Paragraphs 178-182 should also emphasize thestrong and positive competitiveness and knowledge benefits that the digital economy delivers tobusiness and consumers in smaller and remote markets. Tax rules should support and encouragesuch access; new tax and administrative burdens unrelated to local profit or activity could achieve
the opposite effect. It is important to note in relation to paragraphs 183-185, that the value of data
is mostly only unlocked through a heavy investment in skilled personnel and technology to analyse,interpret and manage high volumes of raw data.
Collection of VAT in the Digital Economy
Ibec looks forward to continued engagement at OECD level between governments and business toassess VAT/GST through the relevant Technical Advisory Group (TAG). It is important that solutions
adopted take account of the value of transactions balanced against the administrative burdens ofcollection/administration for business and local tax authorities.
VII.

Potential options to address the broader tax challenges raised by the digital
economyIbec notes that the proposals in this chapter on the digital economy have been put forward by
stakeholders for discussion and that no conclusions have been reached on the issues raised.

5232

Ibec supports the continued application of the Ottawa Taxation Framework principles which,supplemented as necessary, can provide a useful framework for evaluating future Task Forcediscussions on options. The Ottawa principles include guaranteeing fairness and neutrality, and Ibec
considers that in this regard, the application of distinct rules for the digital economy would not beappropriate (and, in any event, would be difficult to implement given the scale and growth of thedigital economy).
Modifications to the exemptions from Permanent Establishment status
Ibec would be greatly concerned at any proposed amendment to Article 5 (paragraph 4) of the OECD
Model Convention on permanent establishments which could potentially generate considerable
uncertainty and substantially increased administrative burdens for business. Ibec looks forward tosubmitting views to the OECD on Permanent Establishment status as part of BEPS Action Plan 7.
A new Nexus based on significant digital presence
Ibec considers that the suggested nexus function runs counter to the Ottawa principles by proposing
rules that would delineate ‘traditional’ business from the digital economy, therefore violating theneutrality principle. If income tax on ‘fully dematerialized digital activities’ were applied, it could
potentially result in double taxation and also affect the provision of digital economy goods andservices to smaller markets or more remote economies. The application of VAT on a broader range
of deliveries of digital goods and services would be a better option of taxation than the proposals
outlined.
Virtual Permanent Establishment
Ibec considers that a country should not tax income where there is no actual nexus to that same
country. The measures proposed would also run contrary to the Ottawa principles by ring-fencing
the digital economy for tax purposes from the broader economy, and would also generate significant
increases in administrative burdens for business and augment the risk of double taxation.
Creation of a withholding tax on digital transactions
This proposal again raises the issue of singling out specific types of payments which is effectively
ring-fencing the digital economy. The options outlined could also lead to double taxation and, given
the low values of transactions, could be administratively burdensome. VAT or a broad consumption
tax which does not differentiate between digital and non-digital services or the origin(domestic/foreign) of providers would be preferable.
Concluding remarks
Ibec considers that the discussion draft does not make a case for developing specific tax rules for thedigital economy sector. Ibec will continue to engage with the OECD on other broad BEPS actions
which may have implications for the digital economy.
Ibec sincerely thanks the OECD for the opportunity provided to outline the views of its members on
this extensive and detailed draft discussion paper and would be pleased to elaborate on the issues
raised in this submission if required. Ibec looks forward to further future engagement with theOECD on BEPS actions and initiatives.
Yours sincerely,___________________
Fergal O’Brien
Head of Policy and Chief Economist
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Ibec Head Office84/86 Lower Baggot Street
Dublin 2
T: + 353 1 605 1500
E: membership@ibec.ie
W: www.ibec.ie/membership

GalwayRoss House
Victoria Place
GalwayT: + 353 91 561109
E: west@ibec.ie
W: www.ibec.ie/west

Cork
Knockrea House
Douglas Road
Cork
T: + 353 21 4295511
E: cork@ibec.ie
W: www.ibec.ie/cork

LimerickGardner House Bank PlaceCharlotte Quay Limerick
T: + 353 61 410411
E: midwest@ibec.ie
W: www.ibec.ie/midwest

Donegal
3rd Floor, Pier One Quay Street
Donegal Town Donegal
T: + 353 74 9722474
E: northwest@ibec.ie
W: www.ibec.ie/northwest

Waterford
Business Park Cork Road
Waterford
T: + 353 51 331260
E: southeast@ibec.ie
W: www.ibec.ie/southeast

8
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Ibec Europe
Avenue de Cortenbergh89, Box 2
B-1000 Brussels
BELGIUM
T: + 32 (0)2 512.33.33
F: + 32 (0)2 512.13.53
E: europe@ibec.ie
W: www.ibec.ie/europe

TAXREP 20/14(ICAEW REPRESENTATION
53/14)BEPS ACTION 1: ADDRESS THE TAX CHALLENGES OF THE DIGITAL ECONOMYICAEW welcomes the opportunity to comment on the public discussion draft BEPS Action 1:
Address the tax challenges of the digital economy published by OECD on 24 March 2014.
This response of 12 April 2014 has been prepared on behalf of ICAEW by the Tax Faculty.
Internationally recognised as a source of expertise, the Faculty is a leading authority on taxation. It
is responsible for making submissions to tax authorities on behalf of ICAEW and does this withsupport from over 130 volunteers, many of whom are well-known names in the tax world. Appendix
1 sets out the ICAEW Tax Faculty’s Ten Tenets for a Better Tax System, by which we benchmark
proposals for changes to the tax system.

Contents
Paragraphs
General comments

1-6Sound principles of taxation policy

7-8

Modification of the exemptions from Permanent Establishment Status

9-11

A new nexus based on significant digital presence

12-13

Consumption tax option

14-16

Ten Tenets for a Better Tax System

The Institute of Chartered Accountants in England and Wales
Chartered Accountants’ Hall
Moorgate Place London EC2R 6EA UK
icaew.com/taxfac

Appendix 1

T
F
E
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+44 (0)20 7920 8646
+44 (0)20 7920 0547
taxfac@icaew.com

ICAEW is a world-leading professional accountancy body. We operate under a Royal Charter,
working in the public interest. ICAEW’s regulation of its members, in particular its responsibilities inrespect of auditors, is overseen by the UK Financial Reporting Council. We provide leadership andpractical support to over 142,000 member chartered accountants in more than 160 countries,
working with governments, regulators and industry in order to ensure that the highest standards
are maintained.
ICAEW members operate across a wide range of areas in business, practice and the public sector.
They provide financial expertise and guidance based on the highest professional, technical andethical standards. They are trained to provide clarity and apply rigour, and so help create long-termsustainable economic value.

Copyright © ICAEW 2014
All rights reserved.
This document may be reproduced without specific permission, in whole or part, free of charge andin any format or medium, subject to the conditions that:• it is appropriately attributed, replicated accurately and is not used in a misleading context;• the source of the extract or document is acknowledged and the title and ICAEW reference

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Where third-party copyright material has been identified application for permission must be made to
the copyright holder.
For more information, please contact ICAEW Tax Faculty: taxfac@icaew.com
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ICAEW representation TAXREP 20/14 BEPS ACTION 1: ADDRESS THE TAX CHALLENGES OF THE DIGITAL ECONOMY

GENERAL COMMENTS
1. We believe that the Digital Economy should not be treated as separate from the “real”
economy. In response to the first bullet-point in paragraph 10 we do not believe it is possible toring-fence the digital economy from the rest of the economy.
2. All parts of the economy demonstrate, or use, to some extent digital methods in carrying on
business and some more so than others.
3. Many businesses which use digital carry on their business in a great number of different
countries without satisfying the traditional OECD definitions of a Permanent Establishment(PE) and so, under current rules, fail to create a taxable presence in the source country.
4. We do not believe that the solution to this problem should be a major reworking of the existing
rules which could have, as an end result, that multinational are deemed to have PEs in a very
considerable number of countries and an obligation to make returns in those countries.
5. But it is clear that some multinational business do have a commercial presence in countries
which is an integral and essential part of their business model but which do not currently, forinstance, meet the conditions to be deemed to have a PE in such countries.
6. We accept that some redefinition of PE is required.

SOUND PRINCIPLES OF TAXATION POLICY
7. We do also very much support the Ottawa taxation framework principles, mentioned in the final
bullet-point of paragraph 10, and set out in a Box in paragraph 6.
8. The ICAEW Tax Faculty formulated its own Ten Tenets Towards a Better Tax System in thelate 1990s, which are reproduced in Appendix 1 to this response. More recently these havebeen taken up by the UK Parliament’s Treasury Select Committee in its 2011 Report Principles
of Tax Policy
http://www.publications.parliament.uk/pa/cm201011/cmselect/cmtreasy/753/753.pdf in which it
concluded that tax policy should:
•
•
•
•
•

be fair;
support growth and encourage competition’provide certainty;
provide stability; andbe practicable.

MODIFICATION OF THE EXEMPTIONS FROM PERMANENT ESTABLISHMENTSTATUS
9. Various options are put forward in paragraph 211 as to how one could modify the exceptions
contained in paragraph 4 of Article 5 of the OECD Model Tax Convention.
10. We support qualifying the Article 5(4)(a)-(d) exceptions to a PE to limit this to where themaintenance of a stock of goods, warehouse etc is itself of a preparatory or auxiliary character,and not an integral feature of the business in question.
11. If there is to be a change of definition then we urge OECD to introduce a number of further
examples in the Commentary so that it will be clearer as to what sort of activities will beconsidered to be of a preparatory or auxiliary character.

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A NEW NEXUS BASED ON SIGNIFICANT DIGITAL PRESENCE
12. We are not in favour of extending the PE definition to create a taxable presence because abusiness has a “significant digital presence”.
13. We are also not in favour of extending the PE definition to the other examples included inparagraph 217 under the heading Virtual Permanent Establishment.

CONSUMPTION TAX OPTION
14. The discussion draft identifies the opportunities presented by the digital economy to makesignificant sales, cross-border, without creating a taxable presence in the country of
consumption.
15. The EU has adopted the 2003 OECD E-commerce guidelines in respect of sales from third
countries into the EU but very few, only about 1,000 companies, have registered and accountfor VAT, and compliance and administration present very great difficulties.
16. The EU is changing its place of supply rules in relation to telecommunications, broadcastingand electronically supplied services within the EU from 1 January 2015 so that from that date
the place of supply will be the country of the consumer rather than the producer. VAT is a tax
on the value of the sales rather than tax on profit so this is a different taxation approach thandirect taxation and we would not recommend it as an immediate option not least because of
the difficulty of administering it in practice. But we believe the developments in the EU need to
be kept under review by OECD to determine whether such a development may be capable ofintroduction on a wider geographical front.

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APPENDIX 1
ICAEW TAX FACULTY’S TEN TENETS FOR A BETTER TAX SYSTEM
The tax system should be:
1.

Statutory: tax legislation should be enacted by statute and subject to proper democratic
scrutiny by Parliament.

2.

Certain: in virtually all circumstances the application of the tax rules should be certain. Itshould not normally be necessary for anyone to resort to the courts in order to resolve how
the rules operate in relation to his or her tax affairs.

3.

Simple: the tax rules should aim to be simple, understandable and clear in their objectives.

4.

Easy to collect and to calculate: a person’s tax liability should be easy to calculate andstraightforward and cheap to collect.

5.

Properly targeted: when anti-avoidance legislation is passed, due regard should be had tomaintaining the simplicity and certainty of the tax system by targeting it to close specificloopholes.

6.

Constant: Changes to the underlying rules should be kept to a minimum. There should be ajustifiable economic and/or social basis for any change to the tax rules and this justification
should be made public and the underlying policy made clear.

7.

Subject to proper consultation: other than in exceptional circumstances, the Government
should allow adequate time for both the drafting of tax legislation and full consultation on it.

8.

Regularly reviewed: the tax rules should be subject to a regular public review to determine
their continuing relevance and whether their original justification has been realised. If a tax
rule is no longer relevant, then it should be repealed.

9.

Fair and reasonable: the revenue authorities have a duty to exercise their powers
reasonably. There should be a right of appeal to an independent tribunal against all theirdecisions.

10.

Competitive: tax rules and rates should be framed so as to encourage investment, capitaland trade in and with the UK.

These are explained in more detail in our discussion document published in October 1999 as
TAXGUIDE 4/99 (see icaew.com/en/technical/tax/taxfaculty/~/media/Files/Technical/Tax/Tax%20news/TaxGuides/TAXGUIDE-4-99-Towards-a-Better-tax-system.ashx )240

5Informa Group plc
Informa House
30-32 Mortimer Street
London W1W 7RE

14 April 2014
OECD
BEPS Project
via e-mail: CTP.BEPS@oecd.org
Dear Sirs,
Base Erosion and Profit Shifting (BEPS) Action 1

Address the Tax Challenges of the Digital Economy
Informa plc welcomes the OECD’s request for input on BEPS Action 1, “Address the Tax
Challenges of the Digital Economy” following the Public Discussion Draft issued on 24 March
2014.
Informa previously responded to the 22 November 2013 discussion document. Backgroundinformation on the company is included as an appendix to this document.
We are pleased to provide input as follows:
1. The document specifically asks for comments on the following three areas:•

Whether it is possible to ring-fence the digital economy from the rest of theeconomy, and if not, whether specific types of digital transactions could be
identified and addressed through specific rules;•

The key features of the digital economy identified by the Task Force andwhether there are other key features that should be taken into account;•

The examples of new business models in the digital economy and whether(and if so which) other business models should be considered.

2. In our view, Parts II and III of the document provide good background information on
the development and influence of information and communication technology, andhow the “digital economy” has increasingly become the economy itself. The key
features of the digital economy and its business models are identified and analysed
well. These parts of the document illustrate that the “digital economy” hasincreasingly become simply “the economy”.

241Informa Group plc
Informa House
30-32 Mortimer Street
London W1W 7RE

3. The document also asks for comment on•

The ability of the measures developed in the course of the BEPS Project andthe current work on VAT/GST to address BEPS concerns in the digital
economy;•Whether other measures should be developed during the course of the workon other aspects of the BEPS Action Plan to address BEPS concerns in thedigital economy and if so which ones .

4. Parts IV & V of the document illustrate that BEPS is a feature of mismatches andmissing elements in the international tax system. Some multi-national enterprisesthat work in areas of the economy which have seen the greatest impact of digitaltechnology may be well placed to take advantage of such mismatches and missing
elements; however, none of the BEPS issues are exclusive to such companies. We are
not aware of BEPS concerns that are specific to companies creating digital products.
5. Accordingly, the other actions contemplated by the BEPS project will thus address
BEPS for digital and non-digital companies alike. We do not see any value in othermeasures beyond those identified for direct taxation. The current work on VAT/GST
should also address BEPS concerns.
6. The document finally asks for comments around broader taxation challenges of thedigital economy as follows:•

The broader tax challenges raised by the digital economy which have been
identified by the Task Force and how these challenges should be addressed,
taking into account both direct and indirect taxation;•

The options to address these broader tax challenges discussed by the Task
Force and summarised in the discussion draft;•

The potential cost of compliance arising from the options proposed to address
the tax challenges of the digital economy and suggestions for more cost
efficient alternatives;242

Informa Group plc
Informa House
30-32 Mortimer Street
London W1W 7RE•

Whether the Ottawa taxation framework principles identified above are an
appropriate framework for analysing options to address the tax challenges,
and whether and how they should be supplemented.

7. Addressing the final bullet first, we agree the Ottawa taxation framework principles
are the appropriate framework for analysing these tax challenges.
8. The broader challenges of the Digital Economy raised in Part VI of the paper would
exist if the mismatches and missing elements of the current system were all
eliminated. These challenges do not involve base erosion or profit shifting – they area consequence of advances in technology.
9. We do not under-estimate these challenges, nor suggest they should not be tackled.
However, in our view they open up profound questions of how taxation should
operate in a world of largely digital commerce. These questions need to be discussed
and debated outside the framework of the BEPS project.
10. What is not addressed in the document is the extent to which tax challenges areperceived to be greater in countries that have been somewhat slower to adopt
digital technologies, and thus may have a lower level of “digital exports”. The
document does not, in our view, sufficiently question whether the tax challenges ofthe digital economy could be more a matter of timing due to different rates of digitaldevelopment rather than permanent changes to tax bases, and as digital exports
become more evenly spread, the challenges may recede.
11. If the challenges are a “timing issue”, any adaptions to the international tax systemthat entrench the current differences between economies are likely to lead to issues
persisting rather than being solved.
12. Part VII of the document sets out potential options to address the tax challenges
raised by the digital economy. We propose these should be debated separately fromthe BEPS action points. None of these recommendations should be introduced underthe BEPS umbrella, as they are not addressing profits of base erosion or profit
shifting.

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Informa House
30-32 Mortimer Street
London W1W 7RE

13. In relation to the specific proposals in Part VII we would make the following
comments:•

An over-arching point we would make is that in our field in particular themove from traditional print based business to digital based business has notaffected our core “mission” – we are still delivering information into thesame markets, just in a more technologically advanced manner. From ourperspective, the supply chain may have shortened, but the value in our
product is still created prior to the point of delivery.

•

We would thus find it surprising that moving from printed to digital deliveryof the same product, used by the same customers in the same markets would
lead to profoundly different tax results for us.

•

The “New Nexus based on significant digital presence” represents a tax on an
attributed profit based on revenue in a place of sale. This goes against the
principle that value is created in where a product is created, not simply by amarket for that product; it would represent a fundamental shift in theinternational tax system to adopt such an approach.

•

Such as system would also be very complex to administer. It would
substantially increase compliance costs for business through increasing thenumber of returns required and the complexity of attributing profit to various
jurisdictions.

•

The approach does also not fit well with a central concept of the BEPS project
as a whole which is that value is created where significant people functions
are located.

•

This is particularly relevant if a digital presence is considered to be createdfrom collecting data – data collection itself, however massive, does notcreate any value. Data only has value when analysed. Such analysis is done bypeople or by algorithms designed by people. The value is thus created where
people analyse the data or where people created the analysis tools.

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Informa Group plc
Informa House
30-32 Mortimer Street
London W1W 7RE•

Three “virtual PE” models are described. The first is surely now rendered
impractical by technologies that allow transactions to be made from multiple
server locations. The second seems to be a restatement of the “New Nexus”
concept and shares the same problems; and the third would seem to be alogical extension of current rules, but would be of limited application.

•

Another approach put forward is applying a withholding tax to digitaltransactions. This raises similar concerns to the “New Nexus” approachmentioned above. It marks a shift in taxation to where sales are made from
where product is created.

•

Any withholding tax above a low single digit number is likely to result indouble taxation. Under current principles a state where a product is createdis unlikely to give enough double tax relief on profits on that product for awithholding tax on revenue from that product to be fully compensated. If
greater credit for such withholding tax is given in future, producer states,
where value has traditionally been considered to be created, will lose out.

•

If withholding tax results in double taxation, producers are likely to increaseprices to compensate for this effect, with detrimental impact on the
consumer economy.

•

A withholding tax also transfers the burden of compliance/payment fromproducer to consumer, with the difficulties noted in the document.

•

None of the options proposed address the question of increasing “digital
exports” in those countries currently lagging behind. Such an increase is likely
to reduce international tensions over taxation of the digital economy, and wewould suggest the focus should be on increasing digital trade, andencouraging digital product to be developed in economies which have beenslower to adapt.

14. We would broadly agree that the principal effective consumption tax option is torequire non-resident suppliers to register and account for VAT in states ofconsumption. This process should be made as simple as possible.

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Informa Group plc
Informa House
30-32 Mortimer Street
London W1W 7RE

15. There is one specific challenge of the digital economy which the document does notaddress. This is differential consumption tax rates on physical and digital versions of
the same product.
16. In general, this is an area where governments potentially benefit from significantly
increased tax revenues on the same product; effectively the reverse of base erosion.
17. We face specific challenges in our businesses when dealing with non-VAT registeredconsumers.
18. Consumers regard printed and digital versions of the same information as essentiallythe same product. Some digital products may contain features that cannot bepresent in print, and these may be valued by the consumer; but the premium they
are prepared to pay is small (and may be non-existent).
19. The non – VAT registered consumer is focused on the price they pay – the pre VAT
price is irrelevant to them.
20. We have therefore experienced the need to discount digital certain products where
the consumers are non - VAT registered against the printed product price, so thatthe consumers pay broadly the same price.
21. The beneficiary of such discounts is the taxing authority, not the consumer. In the
Digital Economy, the challenges are not confined to loss of tax revenues –governments are often gaining revenues from a shift from print to digital delivery.
We trust the OECD will find these comments helpful as it continues its work on BEPS Action
Point 1.
Yours faithfully,

GLYN FULLELOVEGroup Tax Director, Informa plc
cc: Zoe Leung-Hubbard, UK Government HM Treasury – zoe.leung-hubbard@hmtreasury.gsi.gov.uk

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Informa Group plc
Informa House
30-32 Mortimer Street
London W1W 7RE

APPENDIX
Information on Informa plc
Informa plc is a broad based, resilient business to business media group. We operate inthree main areas; Global Events, which incorporates a range of face to face media
businesses, including exhibitions, conferences and awards; Business Intelligence, which
delivers high value proprietary content to a number of industries including healthcare,pharmaceuticals, financial services, maritime, commodities, telecoms and insurance and thelegal profession; and Academic Publishing, which produces books and journals for theacademic market, including university libraries.
We have over 6,000 employees in over 100 offices in 25 countries; we also run events andsell digital products in many more countries.
We pride ourselves on our digital expertise, which runs across all our businesses. The vast
majority of our publishing products have now transitioned to digital platforms andapproximately three-quarters of our publishing revenues are from digital product. In the
Events business, we have seen social media becoming a powerful marketing tool, and haveinvested in technology used “within events”.
We see our mission as Bringing Knowledge to Life: Businesses, professionals and academics
worldwide turn to Informa for unparalleled knowledge, up-to-the minute information andhighly specialist skills and services. Our ability to deliver high quality knowledge and services
through multiple media channels, in dynamic and rapidly changing environments, makes ouroffer unique and extremely valuable to individuals and organisations.

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April 14, 2014
Tax Challenges of the Digital Economy
Comments by the Insurance Company Working Group on BEPS

1.

Introduction and Summary of Comments

These comments are being submitted to the OECD by the Insurance Company Working Groupon Base Erosion and Profit Shifting (BEPS), which consists of insurance companies conducting
international business, in response to the OECD’s Public Discussion Draft, BEPS Action 1:
Address the Tax Challenges of the Digital Economy (March 24, 2014).
Our comments on the Discussion Draft may be summarized as follows:•••

We believe that it is important for the OECD to refrain from making any
recommendations that are specific to the digital economy until all stakeholders canevaluate, at a future time, the effectiveness of the recommended measures developed in
the course of the BEPS Project, as well as recommendations stemming from work
currently being done on VAT/GST.
We are concerned about the potential option of a new, alternative type of permanentestablishment based on a “significant digital presence” in a jurisdiction. We do not see
how this concept could be developed successfully, from either a theoretical perspective ora practical perspective.
While acknowledging that VAT/GST measures may be appropriate for many types ofbusinesses, we wish to highlight that VAT/GST is not an appropriate option for the
insurance industry.

2. Need for future evaluation of the effectiveness of anti-BEPS measures
The Discussion Draft acknowledges that the tax issues related to the sale of digitized products
and services by nonresident sellers are not essentially different from the tax issues arising fromsales of physical goods and other transactions between nonresident providers and consumers
located in a jurisdiction where the provider has no physical presence. Advances in informationand communication technology have simply made direct interactions between providers andconsumers in different jurisdictions more efficient, while enabling the delivery of a variety of
products and services in digitized form through telecommunications. From an income tax
perspective, therefore, the digital economy does not appear to raise new issues. Rather, it has
raised the stakes regarding BEPS and the various elements of the existing international tax
regime that permit BEPS to occur.
1
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As suggested in Section V, paragraph 146, of the Discussion Draft, the overall aim of the BEPS
Action Plan is to “ensure that, once the different measures are implemented in a coordinatedmanner, taxation is more aligned with where economic activities take place.” Indeed, all of
Section V is devoted to a discussion of “how the work on the implementation of the BEPS
Action Plan, as well as the work on consumption taxes, is expected to address” the BEPS
concerns that are enlarged by key features of the digital economy such as mobility of functions,assets and people. The discussion covers measures designed to restore taxation in market
jurisdictions, measures aimed at restoring taxation in both market and ultimate parent
jurisdictions, measures that will restore taxation in the jurisdiction of the ultimate parent, andmeasures to address BEPS in the consumption tax area.
In paragraph 208 of the Discussion Draft, it is noted, appropriately, that “it is expected that as
described in Section V, the development of the measures envisaged in the BEPS Action Plan will
effectively address the BEPS concerns that arise in the digital economy.” Given this expectation,
it seems clear that the OECD should not, at this stage, make any recommendations pursuant to
Action 1, which relates only to the digital economy. Instead, all stakeholders should have theopportunity to evaluate the effectiveness of the measures implemented as a result of the BEPS
project before any decision is made to develop recommendations that are specific to the digital
economy.
3.

“Significant digital presence”

The Discussion Draft discusses, as a potential option, an alternative standard of taxable nexus,
namely that an enterprise engaged in fully dematerialized digital activities would be deemed tohave a permanent establishment in a jurisdiction for tax purposes if the enterprise had a“significant digital presence” in the jurisdiction. Examples given in the Discussion Draft of whatmight give rise to such a presence include:
•

•
•
•
•

The existence of a significant number of contracts for digital goods or services thatwere remotely signed between the enterprise and customers resident in thejurisdiction;
Widespread consumption of digital goods or services of the enterprise within thejurisdiction;
Substantial payments by customers resident in the jurisdiction for digital goods orservices delivered as part of the enterprise’s core business;
The performance of secondary functions such as marketing and consulting in thejurisdiction by a branch of the enterprise; andThe enterprise’s use of personal data, obtained by systematic monitoring of internet
users in the jurisdiction, to do a substantial amount of business.

There is no discernible principle of tax policy underpinning the idea that any of the above
examples should give rise to a taxable presence of an enterprise that has no employees, agents, or2249

tangible assets in the jurisdiction. An enterprise selling physical goods to customers in ajurisdiction where the seller has no physical presence does not become taxable in the jurisdiction
due to the existence of numerous remotely signed contracts with residents, or widespread
consumption of the seller’s products in the jurisdiction, or the receipt of substantial sales revenue
from residents, or the performance of secondary functions through a local branch, or the use ofdata obtained from residents. Why should there be a different result when the enterprise isselling digitized products rather than physical products?
In the insurance industry, streams of data flowing cross border are extremely common. In
Europe, for example, it is normal business practice, sanctioned through the EU freedom ofservices directives, to allow an insurance business authorized by one member state to carry out
its insurance activities throughout the European Union. The existence of a data flow from thecountry in which the risk is located to the country in which the insurance is being written should
not create a new type of taxable presence.
It seems clear, therefore, that the threshold for a PE, particularly for our industry, will be further
reduced if not effectively eliminated by the creation of a digital PE standard. Moreover, from apractical standpoint, a digital PE will be difficult to define in a way that will not lead to more,rather than less controversy.
In our view, the discussion of this idea in the Discussion Draft (paragraphs 212-217) is not
persuasive from a policy standpoint. In addition to lacking any policy basis, it would most
likely be very difficult to administer as a practical matter, both for taxpayers required to comply
with it and for tax administrators attempting to implement it.
4. Consumption tax options
Given that established tax policy principles allow a foreign seller of physical goods to make anunlimited number of sales, free of income tax, to residents of a jurisdiction where the seller has
no physical presence or dependent agent, it appears that for some industries, a consumption tax,
rather than income tax, may be the appropriate area for the OECD to focus on in developing
potential options for addressing tax challenges posed by the digital economy. We would note,however, that this would not represent an effective or practical option in the financial services
context, in light of the extraordinary and widely recognized difficulty of disaggregating theservices component of conventional financial transactions. For insurance companies
specifically, the inability to pass through and completely recover VAT from the consumer of our
products means that the insurance company will have to at least in part suffer the burden of theconsumption tax.
We understand that work is ongoing within the OECD and elsewhere with regard to improving
the administration of consumption taxes on cross-border transactions. We suggest that it would
be appropriate to await the results of that work and evaluate any relevant recommendations that
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Plan.

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INTERNATIONAL ALLIANCE FOR PRINCIPLED TAXATIONCOUNSEL AND SECRETARIAT TO THE ALLIANCE:
BAKER & MCKENZIE LLP
ATT: MARY C. BENNETT
815 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20006
USA
TEL: +1 202 452 7045
FAX: +1 202 416 6910
mary.bennett@bakermckenzie.com

April 14, 2014
VIA E-MAIL
Mr. Pascal Saint-Amans
Director
Centre for Tax Policy & Administration
Organisation for Economic Co-operation and Development
2, rue André-Pascal
75016 Paris
FranceCTP.BEPS@oecd.org
Re:

Comments on Discussion Draft on BEPS Action 1: Tax Challenges of the Digital Economy

Dear Mr. Saint-Amans:
The International Alliance for Principled Taxation (IAPT or Alliance) is a group of about two dozen
major multinational corporations based throughout the world, and representing business sectors as diverse
as consumer products, media, mining, telecommunications, oilfield services, transportation, luxury goods,
computer technology, energy, pharmaceuticals, heavy equipment, entertainment, software, beverages,
automotive, IT systems, publishing, electronics, and advertising. The group’s purpose is to promote thedevelopment and application of international tax rules and policies based on principles designed toprevent double taxation and to provide predictable treatment to businesses operating internationally.
The Alliance appreciates the opportunity to provide input to the OECD and its Digital Economy Task
Force with respect to the Discussion Draft on Tax Challenges of the Digital Economy (Discussion Draft)
released on March 24, 2014. Our comments are set forth in Annex 1 to this letter.
As you know, the IAPT submitted comments on Action 1 of the July 2013 BEPS Action Plan on
October 16, 2013, and we include copies of those comments as Annex 2 to this letter for reference.

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Mr. Pascal Saint-Amans
April 14, 2014
Page 2

INTERNATIONAL ALLIANCE FOR PRINCIPLED TAXATIONIn our comments, we identify our areas of support for and concern with the analysis put forth in the
Discussion Draft. We address each of the options described in Chapter VII of the Discussion Draft,which we understand to be non-consensus options presented to the Task Force. As companies that
operate in a variety of traditional businesses, but whose operations increasingly include activities that rely
on information and communication technology, the members of the IAPT approach these options fromthe perspective of how these “potential options to address the broader challenges of the digital economy”
could affect our businesses. Finally, we provide our views on the various issues on which the Task Forcespecifically requested comments.
Once again, the Alliance appreciates the opportunity to comment on this important element of the BEPS
project and stands ready to respond to any questions or to provide further input as the work of the OECDon this item continues.
Sincerely yours on behalf of the Alliance,

Mary C. Bennett
Baker & McKenzie LLPCounsel to the Alliance

Annex 1: Comments on the March 24, 2014 Discussion Draft
Annex 2: October 16, 2013 comments on Action Item 1 of the July 2013 BEPS Action Plan

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INTERNATIONAL ALLIANCE FOR PRINCIPLED TAXATIONCOMMENTS ON MARCH 24, 2014 DISCUSSION DRAFT ON TAX CHALLENGES FO THE
DIGITAL ECONOMYAPRIL 14, 2014257

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IAPT Comments on the March 24, 2014 Discussion Draft on BEPS Action 1: Address the
Tax Challenges of the Digital Economy
1.

Introduction

1.
The IAPT would like to commend the OECD’s Digital Economy Task Force on its thoroughexamination of the digital economy and its thoughtful analysis of the tax challenges and issues the digital
economy presents. This type of careful, fact-based evaluation of the nature of a particular problem andimplications of different ways of addressing it which is reflected in the March 24, 2014 Discussion Draft
on the Tax Challenges of the Digital Economy (the Discussion Draft) is the hallmark of the OECD’s best
working methods.
2.
We are also pleased to note that there are a number of points on which we can express strong
agreement with the Discussion Draft. These include the following:•That the Ottawa Taxation Framework Principles (i.e., neutrality; efficiency; certainty andsimplicity; effectiveness and fairness; and flexibility) provide an appropriate framework forevaluating the options to address the tax challenges of the digital economy;•

That it is not feasible or appropriate to try to ring-fence the digital economy from the rest of
the economy and apply separate tax rules to it;•

That digital economy business models frequently have parallels in traditional businessmodels;•That tax structures used by digital companies are similar to those used by companies in more
traditional businesses;•

The work being done on many of the other BEPS Action Plan items will address most if not
all of the concerns the Discussion Draft raises with respect to the digital economy; and•That it is appropriate to consider indirect taxation as a potential approach to deal withperceived under-taxation in market jurisdictions where there is no or very limited physicalnexus.

3.
We also have, however, certain concerns about various aspects of the Discussion Draft, on which
we will comment in more detail below. These are centered around the following concerns:•

That each of the options in Chapter VII presents serious challenges from the point of view ofprinciple and administrability; and•That the description of digital economy activities inappropriately suggests routine
noncompliance and understates the significance of people functions to the business models.

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Comments on the Chapter VII Options

4.
As noted above, the IAPT supports the general framework suggested for evaluating the options
described in Chapter VII of the Discussion Draft. As companies that operate in a variety of traditional
businesses, but whose operations increasingly include activities that rely on information andcommunication technology (ICT), the members of the IAPT approach these options from the perspectiveof how these “potential options to address the broader challenges of the digital economy” could affect ourbusinesses. We see implications for our businesses in each of the options described, as outlined below.
2.1

Modifications to Article 5(4)5.
The OECD Model Tax Convention has included language, such as that currently found in
Article 5(4), which excludes certain activities from permanent establishment (PE) status since it was firstpublished over 50 years ago in 1963, reflecting what was already then established treaty practice among
governments. Having PE exceptions for preparatory and auxiliary activities is a sensible mechanism to
avoid triggering compliance obligations and revenue disputes with respect to operations that may benecessary to conduct business but do not typically reflect business drivers attracting material returns.
Businesses across all sectors have relied on the Article 5(4) exceptions for decades, and the availability of
those exceptions will continue to be important to them.
6.
Complete elimination of Article 5(4) would severely affect normal business operations in many
sectors and give rise to difficult and costly disputes about profit attribution based on the most minor
incursions into the economy of a host jurisdiction, thereby creating a real chilling effect on cross-border
trade. The effect on tax administrations would also be detrimental, as it would require them to devoteresources to policing thousands (or more) new taxpayers with generally minimal (and potentially hard to
calculate) revenue generation.
7.
The elimination of paragraphs (a) – (d) of Article 5(4) 1 would lead to difficult debates about
whether the types of routine business operations listed in those paragraphs are “preparatory or auxiliary”

1

Article 5(4)(a) – (d) currently provides that the following activities are deemed not to create a PE:a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise
belonging to the enterprise;b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose ofstorage, display or delivery;c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose ofprocessing by another enterprise; [and]04-v1\

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in particular cases and are therefore eligible for a general exception for activities falling into thatcategory. As noted by the Commentary on Article 5(4), “It is often difficult to distinguish between
activities which have a preparatory or auxiliary character and those which have not.” For businesses
across all sectors of the economy, the elimination of those subparagraphs would create substantial
uncertainty and potential exposure, without commensurate benefits to the host jurisdictions. Indeed, thecost to host jurisdictions of having to devote resources to making these kinds of difficult determinations inwhat are frequently cases involving minimal taxable income should not be underestimated.
8.
It should be noted that paragraphs (a) – (d) of Article 5(4) are already subject to the overall
condition that carrying on a combination of the specified activities at a fixed place of business will be
excepted from PE status only if the overall activity of that fixed place of business is of a preparatory or
auxiliary character. Moreover, paragraph 27.1 of the Commentary on Article 5 already contains a ruleagainst fragmenting complementary activities into separate locations in order to argue that each is
excepted from PE status as preparatory or auxiliary. In other words, if host jurisdictions are concernedthat foreign enterprises are using the Article 5(4) exceptions to carry on a number of activities in theircountry, whether or not at a single location, that go beyond preparatory and auxiliary activities but aresaid to fall within the exceptions, it is important to understand that the existing rules already provide
sufficient weapons for those jurisdictions to use to assert that the line has been crossed and PE status has
resulted. There is no need to create doubt about the status of every activity traditionally excepted by
Article 5(4) to combat that type of problem.
9.
If the OECD chose to maintain the availability of Article 5(4) exceptions but limit them toactivities whose overall character is preparatory or auxiliary, it should provide further guidance on theCommentary’s concept that an activity is not preparatory or auxiliary if the activity “in itself forms anessential and significant part of the activity of the enterprise as a whole”. For example, is an activity likestorage “essential” because it needs to be done to carry on a business, or “non-essential” because it caneasily be, and often is, outsourced to a third party provider? Is an activity like delivery “significant”
because it represents the entirety of an enterprise’s activity in a particular jurisdiction or because it attains
certain volume levels, or “not significant” because it represents a small portion of the enterprise’s overall
cost structure or can easily be, and often is, outsourced to a third party provider? These are issues that
affect businesses operating in all sectors of the economy, and introduction of substantial new ambiguity
about the tax treatment of these routine business operations through the need to make these kinds ofdeterminations would be very detrimental to the day-to-day conduct of international trade.
10.
We think the changes suggested by this option would create widespread uncertainty about
whether PE’s exist for enterprises with relatively minor activities being conducted in a host country. Thed) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise
or of collecting information, for the enterprise.

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changes would either have to apply to all business sectors, in which case their effects would be very
far-reaching indeed, or would have to be limited to the digital economy sector, which would violate thestated goal of neutrality and introduce difficult and potentially arbitrary line-drawing. Alternatively, if thechanged rules made it clear that PE’s did exist in the types of situations currently excepted by
Article 5(4), we think it would often be difficult to determine how much of a foreign enterprise’s profits
were attributable to those types of activities. This is especially true because these activities are by theirnature so frequently far removed from the real drivers of the business. We are concerned that theperception that creating PE’s out of these activities would somehow solve a BEPS revenue problem
would tend to encourage tax administrations to attribute more profits to these activities than a true
evaluation of their functions, assets, and risks could justify, leading to contentious disputes.
2.2

A New Nexus based on Significant Digital Presence11.
As an initial point, we note that this proposal appears contrary to the Task Force’s conclusion that
“Attempting to isolate the digital economy as a separate sector would inevitably require arbitrary lines tobe drawn between what is digital and what is not.” This proposal clearly seems aimed at crafting aseparate rule for a particular “digital” economy situation, and we think it is ill-advised on that groundalone.
12.
Moreover, the concept of “fully dematerialized digital activities” appears to reflect the bias thatenterprises in the digital economy do not conduct significant people functions. For example, it is difficult
to conceive of a business that matches the description: “No physical elements or activities are involved in
the value chain other than the existence, use, or maintenance of servers and websites or other IT tools andthe collection, processing, and commercialization of location-relevant data.” The reality is that evenso-called “pureplay” internet businesses typically have substantial workforces engaged in constantinnovation, programming, research, marketing, customer service, etc. If the cited description was
intended to refer to the activities of an entire enterprise, it reflects a misunderstanding of how business isconducted in the current business models and what functions, assets, and risks are important to the value
chain. On the other hand, if it was intended to refer only to an enterprise’s activities in any one of themany jurisdictions from which it might be receiving revenues, it could sweep in all kinds of businessmodels from a wide variety of sectors.
13.
Depending on how many of the other factors for identifying “fully dematerialized digital
activities” are taken into account, the concept could also sweep in a very wide range of businesses. For
example, one can imagine a great number of businesses about which it could be said:•“Contracts are concluded exclusively remotely via the Internet or by telephone”;•“Payments are made solely through credit cards or other electronic payments using on-line
forms or platforms linked or integrated to the relative websites”; or•“The legal or tax residence and the physical location of the vendor are disregarded by thecustomer and do not influence its choices”.

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14.
In other words, the concept of “fully dematerialized digital activities” is either so narrow as to be
non-existent or potentially extremely broad.
15.
The uncertainty created by the scope of that concept is compounded by the definition of“significant digital presence”, which would include elements now common to the operations of businesses
in a wide range of sectors, such as:•“A significant number of contracts for the provision of fully dematerialized digital goods orservices are remotely signed between the enterprise and a customer that is resident for tax
purposes in the country”;•“Digital goods or services of the enterprise are widely used or consumed in the country”;•“Substantial payments are made from clients in the country to the enterprise in connection
with contractual obligations arising from the provision of digital goods or services as part ofthe enterprise’s core business”; or•“An existing branch of the enterprise in the country offers secondary functions such as
marketing and consulting functions targeted at clients resident in the country that are strongly
related to the core business of the enterprise.”16.
In effect, the concept of a “significant digital presence” is so broadly drafted that it could
effectively cause many businesses to have new PEs in jurisdictions all over the world, merely because
they have customers there. The alternative definition for a “significant digital presence” (i.e., “anenterprise engaged in a fully dematerialized digital activity does a significant business in the country
using personal data obtained by regular and systematic monitoring of Internet users in that country
through the use of multi-sided business models”) is vague and unworkable. For example, what does itmean to “do a significant business in the country”?
17.
As noted in the discussion draft, changing the PE definition to adopt these concepts would requirea fundamental re-thinking of the current principles on PE profit attribution (which are highly dependent
on the location of “significant people functions”), as well as a determination of whether any such revised
PE profit attribution concepts would apply only to this particular category of enterprise or to allinternational business. We note that it took twelve years (from 1998 to 2010) for the OECD to complete
its project of laying out the principles for the attribution of profits to permanent establishments, whichwere grounded in an analogy to existing guidance on the arm’s length principle found in the OECD’s
Transfer Pricing Guidelines. It is difficult to see how a fair application of those principles would
generate much revenue for a jurisdiction that chose to change its PE definition to incorporate this proposal
from Chapter VII. On the other hand, the idea of throwing those principles out the window just four years
after they were finalized and trying to get international consensus on a wholly new approach is extremely
worrisome to business, which cannot operate successfully without some stability and predictability in therules that will apply to them and some guarantee that widespread disputes and/or double taxation can be
avoided.

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Virtual Permanent Establishment

18.
The “virtual fixed place of business PE”, which would create a permanent establishment when theenterprise maintains a website on a server of another enterprise located in a jurisdiction and carries on
business through that website, would render the PE threshold almost meaningless for a very wide swathof businesses and would similarly raise questions about the need for a fundamental revision of PE profit
attribution principles.
19.
The “virtual agency PE”, which would seek to extend the existing dependent agent PE concept tocircumstances in which contracts are habitually concluded on behalf of an enterprise with persons locatedin the jurisdiction through technological means, rather than through a person, would do the same.
20.
The “on-site business presence PE”, which would look at the economic presence of an enterprisewithin a jurisdiction in circumstances in which the foreign enterprise provides on-site services or otherbusiness interface at the customer’s location, has already been addressed through the OECD’s work on
the services PE alternative, which would allow countries that wish to include a services PE definition in
their treaties to do so in accordance with the well-developed guidelines set out in the Commentary on
Article 5. There does not seem to be any need to revisit that topic so soon after the relevant work wascompleted (2008) to come up with some new approach for the digital economy.
2.4

Creation of a Withholding Tax on Digital Transactions

21.
Imposing a final withholding tax on certain payments made by residents of a country for digital
goods or services provided by a foreign e-commerce provider would fundamentally violate the neutrality
principle by treating transactions in digital goods or services different from transactions in comparable
non-digital goods or services. It could also raise difficult definitional issues as to what is and is not“digital” (e.g., is a lawyer’s opinion a “digital” service if it is delivered by e-mail, but not if it is printed
and mailed or couriered to a client? Is software or music a “digital” product if it is downloaded, but not if
it is provided to a customer on a CD?).
22.
Equally problematically, it could lead to systematic over-taxing of the digital sector if thewithholding tax exceeds what would be the tax on net profits. This would clearly violate the neutrality
objective which was central to the Ottawa Taxation Framework Principles.
23.
As noted in the Discussion Draft, it would also raise issues about compliance with tradeobligations as well as enforceability issues, especially in B2C transactions. There is a reason thatcountries legitimately avoid enacting tax laws that have little chance of being enforceable. Adopting rulesthat are unenforceable risks undermining respect for the tax system. It implicitly favors noncompliant
over compliant taxpayers and erodes the latter’s commitment to adherence with the rules.
2.5

Consumption Tax Options

24.
As a general matter, the IAPT supports the idea of addressing issues of market jurisdiction
non-taxation, if necessary, through consumption tax options. If there is a concern that market
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jurisdictions are unable to obtain a desired amount of revenue from digital providers due to the latter’s
lack of taxable nexus with those jurisdictions, the proper solution would be to impose a consumption tax
on those transactions, rather than to distort income tax principles.
25.
Regarding the issue of exemptions for imports of low valued goods, we acknowledge that this is
an issue worth considering in the interest of providing a level playing field. We note, however, that it is
not an issue limited to the digital economy.
26.
Moreover, we would stress the need for streamlined, simplified registration and compliance
procedures for a nonresident supplier if a system of collecting consumption taxes on such transactions is
to be workable. We should also note that while this may be achievable in some regions, we have somedoubts that adequately simplified procedures can be developed to make such approaches acceptable on a
global basis.
27.
Regarding the issue of subjecting remote digital supplies to consumers to indirect taxation, ourcomments are similar.
3.

Comments on Specific Issues Identified by the Digital Economy Task Force28.
In this final section, we provide our comments on the issues specifically identified in the
Discussion Draft as ones on which the Task Force was seeking comments.
3.1

Whether it is possible to ring-fence the digital economy from the rest of the economy, and if not,whether specific types of digital transactions could be identified and addressed through specific
rules

29.
As indicated above, it is our view that digital transactions pervade all business sectors, and that it
is not feasible to ring-fence the digital economy. Accordingly, we would discourage any effort toprescribe specific rules for specific types of digital transactions.
3.2

The key features of the digital economy identified by the Task Force and whether there are otherkey features that should be taken into account30.
On this topic, our main concern, which is alluded to above, is that the description of the digital
economy tends to understate the significance of people functions in the conduct of a successful digitalbusiness. We believe this tends to distort the understanding that is conveyed of the nature of the value
chain of that type of business, and where the business drivers in the nature of assets and activities canactually be found.
3.3

The examples of new business models in the digital economy and whether (and if so which) otherbusiness models should be considered31.
We believe the Task Force has done a good job of covering all the relevant business models in
operation at this time.

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The ability of the measures developed in the course of the BEPS Project and the current work on
VAT/GST to address BEPS concerns in the digital economy

32.
It is our impression that the main issues of concern seem to involve stateless income andnon-taxation in market jurisdictions, and we believe that the OECD’s work under other BEPS Action Plan
items, as well as its indirect taxation work, will adequately address any BEPS concerns arising from thoseissues.
3.5

Whether other measures should be developed during the course of the work on other aspects of
the BEPS Action Plan to address BEPS concerns in the digital economy and if so which ones

33.
We do not have further measures to suggest, as it is our firm view that the work which is alreadyslated to be done under the other BEPS Action Plan items and through the OECD’s indirect taxation
activities will provide solutions to the BEPS concerns in the digital economy.
3.6

The broader tax challenges raised by the digital economy which have been identified by the Task
Force and how these challenges should be addressed, taking into account both direct and indirect
taxation;34.
On the issue of nexus, we believe the Discussion Draft may reinforce the misimpression thatmarket jurisdictions are losing significant revenue from lack of nexus. In our view, deeming nexus toexist based on the level of presence that there is in many market jurisdictions would not have the result of
attributing significant profits to those jurisdictions, at least in the absence of a fundamental redesign of theprinciples for attributing profits to PE’s.
35.
Regarding data, we support the Task Force’s conclusion that raw data has little value, and that itis the work done to collect, analyze, and exploit the data that is the value driver.
36.
With respect to the challenges posed by characterization of income from transactions, we support
the work done by the Treaty Characterization TAG several years ago. We believe the principles
developed there are still relevant for purposes of addressing characterization issues arising from thecurrent business models.
37.
Regarding VAT challenges, we acknowledge the need for a solution to VAT leakage in remote
B2C supplies and commend the OECD’s efforts to work towards such a solution.
3.7

The options to address these broader tax challenges discussed by the Task Force and summarized
in the Discussion Draft

38.

We have laid out our views on those options in section 2 of this submission.

3.8

The potential cost of compliance arising from the options proposed to address the tax challengesof the digital economy and suggestions for more cost efficient alternative

39.
The cost of compliance, along with enforceability, should be very relevant criteria, in line with
the Ottawa principles. We would note that unduly costly procedures will operate as a clear barrier to
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entry for smaller businesses, which will be contrary to the growth interests of many governments. It isalso worth pointing out that a significant cost of compliance can arise from the uncertainty and disputesthat can be the result of the introduction of untested concepts around which there is no consensus or only
a fragile one.
3.9

Whether the Ottawa taxation framework principles identified above are an appropriate
framework for analyzing options to address the tax challenges, and whether and how they should
be supplemented.

40.

As indicated above, in our view they still remain valid today.

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INTERNATIONAL ALLIANCE FOR PRINCIPLED TAXATIONCOMMENTS ON ACTION ITEM 1 OF THE JULY 19, 2013 BEPS ACTION PLAN
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IAPT Comments on BEPS Action #1 (Address the tax challenges of the digital economy)

ACTION 1
Address the tax challenges of the digital economy
Identify the main difficulties that the digital economy poses for the application of existing
international tax rules and develop detailed options to address these difficulties, taking a holistic
approach and considering both direct and indirect taxation. Issues to be examined include, but are
not limited to, the ability of a company to have a significant digital presence in the economy ofanother country without being liable to taxation due to the lack of nexus under current internationalrules, the attribution of value created from the generation of marketable location-relevant data
through the use of digital products and services, the characterisation of income derived from new
business models, the application of related source rules, and how to ensure the effective collection of
VAT/GST with respect to the cross-border supply of digital goods and services. Such work will
require a thorough analysis of the various business models in this sector.

Action 1 of the Action Plan indicates that “tax challenges” relating to the “digital economy” will beidentified and studied as part of the OECD / G20 BEPS project. This Action differs from the others inthat it contemplates an initial period of study and analysis that is to conclude with the identification of“detailed options” for consideration, rather than with specific proposed changes or recommendations.
The IAPT believes that this two-step approach reflects a wise recognition by OECD and G20 tax
policymakers that the digital economy issues are of a nature and scope that require additional analysis andconsideration.
We appreciate that it is the prerogative of tax policymakers to revisit and reconsider current rules andpolicies and that there is currently political pressure in a number of jurisdictions to do so particularly withrespect to what has been called the “digital economy.” However, the issues noted for examination in
Action 1—the lack of nexus under current rules based on “digital presence” alone, the “attribution ofvalue” created by the generation of certain types of data, the characterization and source of income fromnew business models, and the consumption taxation of cross-border supplies of digital goods andservices—raise a series of difficult factual, tax policy, and administration issues that are worthy of carefulanalysis and consideration. They also seem different in nature from the base erosion and profit shifting
issues addressed elsewhere in the Action Plan. It is, therefore, particularly welcome that the Action Plan
resists the temptation to propose immediate actions that could involve major changes to current treaty anddomestic law principles and provides at least some opportunity for development of a deeper
understanding of current business models and a more deliberative consideration of these issues.

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IAPT member companies generally have subsidiaries, branches, or other physical operations in most or
all of our market jurisdictions. However, we are concerned that the work on the digital economy could
have broad negative implications for international business and for international trade and investment in
the jurisdictions where we reside and operate. We summarize these concerns below in the interest of
avoiding consequences that may not be intended or appropriate.
•

A Clear Definition of the “Digital Economy” Would Be Essential If It Were Subjected toSpecial Rules, but Difficult to Establish

Defining clear and administrable criteria to identify “digital economy” enterprises to which a special setof rules would apply would be essential for tax administration and compliance purposes. However, theAction Plan itself suggests that this would prove conceptually and administratively difficult. On the one
hand, the Action Plan refers to companies with a “significant digital presence” but no nexus in the market
jurisdiction under current tax rules, which would include a very small subset of the international business
community, if “nexus” here is meant to include the taxable presence of separate affiliated entities
established in such jurisdictions. On the other hand, as used in the Action Plan, a “digital presence”
appears to refer to any data, website, or electronic service that a customer may access from a nonresident
enterprise resident in another jurisdiction, which could reach every international business. The continuingchanges in business models and technologies increase the inherent difficulty of reaching and delineating aclear consensus on even a narrow definition of the digital economy and make it more likely that any effort
to do so at this point would unintentionally sweep in other businesses that are increasingly using the same
technologies.
Under a broad interpretation, an enterprise that manufactures tangible goods in one jurisdiction andsources materials for these goods in another jurisdiction through online interfaces might be considered tohave a digital presence in that other jurisdiction. So might an educational enterprise in one jurisdictionthat posts a banner advertisement soliciting students on a website visible from another jurisdiction, or a
medical center in one jurisdiction that outsources the review of electronic patient records to a service
provider in another jurisdiction. In other words, a focus on digital presence alone could reach far beyond
the oft-cited examples of the online retailer or the Australian mining company selling ore to customers in
China over the internet. Even if narrowed to apply only to sales of goods or services which are contracted
for electronically, special rules based on digital presence could apply to companies in business sectors as
diverse as automotive, consumer products, telecommunications, mining, electronics, telecommunications,aerospace, beverages, chemicals, defense, IT systems, publishing, retail, software, computer technology,energy, pharmaceuticals, media, and consulting.
Action 1 also undertakes to address “new business models” in the digital economy context. This could
likewise reach an even wider spectrum of businesses, especially if the focus is on novel ways of doing
business even in the absence of a “significant” market presence.

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We would suggest, therefore, that if special rules are considered for the “digital economy”, it will be
critical to define their scope very carefully to avoid overbroad or inconsistent application orinterpretations that could turn an intended exception into the general rule.
•

Sector-Specific Rules Should Be Considered With Great Caution

Regardless of how the affected business sector is defined, sector-specific changes to fundamental
international tax principles would be a rare departure from international practice that could raisepotentially serious administrative and policy issues. They should, therefore, be considered very carefully.
As the above examples indicate, there is a risk that most if not all businesses could have some portion of
their operations viewed as digital economy operations. The application of two different taxation
frameworks to a single company in such cases would raise obvious bifurcation issues for both tax
administrators and taxpayers that would surely create new uncertainty and controversy. This isespecially so, given the difficulty of applying new and untested standards for what does and does notconstitute being part of the digital economy. Even if digital economy measures were very narrowly
targeted, tax administrations called upon to audit, determine, and collect tax from an enterprise which has
no physical presence in their taxing jurisdiction would encounter unprecedented practical hurdles.
Special digital economy rules that create new nexus or other income taxation rights could also present
policy challenges for jurisdictions that wish to preserve their rights to impose tax on other income on
existing residence or source grounds. In their broadest reading, the key issues identified for discussion in
Action 1 are whether tax should be imposed solely on the basis of the location of the customer or market
even in the absence of personnel or assets of the nonresident enterprise, and whether expanded
consumption or other gross-basis taxation, with its potential tariff-like nature, should be imposed oncross-border deliveries of goods or services.
The arguments suggested by the Action Plan in support of special digital economy rules closely echo
those advanced by some jurisdictions, particularly some emerging economies, for significantly expanded
taxation in their jurisdictions. Both sets of arguments reject the economic “creation of wealth” analysis
on which the current international balance between source and residence taxation is based and seek
instead to allocate taxing jurisdiction based on factors relating to the market, such as location savings,
other location-specific advantages, or even the mere existence of the market.
It is not clear how such arguments regarding the digital economy could be distinguished, either
conceptually or politically, from the arguments advanced more broadly by jurisdictions seeking toredefine concepts of “value creation” to support general changes to the current source-residence balance.
Jurisdictions that do not favor such a material change may, therefore, wish to weigh the potential
collateral implications of arguments regarding the digital economy and of the association of these issues
with the BEPS project.

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A Fundamental Rethinking of the Principles for Attribution of Profits to PEs Would Be
RequiredAs the Action Plan acknowledges, any movement towards abandoning the physical presence requirement
for establishing taxing jurisdiction would require a fundamental rethinking of the principles for theattribution of profits to permanent establishments. These principles were very recently the subject of
substantial work by the OECD, which places substantial emphasis on the location of “significant people
functions” for attributing profits. In other contexts, including in its BEPS-related transfer pricing work,
the OECD is also clearly emphasizing the contribution of people functions.
In contrast, a virtual PE concept would necessarily be divorced from the presence of labor and assets in ajurisdiction and would require a fundamental rethinking of the principles for attributing profits to a PE for
affected businesses. Even where there is a physical presence that clearly gives rise to a PE in a country it
is, of course, important not to apply an overbroad “force of attraction” approach to attribute profits to that
PE if the profits are not sufficiently closely related to the activities carried on at the location of thephysical presence. It would be conceptually more challenging but equally important to avoid the overattribution of profits to a virtual PE. If the work on the digital economy should take the virtual PE path,careful consideration would need to be given to how profits could be attributed in a principled, consistent,
and predictable manner.
We would note that any new profit attribution rules for virtual PEs would need to take into account andproperly allocate start-up and other losses to any virtual PE found in the jurisdiction. These losses can besubstantial, can arise before sales into the jurisdiction commence, and can extend over many years insome internet-enabled sectors.
•

Conclusion

Given all of these challenges, the IAPT agrees with the Action Plan’s statement that it will be important
for tax policymakers to first gain a more complete understanding of internet-enabled technologies andbusiness models to inform their judgments as they consider issues relating to the digital economy. We
respectfully suggest that the most effective means of developing such an understanding within the very
limited time available is through substantial, ongoing input from and dialogue with potentially affected
sectors of the business community.
Finally, if the work on Action 1 results in the further consideration of separate and unique rules for thedigital economy, we would urge that any options identified should be evaluated against their ability toprovide certainty and clarity to taxpayers and to be applied in a principled and consistent manner by both
taxpayers and tax administrations, and should apply with prospective effect only.

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IBA Taxes Committee Comments on the OECD Public Discussion Draft
BEPS ACTION 1: ADDRESS THE TAX CHALLENGES OF THE DIGITAL ECONOMY
24 March 2014 – 14 April 2014
The IBA Taxes Committee Working Group (“the Group”) includes
Albert Collado, Garrigues, Spain
Carlos Gómez, Garrigues, Spain
Shefali Goradia, BMR Advisors, India
Phil O’Reilly, Barnes & Nobles, USA
David Shapiro, Shapiro Tax Law, USA
Ramon Tejada, Garrigues, Spain
Peter Utterstrom, Hellstrom Law, Sweden
1.

Introduction

As an introduction to the Group’s comments we wish to refer to the comments made by thesame group which was filed with the OECD in December 2012. Therein we clearly demonstratethat most of the commercial activities carried out in the “digital economy” in reality are justdifferent ways of using the new technology for more effective distribution. Furthermore, wewould also like to reiterate a few of the initial comments made by the OECD in the Discussion
Draft issued March 24, 2014, on page 6 and onwards, viz.
“Against this background, the BEPS Action Plan includes the following description of the work
to be undertaken in relation to the digital economy:
ACTION 1 – Address the Tax Challenges of the Digital Economy
Identify the main difficulties that the digital economy poses for the application of existing
international tax rules and develop detailed options to address these difficulties, taking aholistic approach and considering both direct and indirect taxation. Issues to be examined
include, but are not limited to, the ability of a company to have a significant digital presence inthe economy of another country without being liable to taxation due to the lack of nexus
under current international rules, the attribution of value created from the generation ofmarketable location relevant data through the use of digital products and services, thecharacterisation of income derived from new business models, the application of related
source rules, and how to ensure the effective collection of VAT/GST with respect to the crossborder supply of digital goods and services. Such work will require a thorough analysis of thevarious business models in this sector.

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In particular, the Task Force discussed the outcomes of the 1998 Ottawa Ministerial
Conference on Electronic Commerce where Ministers welcomed the 1998 CFA Report“Electronic Commerce: Taxation Framework Conditions” setting out the following taxation
principles that should apply to electronic commerce.
Ottawa Taxation Framework Conditions – Principles
Neutrality: Taxation should seek to be neutral and equitable between forms of electroniccommerce and between conventional and electronic forms of commerce. Business decisions
should be motivated by economic rather than tax considerations. Taxpayers in similar
situations carrying out similar transactions should be subject to similar levels of taxation.
Efficiency: Compliance costs for taxpayers and administrative costs for the tax authorities
should be minimised as far as possible.
Certainty and Simplicity: The tax rules should be clear and simple to understand so that
taxpayers can anticipate the tax consequences in advance of a transaction, including knowing
when, where and how the tax is to be accounted.
Effectiveness and Fairness: Taxation should produce the right amount of tax at the right time.
The potential for tax evasion and avoidance should be minimised while keeping counteracting
measures proportionate to the risks involved.
Flexibility: The systems for taxation should be flexible and dynamic to ensure that they keep
pace with technological and commercial developments.
“The Task Force considers that these principles are still relevant today and, supplemented asnecessary, can constitute the basis to evaluate options to address the tax challenges of thedigital economy. In addition, the Task Force discussed the post -Ottawa body of work and inparticular the work of the Technical Advisory Group on Business Profits relating to theattribution of profits to permanent establishments, the place of effective management
concept and treaty rules in the context of e-commerce. For an overview of this prior work,
please refer to Annex 1.”
The above quotes have been included in the Groups comments as we believe that they are – inparticular the 1998 Ottawa Taxation Framework – highly relevant in most of the tax areas, notonly the digital economy. It is our firm opinion that neutrality, efficiency, certainty andsimplicity, effectiveness and fairness, and flexibility are all key elements for any business
whether digital or “analogue”. The long term credibility of any system – legal, tax or other –must (still) rest on those factors. This is also our strongest argument in our previous comments
as well as our comments in this document.

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In the Discussion Draft subject to our below comments the OECD listed a number of bullet
points – all in all 9 – which we will comment further upon below. To the extent possible we willkeep our comments to the individual bullet point and any further comments we may have will
be included in the final summary below.
2.

The Group’s Summary

2.1
The Group still maintains that the risk is that special legislation for what is perceived as
the “digital economy” will just put an extra strain and restriction on what is in reality just a
different – modern - way of carrying out a traditional commercial activity. Only a minority of
the “digital economy” is in reality something new and there is therefore no point in creating
new rules. Also these activities should thus be covered by the existing rules, possibly as
modified by other parts of the BEPS Action plan.
2.2
Furthermore, the Group is of the opinion that the Ottawa Taxation Framework is still
highly relevant in order to secure a fair, neutral and foreseeable tax system applicable to all tax
payers.
2.3
Many of the recommendations proposed by the Task Force go hand-in-hand withother action plans such as Permanent Establishment (PE), Attribution of profits to PE, CFC etc.
Therefore, there is a need for a synchronised approach.
3.
The OECD Public Discussion Draft request comments on the following issues addressedin the discussion draft:
3.1
Whether it is possible to ring-fence the digital economy from the rest of the economy,
and if not, whether specific types of digital transactions could be identified and addressed
through specific rules;
3.1.1. The Group has in its comments made in December clearly responded to this question –based on our analysis and experience the fact is that most of the commercial activities carriedout in what some refer to as the digital economy is primarily better and more efficientlogistics. It entails both quicker and eco-friendlier methods of the distribution/shipment of
products as well as – in many cases – more effective marketing and sales chains to the benefitof the customers. Those arguing for “ring-fencing” and special rules for the digital economy are
in reality looking at very visible (e.g. Google) but still clearly just a small fraction of the digitalworld as such. The group is of the opinion that ring-fencing a larger group of commercial
activities in order to address a perceived issue with a smaller group will risk to seriously
harming the commercial activities now being developed with the help of the new technology
as well as the global economy and the development.

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3.1.2 Further, if ring-fencing in some way would be considered it is necessary to clearly
identify exactly those situations where a commercial activity would be considered being partof the “digital economy” and possible special tax rules applicable for that activity, and also thesafe harbour rules applicable to avoid such special taxation. In the opinion of the Group this is
not something that can be done easily and definitely not something that can be achieved
simply by modifying the OECD Guidelines.
3.1.3 The Discussion Draft raises the issue of whether an alternative would be to introduce“virtual permanent establishments” in the definition of the OECD Guidelines. What must be
considered when looking at the PE-concept as such is that the current definition of permanentestablishment is being aggressively tested by the tax authorities in a number of countries OECD members as well as non-members – with the result that sales activities into a country by
a foreign resident is in fact deemed to be a PE at a far earlier stage than envisaged before. Also
here an introduction of a “virtual PE”-concept would require a very clear set of rules so as to
avoid the normal commercial activities being caught in the virtual PE-net. Again, based on theexperience of the Group this is a very difficult task and the risk that local tax authorities will tax
the normal commercial activities using modern technology is in our opinion very high.
3.2
The key features of the digital economy identified by the Task Force and whether there
are other key features that should be taken into account;
3.2.1 The Group believes that the critical feature in the digital economy is the dramaticallyreduced costs of entry. Certain aspects of the digital economy (e.g. provision of hosting
services) clearly are capital intensive, but the barriers to entry for a developer of digital media,
applications or services are much lower than they were prior to the development of the digital
economy. The costs of maintaining even massive quantities of data on a server andtransferring large files are significantly lower than the costs of maintaining warehouses of
products and shipping products to consumers.
3.2.2 The result of this shift is that most of the value in many digital businesses is in theirintellectual property or other intangible assets. Distribution networks carry significantly lessvalue than they did even 20 years ago, and far less physical presence is required in a country toeffectively distribute goods to that country.

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3.2.3 The reduced capital needs make it much easier for a sophisticated business to plan tominimize its taxes. Where it once may have been critical to maintain warehouses nearcustomer locations, for instance, it may not be necessary to maintain servers close tocustomers, or even in the same country. In certain cases, such as streaming video or highspeed trading, network latency may dictate server location, but often there are no such
restrictions and servers may be placed wherever a company wishes. For instance, a mail-orderbookseller (or even an online bookseller that deals in physical books) might need to place awarehouse in Europe to serve its European customers, but a digital bookseller can maintain its
master files on servers in a low-tax jurisdiction, with no physical presence anywhere near its
customers.
3.2.4 This reduced barrier to entry also means that even small content developers are selling
software and media globally. Traditionally international commerce was the near-exclusive
domain of large businesses that had significant in-house tax capabilities, and hired
sophisticated international tax advisers, to help them plan their operational structures andmanage compliance. Such sophisticated organizations could manage complex rules andheavier compliance burdens, but creating tax rules with such organizations in mind could
produce “traps for the unwary” that stifle the development of the small businesses that now
represent a significant part of the digital economy. This is a particular issue in the case of a“virtual permanent establishment.”
3.2.5 Another significant change is a shift away from ownership of property to licensing. In
the case of digital downloads, one often receives only a “license” to use the property that isrevocable upon a number of circumstances, rather than receiving outright ownership of theproperty the way one would with, for instance, a hard-bound book. This model has beenprevalent in the software industry, where even physical delivery of software on discs often istreated as a license only, rather than an outright sale. Many taxing jurisdictions historicallyhave viewed these licenses as sufficiently ‘sale-like’ to justify treatment as a sale for tax
purposes.
3.2.6 The current shift toward the “cloud” is another shift away from ownership of property.
Rather than transfer physical goods, a customer pays for access to materials or software on aremote server, analogous to the “thin client” common in the early days of computing. The
customer has no knowledge of where the server is based - and in some cases neither does thevendor. The customer may access the server from multiple different locations over the courseof a contract. If the vendor is to be taxed based on the location of the customer, this tracking
may prove especially complex. Some members of the Group, for instance, regularly travelinternationally on business, and while traveling access cloud-based research services for which
they have prepaid. In the Group’s view, conventions and presumptions are required regarding
sourcing of services and locations of customers in order to facilitate tax administration.
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3.2.7 In a virtual PE concept, scattered points of presence across countries may lead tomultiple PEs and would aggravate the issue of attribution of profits and the need to allocate
profits of a single trade across a number of jurisdictions. The problem would get further
amplified since in many cases some parts of a business involved in a particular trade may not
be visible or it may not be practically feasible to rationally allocate profits amongst various
functions – whose significance for a business may vary from time to time.
3.3
The examples of new business models in the digital economy and whether (and if so
which) other business models should be considered;
3.3.1 As noted above, the Group believes that what is referred to as the digital economy isin reality little more than improved logistics. As such the digital economy does not represent a
new business model. Instead, is instead better viewed as an evolution of existing businessmodels which takes advantage of the new tools that have become available. For example, aconsumer in a particular country that is looking to purchase furniture has options beyond a
local retail establishment or a mail order catalogue. Now, that consumer can also purchasefurniture through the websites of numerous other furniture distributors. For othercommercial goods, such as movies or books, the physical product now also has digital
analogues that are widely available, further simplifying distribution. The same is true of many
types of services.
3.3.2 Generally, the Group believes that the digital economy has been extremely positive for
consumers and ought to be encouraged. The improved logistics that is the digital economy
means that less capital is required to bring goods and services to consumers. This reduces thebarriers to entry, increasing competition and reducing prices.
3.3.3 The Group also believes that tax authorities have had and continue to have the tools
needed to properly tax the digital economy. Generally, income tax authorities in OECDjurisdictions look to align revenue with the assets and expenses that relate to the generationof this revenue. The Group continues to believe that this is the appropriate approach and thatexisting legislation generally is sufficient to carry out this approach to taxation. Indeed, itwould be extremely difficult to develop new tax regimes specifically applicable to the digital
economy without creating a tremendous amount of confusion and uncertainty. In addition,and consistent with observations made elsewhere in this document, the impact on newer, lesswell capitalized market participants would need to be kept to a minimum. The presence of
these enterprises has generally been positive for consumers.

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3.3.4 With that said, the Group believes that two areas of recent discussion are appropriate
for continued development. The first relates to the development of consumer-related
intangibles. It is now significantly easier to gather data on the preferences and habits ofindividual and groups of consumers. The value of this data, and the question of whether
current income tax regimes adequately capture this, is unclear. While it is likely the case thatexisting tax regimes are sufficient, and there are significant concerns around theadministrability of the alternative proposals currently being considered, this is a topic worthyof further analysis.
3.3.5 A second area that bears further discussion is the enhanced ability within the digital
economy of suppliers to generate new sales from previously sold products. As one example,
when a consumer purchases a digital product (e.g., an app), it is common for that product tohave embedded within it the opportunity for the consumer to purchase additional products.
These additional products might be upgrades or enhancements to the product originallypurchased. Alternatively, these products might be suggested to the consumer based on that
consumer’s activity within the product originally purchased. The Group believes there is acertain lack of clarity around the proper taxation of these subsequent sales and that some
guidance would be appropriate. However, the Group notes that follow-on sales of add-ons,
upgrades, and the like occur in the physical economy as well, and that while the digital
economy facilitates follow-on sales, any rules should apply to follow-on sales in both the digitaland physical economies. The Group would welcome the opportunity to participate in these
discussions.
3.4
The ability of the measures developed in the course of the BEPS Project and thecurrent work on VAT/GST to address BEPS concerns in the digital economy;
3.4.1. The EU has taken significant steps to address issues in the digital economy. These show
significant promise as a tool to address VAT/GST issues. These steps are reviewed below.
(a)
The EU VAT system makes a distinction between supplies of goods and supplies ofservices. Generally speaking, in the framework of digital economy, telecommunications,broadcasting services and electronically supplied services do not involve transactions withtangible goods and are considered as supplies of services. The EU Directives establish that in
B2C sales of goods, if the supplier is established in the EU, the supply is taxable at its place of
establishment, whilst if it is domiciled outside the EU, the transaction is not taxable. Where
non-EU established suppliers carry out B2C services transactions with customers domiciled in
the EU, the service is taxable where the recipient is domiciled. In this latter case, an optional
regime has been established so that non-EU entrepreneurs are VAT registered in only one

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Member State, where they file VAT returns, including VAT charged corresponding to eachspecific MS in which they have customers domiciled (one-stop shop). These rules have led
compliant non-EU entrepreneurs either to establish places of business in the EU (in the
countries with lower tax rates) or, to a lesser extent, to make use of the one-stop shop system.
(b)
As of January 2015, all services subject to VAT will be taxed in the jurisdiction of therecipient, regardless of the place of establishment of the supplier. The one-stop shop currently
available for non-EU entrepreneurs will be extended for EU businesses so that a level playing
field will be established.
(c)
The Commission services have published explanatory notes on these new rules thatcan be found at:
http://ec.europa.eu/taxation_customs/resources/documents/taxation/vat/how_vat_works/te
lecom/explanatory_notes_2015_en.pdf
3.4.2 The EU’s focus on the place of consumption, which makes the system more neutral
and consistent, has promise, but it is unclear at this time whether the compliance burdens on
the supplier are manageable and whether Member States can establish the necessary control
systems. The possibility to involve third countries in the one-stop shop – so that non-EU
entrepreneurs may pay EU VAT in their country of establishment - has been suggested andpresents its merits in being further discussed but the system should be workable and faircollection of taxes guaranteed. The Group believes that the “one stop shop” rule is extremely
helpful in managing compliance, but notes that it poses significant problems outside the EU,
where there is no broad-based international agreement on how to tax or collect VAT – nor isthere likely to be such an agreement in the near term.
3.4.3 There are other challenges that the EU has not yet clearly addressed, such as ensuringthat an equal treatment is provided to supplies that are equivalent in nature regardless of themeans in which they are supplied. For instance, some printed materials may be taxed at a
reduced rate, whilst if supplied online, they are taxed at the general rate. In this latter context,
the rules within the EU to “distance sales” (in a B2C context) are based on the principle oftaxation at destination, to which the extension of the one-stop shop system should also be
considered (today there is a need to register in the country where the goods are sold, to theextent that a certain threshold is exceeded) thus increasing the administrative burdens for the
suppliers which need to be addressed. Similarly, exemptions on imports of small
consignments may need to be revisited to avoid different taxation regimes on equivalent
goods.

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3.4.4 Given the distinctions between taxation of goods and services, it is critical that anindirect tax regime for digital economy clearly define whether a given supply is to be treated asthat of ‘good’ or ‘service’. Unlike in some jurisdictions where the same unified tax regime istriggered in both scenarios, in many other countries such as India, in the absence ofcomprehensive GST regime, the taxing approach, authority and jurisdiction varies dependingon whether a transaction is seen as that of a sale of good or provision of service. With theincreased overlap between these laws, it is becoming common for both taxes to be charged on
the same transaction. We are uncertain as to whether the better approach is to consistently
tax goods and services, or to establish rules clearly and consistently establishing what aregoods and what are services, but one approach or the other is necessary to avoid double
taxation.
3.5
Whether other measures should be developed during the course of the work on otheraspects of the BEPS Action Plan to address BEPS concerns in the digital economy and if so
which ones;
3.5.1 The Group considers that the comments which are made under other sections in thisdocument will also suffice as comments to this issue.
3.6
The broader tax challenges raised by the digital economy which have been identified
by the Task Force and how these challenges should be addressed, taking into account both
direct and indirect taxation;
3.6.1 The Task Force correctly observes that the digital economy generally does not create
truly new challenges. Rather, the digital economy represents one aspect of a continuing shiftof emphasis from capital to intellectual property. This shift means that assets are more mobile,and that without strong protections it is easy to shift income-producing assets from high-tax tolow- or no-tax jurisdictions.
3.6.2 The Group notes, however, that the digital economy is far from the only aspect of thisshift. For instance, a famous coffee chain recently was subject of intense public scrutiny in the
UK over its showing a net loss despite very high turnover, partly as a result of its intellectual
property licensing arrangements using low-tax jurisdictions as the licensors. The Group
believes that it is dangerous to create a special set of rules for the digital economy, such as a“virtual PE”.
3.6.3 Even apparently new developments such as “marketable location-based intangibles,”however, are merely a furtherance of “customer-based intangibles” that are present in the old“physical” economy, and that can be developed even in non-digital businesses. As such, theGroup believes that it is inappropriate to create special rules specifically for the digital
economy.
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3.6.4 Instead, the Group recommends focusing on four existing tools: transfer pricing fortransfers of intellectual property; controlled foreign company or related-party transfer rules;
withholding taxes on payments made to foreign vendors, particularly when paired with treaty
anti-abuse rules; and indirect taxes such as VAT/GST or sales taxes.
(a)Proper transfer pricing on transfers of intellectual property, taking into accountprojected value as well as risk, can create a significant financial disincentive to transferring
intellectual property to a low- or no-tax jurisdiction, when all the work to develop theintellectual property is conducted in a high-tax jurisdiction.
(b)Transfer pricing rules are most effective when paired with a robust set of rules
regarding transfers to related parties and transactions among controlled foreign companies.
These rules serve to protect both the digital and the “physical” economy against potential tax
abuses.
(c)Withholding taxes could serve to protect the financial interest of the “customer”
country. Withholding taxes generally have been limited to royalties or lease payments, butcountries may wish to impose withholding taxes on payments for services, perhaps bychanging the source rule to the location of the customer. This obviously raises some significant
issues, and if not carefully designed such a withholding rule could shift too much of therevenue from the producer to the consumer country. Additionally, in order to work such a
withholding rule would need to include presumptions (such as defining the location of thecustomer as the customer’s primary residence or place of business), and would need to be
managed by financial institutions to ensure compliance. To the extent that withholding is
reduced or eliminated by applicable treaties, the treaties should include rules protecting
against abuses, such as “conduit” payments.
(d)
In our view, though, VAT/GST and similar taxes likely are a better way to protect thefinancial interests of the “consumer” country. The Group acknowledges that consumers often
add value in the digital economy in a way that they do not in other areas (such as with social
media, or social media-type functions such as “recommendation engines” at digital media
sites). VAT/GST has the advantage of naturally being tied to the consumer’s location. The
Working Group expressed concern that compliance may be “voluntary” in the case of a nonresident supplier, but in our experience companies that are made aware of VAT/GST
compliance obligations will take reasonable steps to comply – particularly given that their
obligations and tax liability are far more certain than they would be in a “virtual PE” or “digitalnexus” situation.
3.7
The options to address these broader tax challenges discussed by the Task Force andsummarised in the discussion draft;

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3.7.1 As noted above, the Group appreciates the Task Force’s focus on anti-avoidance rulesof general application, and believes that approach is vastly preferable to creating special rules
for the digital economy.
3.7.2 The Group is particularly concerned with “virtual permanent establishment” and its
variations, for several reasons. We are concerned that such rules may be administrable. Even if
the rules are theoretically administrable, and compliance is possible for large concerns, we areconcerned that the compliance costs could be overwhelming for small businesses and pushthem out of the marketplace.
3.7.3 The Group believes that creating special rules for a “dematerialised business” will
involve significant degree of subjectivity, and is more likely to be observed in the breach,particularly among small companies. Whatever noncompliance risks exist in the VAT/GST is
amplified significantly in the direct tax context, particularly when “significance” or “substance”
tests are applied. The Group believes that a wiser course would be to focus on a more robust
VAT/GST.
3.7.4 A withholding tax on digital transactions holds more promise, as long as responsibility
is, as suggested, with financial institutions, rather than consumers. However, as discussed
above, we have some concern that a withholding tax could shift too much of the tax revenue
from the producer to the consumer jurisdiction.
3.8
The potential cost of compliance arising from the options proposed to address the tax
challenges of the digital economy and suggestions for more cost efficient alternatives;
3.8.1 The Group’s concern is that the current focus is on what in reality is just a small groupof financially very successful commercial activities, and that special rules will be introduced
affecting a large number of smaller enterprises where the use of modern technology makes it
possible to carry out business effectively and globally. Whether new tax rules or modificationof e.g. the rules on permanent establishment it can be assumed that the cost of compliancewill simply be too high, in particular also taking into account the draconian penalties applied inmany countries for non-compliance, whether intended or not.
3.8.2 One of the magics of the new technologies is that a very small company that
historically only had a few local customers by applying the new technologies can create a
global market. There are many examples – but one is Pebble, a recent Kick-starter successwhich would not exist had a few entrepreneurs not used all of the available modern
technologies for developing, manufacturing and marketing a “smart-watch”. Had special rules
and virtual PE been in place it is very likely that such companies would not have made it. The

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cost of operating in a global economy where each country suddenly can claim reporting –including verified allocation of profits - is simply unacceptable to a normal – small or midsizedcompany. Combining this with the normal cost of compliance what is perceived as the “digital
economy” is likely to be something only for the very large and financially strong companies.
3.9
Whether the Ottawa taxation framework principles identified above are an
appropriate framework for analysing options to address the tax challenges, and whether andhow they should be supplemented.
3.9.1 The Ottawa taxation framework principles were discussed and set out in 1998 as thebasis to evaluate the tax challenges of the digital economy. Those principles are sufficiently
broad and comprehensive to be the basis for the substantial amendments to be implemented
in the digital economy and e-commerce tax framework.
3.9.2 In the last decade, the use of e-commerce, and information and communication
technologies generally, has evolved substantially, giving rise to a significant number of new
business models. In spite of these changes, however, the Ottawa principles are fully applicableand are still a valid framework to evaluate the challenges of the digital economy and ecommerce in the new century.
3.9.3 However, in our opinion, as set out in the BEPS action plan, the challenges of thedigital economy must be addressed taking a holistic approach, considering both direct andindirect tax matters in a coherent and integrated manner. Although this principle may
implicitly stem from the Ottawa principles, we believe that a specific mention is worth
considering.

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Tax Treaties, Transfer Pricing and Financial Transactions Division,
OECD/CTPA,Paris
For e-mail transmission to: CTP.BEPS@oecd.org
14th April 2014
Dear Sir/MadamThank you for inviting comments on OECD Discussion Draft on BEPS Action 1. We
appreciate the opportunity to provide input into options for addressing the tax
challenges of the digital economy.
The International Underwriting Association of London (IUA) represents international
and wholesale insurance and reinsurance companies operating in or throughLondon. Its purpose is to promote and enhance the business environment for its
members. We estimate that premium income for the London company market in2012 was £24.225bn.

THE WORLDOF INSURANCE

General comments
We agree with the view that the digital economy should not be treated as a separate
sector with its own tax rules. We also support the position in the paper that any
issues raised by digital transactions should be dealt with under the other relevant 14
BEPS actions. The insurance industry is one which relies heavily on developments
in information and communication technology to create value and generate
operational efficiencies. As examples, big data is used in the design of new
insurance products, in insurance risk modelling for actuarial pricing and reserving
and in claims management systems, but that does not in itself appear to raise newissues for income tax.
We agree with the key features of the digital economy identified in paragraph 91 andsee mobility and reliance on data as particularly relevant to the global insurance
industry. Developments in the digital economy allow global insurers to interact moreeasily and more frequently with their worldwide customers and brokers and also
within their own worldwide group through digital means, such as websites andapplications, in addition to through a physical presence. Broadly defined, allbusinesses are now digital in one way or another.
Chapter V of the draft discusses how work on the various actions of the BEPS
Action Plan will address BEPS issues arising in the digital economy. The measures
discussed are intended to restore taxation in the market jurisdiction and in theultimate parent jurisdiction. We do not see that developments in the digital economy
change the basic principles that taxation should be aligned with where economic
activities take place and where value is created and that the allocation of income

International Underwriting
Association of London Ltd

London Underwriting Centre
3 Minster Court
Mincing Lane
London EC3R 7DD
Telephone +44 (0)20 7617 4444
Facsimile +44 (0)20 7617 4440
E-mail info@iua.co.uk
Web site www.iua.co.uk

284within a global group should be in line with the relative value created in each location.
The analysis of where economic activity takes place is made more difficult by the increasing
tendency for the individual members of a global workforce to travel frequently, across tax
jurisdictions, while continuing to carry on their locally-based role through digital means such as
laptop or mobile telephone. Measures to prevent artificial avoidance should take account of suchtravel, particularly where it is ad hoc and not in connection with artificial avoidance.
Chapter VI of the draft considers broader tax challenges of the digital economy. For the generalinsurance industry, the flexibility to choose where substantial business activities take place or tomove existing functions to a new location removed both from the ultimate market jurisdiction andfrom the location of other business functions is a relevant business issue. Decisions on location are
typically driven by regulatory and cost considerations. We consider it important that the issues ofnexus and data be considered in this context.
Given all of the above, we believe it is important for the OECD not to make specificrecommendations on the digital economy until other measures in the BEPS project have been
evaluated.
Specific options
Indirect taxes
The comment is made at paragraph 210 that, while certain options are framed as modifications ofincome tax rules, they could also be reframed as indirect taxes. We would ask you to keep in mind
that VAT is intended to be a tax on the consumption of goods and services and not the businesses
that supply them. In the context of BEPS and the digital economy, we consider that dealing withareas of imbalance in current tax legislation such as this would be helpful alongside tackling areas ofperceived abuse.
Consumption taxes proposed in paragraphs 219 to 224 would require non-resident suppliers toregister and account for VAT in the state of consumption (similar to US “use tax”). That would
require a fundamental change to the framework for indirect taxes. Given the work being conductedby the EU on place of supply rules and changes to those relating to electronic andtelecommunications from 2015, we recommend that indirect taxes should be considered in thecontext of those changes.
Exemptions from PE status
We consider it important to maintain an exemption for the activities described in Article 5(4) of theModel Convention. The suggestion in paragraph 211 that some of these activities could constitutecore functions of a business should be considered as part of Action 7 (Artificial Avoidance of PE
Status). If the preparatory or auxiliary exemption is to be eliminated, it should only be for enterprises
whose primary source of income is one of the other Article 5(4) activities. We support the policy thatbusinesses should be subject to tax in the jurisdictions where their core functions take place.
However, in the mobile, digitally enabled business world of today, it is important that a practical,
clearly understood threshold of activity should be regarded as not constituting the activities of a PE.

285

Significant digital presence
The suggestion in paragraph 212 for a new nexus for significant digital presence appears tocontradict the view in paragraph 205 that ring-fencing the digital economy as a separate sector isneither appropriate nor feasible. There is no discernible principle of tax policy underpinning the ideathat any of the examples of significant digital presence in the draft should give rise to a taxable
presence of an enterprise that has no employees, agents, or tangible assets in the jurisdiction. For
example in Europe, it is normal business practice, as laid out in EU directives, to permit aninsurance business authorised by one member state to carry out insurance activities throughout the
EU under the rules on the freedom to provide services. It is accepted that operating on a freedom ofservices basis in this manner should not generally create a taxable presence in the jurisdiction
where the insurance risk is located. The existence of a data flow from the country in which the risk
is located to the country in which the insurance is written should not create a new type of taxable
presence.
It seems clear that the threshold for a PE, particularly for the insurance industry, will be further
reduced, if not effectively eliminated, by the creation of a digital PE standard and we do not see thatthat has a persuasive policy basis.
Conclusion
We note that the issues raised in this discussion draft are being addressed by the other BEPS
Actions and we welcome that. As there is a strong view that the digital economy should not be
considered a separate economy, we recommend that the options which emerge as a result of thisconsultation process be dealt with as an integral part of those other BEPS Actions. This document
could then serve as the technical analysis supporting the view that the digital economy is an integral
part of the wider economy.
We hope you will find this submission helpful and would be happy to provide you with further
comments.

Yours faithfully

Nick Lowe
Director of Government Affairs286

Irish Tax InstituteResponse to OECD Discussion Draft:
Address the Tax Challenges of theDigital Economy

April 2014287

About the Irish Tax Institute
The Irish Tax Institute is the leading representative and educational body for Ireland’s
AITI Chartered Tax Advisers (CTA) and is the only professional body exclusively
dedicated to tax. Our members provide tax expertise to thousands of businesses andindividuals in Ireland and internationally. In addition many hold senior roles withinprofessional service firms, global companies, Government, Revenue and state bodies.
The Institute is the leading provider of tax qualifications in Ireland, educating the finest
minds in tax and business for over thirty years. Our AITI Chartered Tax Adviser (CTA)
qualification is the gold standard in tax and the international mark of excellence in tax
advice.
A respected body on tax policy and administration, the Institute engages at the mostsenior levels across Government, business and state organisations. Representing theviews and expertise of its members, it plays an important role in the fiscal and tax
administrative discussions and decisions in Ireland and in the EU.

1
288

The Irish Tax Institute welcomes the opportunity to contribute to the debate on BEPS
Action 1 – Addressing the Tax Challenges of the Digital Economy.
This particular Discussion Draft is a comprehensive paper that outlines the OECD’s
research into:
•
•
•
•
•

The Definition of the Digital Economy;
Ways in which base erosion and profit shifting can arise within a digital economy;
How the wider BEPS Actions will address problems arising in the digital
economy;The broader challenges associated specifically with the digital economy; andOptions to address these broader challenges.

The “digital economy” is a source of opportunity
Businesses make enormous capital and human investment every year in digitizing theirbusiness. Such advances in technology and developments in the digitisation of theoverall economy provide tremendous opportunities for development and growth forOECD countries. In reviewing the tax framework for businesses operating within thedigital economy, it is important to recognise the huge potential for expansion and ensurethat measures taken do not create unnecessary barriers or complexity which could restrict
this development.
The difficulty of defining the “digital economy”
The challenge of defining the “digital economy” occupies half of the entire 68 pageanalysis within this Discussion Draft document – what does the term “digital economy”
actually mean?
Unless we can clearly define what the digital economy means, it is very difficult to see
how the OECD can seek to apply separate and specific rules to it e.g. do the rules apply
only to businesses supplying certain types of digital goods and services; do they apply tobusinesses carrying out their activities through certain digital means and media etc?
It is acknowledged in the Discussion Draft itself that it is difficult, if not impossible, toisolate a separate digital economy, given than digital business is now fundamentallyembedded into business generally.
Paragraph 59 of the Discussion Draft concludes that:“As digital technology is adopted across the economy, segmenting the digital
economy is increasingly difficult. In other words, because the digital economy isincreasingly becoming the economy itself, it would be difficult, if not impossible,
to ring-fence the digital economy from the rest of the economy. Attempting toisolate the digital economy as a separate sector would inevitably require
arbitrary lines to be drawn between what is digital and what is not.”2289

The difficulty of trying to separately deal with the digital economy has also beenrecognised by the Irish government in our Minister for Finance’s recent comments on the
Discussion Draft:“The digital economy is not a specific sector of the economy anymore rather thewhole economy is becoming digitised”.
And the European Commission’s paper 1 published by the Expert Group on the Digital
Economy states:“Because of the ever-changing technologies of the ICT sector and because of thewidespread diffusion of the digital economy within the whole economy, it can nolonger be described as a separate part, or subset, of the mainstream
economy…..Given that the digital business models are present in more and more
sectors of the economy it is not possible to come up with the size of the digital
economy as a percentage of GDP”.
The Commission’s paper also references the explosive growth in the Internet of Things,
whereby:“…nearly every aspect of human life and economic activity is being equippedwith networked sensors and actuators that monitor the surrounding environment,
report their status, receive instructions and even take action based on received
information.”If experts cannot even measure the size of the digital economy, then how can weseparately tax it?
Focus on the overall international tax framework
The quest to segment the digital economy from the larger economy is fraught withdifficulty and risk. Technology changes on a daily basis and a business that is not in thedigital economy today, could be part of it in 3 or 6 months’ time under an arbitrary
definition. Therefore the exercise of trying to ring-fence the digital economy is one thatwill require refinement and review on an almost continuous basis.
In our view, the efforts of the international community would be much better served byworking together to reform the general rules and framework of international taxation,
within which all businesses operate, including digital businesses. This is the overall goalof the BEPS project and one which the Irish government is firmly committed to.

1

Working Paper: Digital Economy - Facts & Figures, March 2014. Available at:
http://ec.europa.eu/taxation_customs/resources/documents/taxation/gen_info/good_governance_matters/dig
ital/2014-03-13_fact_figures.pdf

3290

“Ireland welcomes the BEPS project and also the co-ordinated effort at
OECD/G20 level to deal with the challenges BEPS poses.” 2
The broad range of Actions 2 – 15 in the BEPS Action Plan, deal with the fundamental
principles of international taxation i.e. CFC rules, treaty abuse, permanent establishment,
transfer pricing, mismatches etc. This Discussion Draft on Action 1 rightly highlights thatthe process of reforming these fundamental principles will itself change the way in which
digital businesses are taxed.
These work streams in the Action Plan are focused on refining the approach of thecurrent source based system of taxation for income taxes to achieve outcomes whereby
the recognition of taxable profits is aligned with substance and activity. We consider thissource based approach to be the correct one for income taxes and to be equally applicableto businesses which have limited physical presence in the market of the consumer.
We believe that the combination of a source based income tax system with the adoptionof a destination based VAT or indirect tax system should adequately address concerns
about base erosion in consumer markets. We believe that this combination of approaches
builds on existing principles and provides a framework to support the evolution of andfuture growth potential for businesses participating in the digital economy.
The Irish Tax Institute believes that this focus on the overall tax framework is the correct
way to approach the challenges of the digital economy. The BEPS Action Plan is due tobe completed by the end of 2015 and is likely to represent the biggest reform tointernational tax rules in 70 years. Businesses will require time to adjust to this level ofreform. The way that businesses operate will no doubt change as a result of this work
and we believe that this process of change should be allowed to take place and the results
reviewed before it is determined whether any additional actions are needed to address thetax challenges of the digital economy.

2

Ireland’s International Tax Strategy Statement, October 2013. Available at:
http://budget.gov.ie/Budgets/2014/Documents/Department%20of%20Finance%20International%20Tax%2
0Strategy%20Statement.pdf

4291

Organisation for Economic Co-operation and Development
2, rue André Pascal
75775 Paris Cedex 16
FranceBy email:CTP.BEPS@oecd.org
14 April 2014
Japan Association of New Economy (JANE)
Ark Hills Executive Tower 8th Floor, N811
14-5 Akasaka 1-chome, Minato-ku
Tokyo 107-0052
Japan
Dear Sirs and Madams,
Comments on the "Public Discussion Draft of BEPS Action 1: Address the Tax
Challenges of the Digital Economy"
We would like to thank you for the opportunity to provide comments on the Public
Discussion Draft of BEPS Action 1: Address the Tax Challenges of the Digital Economy.
A. About Japan Association of New Economy (“JANE”)
JANE is an organisation aimed at strengthening Japan’s competitiveness through promoting
the development of various new industries including the internet and e-business industries
and encouraging innovation, entrepreneurship, and globalisation. The objectives of JANE
also include promoting in-depth constructive discussions and contributing to an
environmental maintenance, as well as a framework in Japan through policy suggestions
regarding: actualisation of innovation and growth strategies in all industries that would makeup the e-business as a core; actualisation of a fair competitive environment; increased
participation of people in politics and more efficient administrative processes; and vitalisation292

of regional communities. Membership of JANE as of 2 April 2014 is 621 (including 294
general members and 327 supporting members).
The current JANE Board of Directors members includes representatives from the following
five companies in Japan:
Rakuten, Inc. is one of the world’s leading internet service companies, providing a varietyof consumer and business-focused services including e-commerce, travel, banking,securities, credit card, e-money, e-book, portal & media, online marketing, andprofessional sports. Rakuten is expanding globally and currently has operations
throughout Asia, Western Europe and America.
CyberAgent, Inc. is a leading worldwide developer, publisher and distributor of interactive
entertainment for PCs, handhelds and wireless devices. Founded in 1998, the company
has provided many types of services in Japan; it is one of the largest social gameproviders, running a blog-based communication service (Ameba) as well as a corporate
venture-capital. CyberAgent is headquartered in Tokyo, and maintains operations in the
United States, China, Vietnam, Indonesia, Taiwan, Korea, and Japan.
Future Architect, Inc., headquartered in Tokyo, is an innovator in IT and businessconsulting services with a proven track record of providing the most advanced systems
since its establishment in 1989. The company mainly operates in three businesssegments: IT Consulting, Package & Services, and Corporation Revitalisation. The
company also engages in multiple business sectors including internet media, security,and investment.
GMO Internet Group, headquartered in Tokyo, is a leading force in the internet industry
offering one of the most comprehensive ranges of internet services worldwide. The
company was founded on a desire to bring the possibilities the internet offers to as many
people as possible. The GMO Group operates mainly in four business segments: Web
Infrastructure & e-commerce, Internet Media, Internet Securities, and Social &Smartphone.
Cisco Systems G.K. designs, manufactures, and delivers Internet Protocol (“IP”) andother products related to the communications and information technology industry. This
involves switching products including modular switches, storage products, workstations,

2293

IP phones, access points, and servers. The company was founded in 1992 and is basedin Tokyo.
B. Nature of Activities Undertaken by JANE Member Companies
Our members are involved in a wide range of businesses on a global scale, including:Online marketplaces for consumers and retailers.



Online platforms through which consumers and businesses interact to share
information, enjoy entertainment (music, electronic books, videos, etc.), and networks.



Subscription-based and free content to consumers and businesses.

Developing, marketing, and selling business and consumer-oriented search,advertising, hardware, and software.

C. Executive Summary
We provide comments below in response to each question included on Page 7 of theDiscussion Draft. In summary, we will focus on the following areas:
Support for Digitalisation and Growth of the Economy
1. First and foremost, JANE supports digitalisation and promotes it globally.
Digitalisation occurs in almost all countries and a significant number of digitalcompanies are emerging all over the world. The options being discussed here willaffect companies resident in many jurisdictions, including Japan. We recommend
further research, analysis, and discussions be undertaken in order to consider thevarious facts and circumstances that impact businesses in various jurisdictions.
2. In our view, digitalisation generates the following benefits:Providing opportunities for individuals to venture into new segments or start new
businesses. Digitalisation can reduce the cost and time involved in setting up a
new business. We believe digitalisation helps to empower individuals andventure companies.

Contributing to growth of the economy. Globalisation can be achieved moreeasily with digitalisation. Small businesses are now able to expand on a global
scale with lower barriers of entry. For example, a company can sell digital books,
music, and videos to people around the world.



Creating new business models which also contribute significantly to growth of3294

the global economy.
Supporting an eco-friendly economy: digitalisation reduces the usage of raw
materials, such as paper and plastic, as well as the negative impact oftransportation on the environment.

3. To promote digitalisation, tax rules and regulations should not discriminate against
digital transactions by imposing additional tax burdens. Such unfair practices do notsupport neutrality, one of the essential principles recognised by the Ottawa
Framework. We believe that such unfair rules and regulations will have a negative
impact on the growth of the economy, which is not in line with OECD’s goal.
Approach to the Digital Economy
4. Separating the digital economy from the traditional economy is challenging, as it canbe difficult to distinguish between the two. Security of payment and maintenance oflogistics networks are some of the most recognised and valued functions of internet
shopping platforms. Therefore, electronic and conventional forms of commerce arelinked. As a result, attempting to segregate electronic commerce from conventional
economies may create taxation disparities. We provide further comments on theseissues in our response to question 1.
Neutrality/Fairness
5. We must maintain neutrality and fairness between the conventional and electronic
forms of commerce. In addition, we should also remain neutral and fair among
inbound and outbound transactions in order to foster competitive markets.
6. We believe that imposing heavy compliance burdens on parties conducting
electronic commerce transactions as compared to traditional commerce transactions
should be avoided. As a general rule, the heavier the reporting and/or withholding
requirements are, the more the growth of businesses would be suppressed and as aresult, it may lead to domestic companies relocating to other countries where such
regulatory measures are more favourable.
Efficiency, Simplicity, and Predictability
7. Without sharing a common principle and policy of taxation across the world, cases ofdouble taxation are likely to increase. For example, the complexity of mutual
agreement procedures is likely to increase in the field of transfer pricing.

4295

VAT Double Taxation and VAT Double Non-Taxation
8. Governments are increasingly relying on indirect taxes to finance their budgets. We
note that in many countries, the rate of VAT/GST is increasing, and sometimes
double taxation or non-recoverable VAT/GST is incurred.
9. Currently businesses are facing increased competition, with pressure to lower theirprice of goods and services, resulting in minimal profit to remain competitive. In
these circumstances, if double taxation occurs, businesses end up recording losses,
resulting in an increase in the burden for businesses.
10. We believe companies should not be burdened with double taxation, which occurs
when there are different rules and practices taken by various jurisdictions. We
support OECD's effort to provide guidance on the application of VAT/GST on
international trade.
11. Clear guidelines will contribute to improving current VAT/GST rules and facilitating
cross-border trade, which will lead to further economic growth. In the meantime,
there should be measures to reduce double taxations. For example, if there is
VAT/GST in the country where the customer is located, there should be an
exemption from VAT/GST applied where the transaction originated (i.e., in the
country of a non-resident supplier).
12. We also appreciate there are benefits in allowing exemptions for imports of low
valued goods. These exemptions in many jurisdictions were established before theadvent and growth of the digital economy. As we saw in the case of the Channel
Islands, there are a lot of criticisms against the practices of using these exemptions.
The low value consignment relief for goods imported from the Channel Islands wasabolished, but this was only a partial measure and similar practices remain. Further
discussions should be held to better understand the comprehensive measures toensure competitive distortions are minimised.
D. Comments
Question 1 - Whether it is possible to ring-fence the digital economy from the rest of
the economy, and if not, whether specific types of digital transactions could be
identified and addressed through specific rules.

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13. It is unfeasible to ring-fence the digital economy from the rest of the economy.
Enterprises that employ digital models operate in all sectors of the global economy,
and these enterprises constitute the so-called digital economy. Traditional
companies, including manufacturing companies, sometimes conduct digitaltransactions, while e-commerce companies often have non-digital transactions.
14. Non-digital transactions are often related to digital transactions. For example, ane-book service provider sells both e-book readers (devices) and e-book contents(digital contents). As discussed in the Discussion Draft, a company may allow a loss
from hardware sales in order to record profits from the digital contents. As noted in
the Paragraph 15 of the Discussion Draft, in many cases, companies now use
hardware devices as loss leaders in their business model, aimed at expanding themarket of customers for goods and services available through those devices, orotherwise leveraging their growing network of end users. Companies expect content
sales to be the profitable segment of their business. In this sense, hardware device
sales and content sales (or digital services) complement each other. Customer
feedback from the sale of contents is also used to improve hardware (devices)
specifications.
15. Technically, as they are not tangible, there may be more detailed definitions andconsiderations for a consistent administration of digital transactions to avoid
differences in interpretations. For example, “electronically provided services” should
be clearly defined and regarded as “services” for withholding tax (“WHT”) and VAT
purposes. Specifically, digital content purchases or rentals, where users pay per itemof download (e-books, videos, and music) should be treated as a service under
WHT and VAT tax rules, following the report "Tax Treaty Characterisation Issues
Arising from e-commerce” by the Technical Advisory Group on Treaty
Characterisation of Electronic Commerce Payments dated 1 February 2001. There
are many countries that already recognise these transactions as a service. If othercountries take a different position, or fail to provide clear guidance and the tax
authorities decide case-by-case, this may result in double taxation.
Question 2 - The key features of the digital economy identified by the Task Force andwhether there are other key features that should be taken into account.
16. The Task Force understands the key features of the digital economy. The identified

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key features are helpful to consider what measures should be developed over thecourse of the work on other aspects of the BEPS Action Plan to address issues inthe digital economy (e.g. VAT/GST). This is discussed further in our response toquestion 5.
17. Other key features may emerge in the future as the digital economy continues toexpand, but these can be hard to predict.
Question 3 - The examples of new business models in the digital economy andwhether (and if so which) other business models should be considered.
18. The Task Force identified some of the major business models of the digital economy.
There are, however, other models as discussed in our response to question 6.
19. As mentioned above, we need to consider the measures developed on otheraspects of the BEPS Action Plan in order to address issues in the digital economy.
20. Once again, it is hard to predict all of the major business models as the digital
economy continue to expand exponentially.
Question 4 - The ability of the measures developed in the course of the BEPS Project
and the current work on VAT/GST to address BEPS concerns in the digital economy.
21. As noted in the Executive Summary, we support OECD's effort to provide guidanceon the application of VAT/GST on international trade. Clear guidelines will contributeto improving current VAT/GST rules and facilitating cross-border trade, which willlead to further economic growth.
22. The current guidelines define the core feature of VAT/GST, clearly identifying thatthe purpose of these indirect taxes is to impose a tax on final consumption byhouseholds and will support a greater understanding of the technical details.
23. We support OECD International VAT/GST Guidelines (draft) stating that “Their
design and consistent implementation is intended to serve as a basis for countries toframe their own laws and administrative practice, reduce impediments tointernational trade and improve the neutrality of VAT regimes worldwide while7298

reducing opportunities for tax avoidance and creating more certainty for businessand tax authorities."
B2B Transactions
24. For B2B digital services, the reverse charge system should be the most effective
system. It is necessary that a foreign business can identify whether the client is anindividual or a business, and using a VAT-ID could be an option.
B2C Transactions
25. For B2C digital services, we believe that having the non-resident supplier to collectand remit VAT as opposed to having individual customers to remit VAT is effective.
As noted in the Discussion Draft, consumer self-assessment has proven to belargely ineffective and as result, it is unlikely that any VAT would be paid by the
consumer.
26. There should be benefits or incentives for the non-resident supplier to be compliant,and/or a penalty for non-compliance, as this method depends on the non-resident
supplier complying with the requirement to collect and remit VAT. Otherwise, thesuppliers will only consider administrative costs, which may lead to differences
between large corporations who want to be compliant and small businesses who
may decide not to be compliant.
27. For example, a government could issue a VAT registration number to the
non-resident supplier who correctly registers, collects and remits VAT, so that thebusiness can show the number on their website identifying they are VAT compliant in
the respective country. Governments should encourage people in their country to
buy digital contents from registered businesses, rather than non-complying
businesses.
28. There may be other measures to promote voluntary compliance. Start-up companies
typically focus on their businesses in the first few years without allocating sufficient
resources to compliance. The local tax authorities should encourage “voluntary”
compliance once the business becomes more stable. The authorities should not
penalise companies if the start-up provides sufficient reasoning for their
non-compliant period. Other measures may include implementing penalties and/or
sanctions on consumers, leading them to be “co-liable” for VAT/GST.

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29. Another option would be to introduce a fiscal representative system and make therepresentatives co-liable for VAT/GST. Non-resident suppliers should designate
fiscal representatives in the target market to file, collect and remit VAT/GST. Hiringsuch fiscal representatives would reduce the administrative burden on thecorresponding non-resident supplier. It is also important to make sure that such
fiscal representative for VAT compliance purposes should not be regarded as a PEof the non-resident supplier.
30. Government should also establish a taxpayer-friendly automated compliancesystem, so businesses do not have to invest to register and be compliant. In addition,an efficient automated system will be useful for smooth and timely deregistration. It
may take several months or years to obtain VAT clearance and deregister the VAT
number from each jurisdiction. Markets are extremely competitive and businesses
must be flexible and agile in order to survive. It is impractical to expect companies tomaintain legal entities which are no longer required, for the sole purpose of waiting
for VAT clearance. Utilising digital information and advanced technologies, theseissues should be resolved in a timelier manner.
Main Rules and Special Rules
31. Where regulations differ by country, companies have difficulties interpreting the rules,
especially where certain countries have exceptions from or relaxation in its main
rules. With regard to special rules, these rules must be clearly defined and it should
only be possible, in certain situations, where they cannot be avoided. Firstly, thespecial rules may not have much advantage vis-à-vis the main rule, as it would be
difficult to provide evidence that the requirements for the special rules are met andthe rules may not be consistent with the business’s structure and processes.
32. Secondly, the broad definition creates too high a risk of a mismatch due to different
interpretations by countries that both apply the Guideline in principle, but define thescope very differently. In Chapter 3 of the Guideline, we recommend including more
concrete examples so that taxpayers are able to determine by themselves whether
any supply of services or intangibles they provide, fall under the main rule(customer's location) or a special rule.

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Compliance Burden
33. Draft Guideline 2.6 specifies that where specific administrative requirements forforeignbusinesses

aredeemednecessary,

theyshouldnotcreateadisproportionate or unreasonable compliance burden for the businesses. Likewise,
there should not be a disproportionate or unreasonable compliance burden for
digital transactions vis-à-vis non-digital transactions.
Neutrality of VAT in Cross-Border Trade
34. We understand the Committee on Fiscal Affairs intends to develop guidelines by theend of 2014 on the place of taxation for cross-border supplies of services andintangibles to final consumers (“B2C”) and the objective is to arrive at a complete setof guidelines applying to cross-border trade in services and intangibles. Although wewould like to obtain these guidelines, we provide some preliminary comments below.
35. We also appreciate there are some VAT non-taxation cases, including exemptions
for importation of low-valued goods. Paragraph 220 in the Discussion Draft statedthat “the thresholds in many jurisdictions were established before the advent andgrowth of the digital economy and may require a review to ensure that they are still
appropriate”. In addition to the compliance burden, it is important to consider theneutrality of VAT in the context of cross-border trade, between domestic companies
and foreign companies, as well as between digital transactions and non-digitaltransactions. Further discussions should be held to better understand thecomprehensive measures to ensure competitive distortions are minimised. We also
believe that aligning the taxation principles of goods and services would help tosimplify the tax system.
36. As noted in the Executive Summary, we recommend relief from double taxation of
VAT/GST due to different rules and practices taken in various jurisdictions. We
support OECD's effort to provide guidance on the application of VAT/GST on
international trade. Clear guidelines will contribute to improving current VAT/GST
rules and facilitating cross-border trade, which will lead to further economic growth.
In the meantime, measures to reduce double taxation, such as VAT exemption forexport should be introduced.

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Question 5 - Whether other measures should be developed during the course of thework on other aspects of the BEPS Action Plan to address BEPS concerns in thedigital economy and if so which ones.
37. As noted in the beginning of this document, the digital economy is perhaps just an
example of the economy, and it could relate to all aspects of BEPS Action Plan.
These action items will also address the tax challenges of the digital economy. In
addition, one action item could impact on another action item, therefore we believethat any options developed under Action 1 should not be further considered until allother actions have been identified, defined or implemented.
38. Particularly, among others, the following aspects may be relevant:• Action Item 3: Strengthen Controlled Foreign Company (CFC) Rules• Action Item 4: Limit Base Erosion via Interest Deduction and Other Financial
Payments• Action Item 5: Counter Harmful Tax Practices More Effectively, Taking Into AccountTransparency and Substance• Action Item 6: Prevent Treaty Abuse• Action Item 7: Prevent the Artificial Avoidance of PE Status• Action Item 8: Transfer Pricing: Intangibles• Action Item 9: Transfer Pricing: Risk and Capital• Action Item 10: Transfer Pricing: Other High-Risk Transactions• Action Item 15: Develop a Multilateral Instrument
Question 6 - The broader tax challenges raised by the digital economy which havebeen identified by the Task Force and how these challenges should be addressed,
taking into account both direct and indirect taxation.
39. First and foremost, simplified and consistent registration regimes across jurisdictions
are important. Current BEPS issues are coming from the non-consistent rules andpractices across jurisdictions. Simplified registration regime is also important tominimise the potential compliance burden on businesses.
40. In addition, there needs to be an environment supporting compliance. For example,
governments should encourage people to support VAT-compliant suppliers as
discussed above.

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41. Paragraph 175 of the Discussion Draft notes that “Advances in business practice,coupled with advances in ICT and liberalisation of trade policy, have allowedbusinesses to centrally manage many functions that previously required local
presence, rendering the traditional model of doing business in market economies
obsolete”. Please note that this distinction is not between pure digital companies
versus non-digital companies. The business models of some non-digital companies
are more globally centralised, while e-commerce companies may be more of adecentralised or localised business model. Although businesses may allocate
functions based on technological feasibility, they would typically consider otherfactors such as cultural background, style of governance, and above all, eachunique business model.
42. Paragraph 95 of the Discussion Draft “3.1.3. Mobility of Business Functions” may notreflect the whole digital economy, and occur in only limited situations. One example
is Rakuten's marketplace business. The mission of the marketplace is to empower
local small and mid-sized merchants to maintain their sites and create relationships
with consumers. In order to reach out and help these local merchants, Rakuten has
e-commerce consultants ("ECC") in local countries. Consumer life is becoming morecentered on the digital economy; however each region and country has many
distinct local cultural habits, languages, regulatory and legal environments, which
need to be considered. Through the above practices, Rakuten is accelerating growthoverseas by utilising knowledge and experience from each country.
Nexus and the Ability to have a Significant Presence without Being Liable to Tax
43. The Discussion Draft highlights in Paragraph 180 that “it is therefore important not tooverstate the issue of nexus as in many cases large MNEs will indeed have ataxable presence in the country where customers are located”. The Discussion Draft
further states that “nevertheless, the fact that it is possible to generate a large
quantity of sales without a taxable presence should not be understated either”.
Companies typically employ different business models and some companies, evenin conducting e-commerce, may want to ensure high quality of services and have a
direct relationship with key clients which results in a desire to have a taxable
presence in the country where the customers are located.
44. This nexus question relates to the definition of permanent establishment for treaty
purposes and the related profit attribution rules. We are therefore interested in

12303seeing the development of the discussions on these other issues. OECD should notpropose any PE rule changes without identifying the result of profit attribution,
especially for the virtual PE option where there is no precedent or guidance.
Data and the Attribution of Value Created from the Generation of Marketable
Location-Relevant Data through the Use of Digital Products and Services
45. Data is one of the key issues identified in the Discussion Draft. As stated, the key
accounting and tax challenge is the attribution of the value to data, and the extent of
this value relative to the systems, software and people that gather, analyse andmake use of the data to develop or deliver products and services. Companies maygather a range of data from different sources for multiple purposes and combined tocreate value, making tracing the source of data challenging.
46. There should be an appropriate definition of what is valuable. In certain situations,the tax authorities assume data has value; however raw data itself does not haveany significant value. A customer list in the digital economy is a type of data,
however the customers can easily move to another supplier, and the list no longer
has any significant value at that point. In addition, there are even cases whereindividuals are registered and use the services for free, but monetising activities
have not yet commenced. When this occurs, the raw data does not have value, butinstead, developing a business model to monetise it.
47. Further analysis would be required to comment in detail on the questions raised. For
example, in regards to big data for e-commerce, it would be of value to have an
index that would contribute to an increase in sales and a technological ability toscale out the index.
Characterisation of Income Derived from New Business Model
48. The Discussion Draft notes there is often no specific guidance on how to treat new
digital services. As noted above in our response to question 1, the TechnicalAdvisory Group on Treaty Characterisation of Electronic Commerce Payments
published a report on 1 February 2001 called "Tax Treaty Characterisation Issues
Arising from e-commerce”. This report provides an analysis and conclusion on
business profits and payments for the right to use a copyright; business profits andpayments for know-how; business profits and payments for the right to use industrial,commercial or scientific equipment; provision of services; technical fees; and mixed

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payments. Annex 2 provides an analysis of 28 categories of typical e-commercetransactions, including, electronic order processing of tangible products, electronicordering and downloading of digital products, application hosting, software
maintenance, data warehousing, etc. These remain valid today and there is no needto create different characterisation rules.
49. It is important that a consistent treatment across various jurisdictions be
implemented, not only for corporate income tax purposes, but also for withholding
tax and VAT/GST. Otherwise there is a risk of double taxation.
Collection of VAT in the Digital Economy
50. As mentioned earlier, Paragraph 220 of the Discussion Draft poses a question about
the thresholds in various jurisdictions. For the time being, mirroring the existing
practice in various jurisdictions is the most practical approach. However, businesses
have difficulties when rules differ by jurisdiction. Ultimately, there should be simpler,consistent, and defined administrative rules across borders so it is clear when ataxpayer is compliant.
Question 7 - The options to address these broader tax challenges discussed by the
Task Force and summarised in the discussion draft.
51. As noted above in our response to question 1, we do not think it is feasible toring-fence the digital economy from the rest of the economy. Enterprises that employ
digital models operate in all sectors of the global economy, and these enterprises
constitute the digital economy. Therefore, any options for addressing the digital
economy should apply fairly and equally across all businesses.
52. In addition, businesses should not be burdened with too much compliance duties. As
noted in the beginning, we believe that digitalisation brings various benefits. Unfair
measures would have a negative impact on the growth of businesses that are
utilising digitalisation to monetise their products and expand overseas.
7-1. Modification to the Exemptions from Permanent Establishment Status
53. Simply modifying the exemptions from permanent establishment status alone would
only increase the compliance cost and risk of double taxation. This would not be
helpful for globalisation or growth in the economy, not only of digital business but

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also for other business lines.
7-2. A New Nexus based on Significant Digital Presence
54. Again, creating a new nexus would only increase the compliance cost and risk of
double taxation, and it would not be helpful for globalisation or growth in theeconomy.
55. Creating a new nexus based on significant digital presence might result in double
taxation, if not clearly and consistently defined and applied by all countries, for boththe source country and the resident country.
56. One of the challenges in creating a new nexus based on significant digital presence
would be how to define the location of the digital presence (i.e. cloud computing). In
addition, there is a difference between simply having a digital presence (e.g., data),
and conducting business activities to monetise the data. With a new nexus, there
may be jurisdictions imposing unfair "income" taxes based on the mere "digitalpresence", along with deemed profits.
57. There is insufficient justification for market jurisdictions to tax profits arising from
economic activity that takes place entirely outside that jurisdiction, and creating tax
nexus for the business simply because they make sales in a certain jurisdiction is
unreasonable. Creating such rules for the digital economy only would not be fair onthese entities.
7-3. Virtual Permanent Establishment
58. Firstly, it would be very difficult to define a virtual PE. With an increase in cloud
applications, it would be even more difficult and unfeasible to define such PE. The
Business Profits TAG considers an alternative view on the “economic presence” ofan entity, but what would be the exact definition of the “economic presence”? If there
is a single customer in a jurisdiction, does an enterprise have an economic presence
within that jurisdiction?
7-4. Creation of a Withholding Tax on Digital Transactions
59. Currently withholding tax rates differ significantly due to different local laws and therelevant income tax treaty between two countries.

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60. Requiring withholding tax on digital transactions only, may not be neutral. We haveconcerns that some countries may misuse it to aggressively withhold taxes on alltransactions which are only part digital.
61. In addition, if withholding tax is imposed on the gross transaction, businesses areforced to pay taxes even if they are making losses. Such gross based withholding
taxes are inappropriate to impose on ordinary business income, since the tax does
not reflect expenses incurred to produce income. It would be a significant burden forbusinesses, especially in the early stage of start-up who are recording losses, andsuch measure discourages investments into new ventures.
62. There is also a question of addressing the challenges of withholding tax in the caseof transactions with individual consumers. The Discussion Draft discusses one
option to consider regarding withholding by financial institutions involved in thosepayments. In practice, there are various payment methods other than credit cards.
Thus applying the withholding tax only on credit card transactions (and some otherforms of payment) may be unfair. It is also a challenge for financial institutions to
identify the country of residence or country of establishment of the payment
recipient.
7-5. Consumption Tax Options
63. In the past few years, there were numerous discussions in Japan about the mosteffective and efficient approach on collection of Japanese Consumption Tax (“JCT”)(similar to VAT) on cross-border B2C digital services.
64. As discussed above in our response to question 4 regarding B2B digital services, we
believe the reverse charge system would be the most effective system. It isnecessary for a foreign business to be able to identify whether the client is anindividual or a business, and using a VAT-ID would be an option.
65. For B2C digital services, asking a non-resident supplier to collect and remit VAT
rather than requiring individual customers to remit VAT is effective. As noted in the
Discussion Draft, consumer self-assessment has proven to be largely ineffective
and as result, it is unlikely VAT would be paid by the consumer.

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66. For exemptions on imports of low-valued goods, it is unfair to allow exemption for
non-digital goods only. In addition, the thresholds for these exemptions vary widely
across jurisdictions. In theory, these thresholds should be removed, as variations
from the main rule may complicate the practices. In reality, there are administrative
burdens to consider, and we forecast that exemptions for imports of low-valued
goods will remain for a foreseeable future. In the meantime, the same exemption
should be allowed for digital services to ensure consistency in all economies. As
discussed earlier, we strongly believe that digitalisation provides a lot of benefits tothe economy, and we do not support unfair measures on digital transactions.
Question 8 - The potential cost of compliance arising from the options proposed toaddress the tax challenges of the digital economy and suggestions for more cost
efficient alternatives.
67. It is true there is a cost to being compliant. As discussed above in our response toquestion 4, there should be benefits or incentives for non-resident suppliers to becompliant, and/or a penalty for non-compliance, as this method depends on the
non-resident supplier complying with the requirement to collect and remit the VAT.
Otherwise, the supplier would only consider the administrative cost, and there may
be differences between large corporations who want to be compliant and small
businesses who choose not to be.
68. In the current digital economy, businesses are volatile and sometimes changes are
required. Often VAT registration can be quite burdensome. For example, in theprocess of reorganisation when a business liquidates several legal entities, VAT
deregistration may take much longer than other forms of deregistrations. This
process may last several months or years to deregister the VAT number from eachcountry, and the business must not conduct any commercial activities using these
legal entities during this time. Taking advantage of the digital information andadvanced technologies, such issues should be resolved in a shorter period of time.
69. From a business standpoint, we would welcome the establishment of simplified
registration regimes to minimise the potential compliance burden on businesses.
Currently businesses struggle with variations in practice to be VAT compliant. If
consistent information is requested in each of the relevant countries, it would help
business have a more simplified system to be VAT compliant. It would be effective

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and efficient if all countries introduced a similar registration and compliance system,
including the taxpayer number and items to be reported on the tax return.
Question 9 - Whether the Ottawa taxation framework principles identified above arean appropriate framework for analysing options to address the tax challenges, andwhether and how they should be supplemented.
70. We believe the outcome of the 1998 Ottawa Ministerial Conference on Electronic
Commerce, referred to as the Ottawa Taxation Framework, is still relevant today andis an appropriate framework for analysing options to address the tax challenges ofthe digital economy.
We hope our remarks will contribute to further development of OECD's work on BEPS. We
are happy to discuss any comments or questions you may have regarding our comments.
Please do not hesitate to contact us.
Yours faithfully,
JANE Board of Directors

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April 14, 2014
Committee on Fiscal Affairs
The Organisation for Economic Co-operation and Development
International Tax Committee
Japan Machinery Center for Trade and Investment

Comments on BEPS Action 1 Public Discussion Draft on ‘ADDRESS THE TAXCHALLENGES OF THE DIGITAL ECONOMY’
Japan Machinery Center for Trade and Investment (“JMC”) is a non-profit organisation
established in 1952 to promote the sound development of international trade in machinery by
Japanese multi-national entities.

Its members include major machinery manufacturers,

trading companies and engineering companies. Its International Tax Committee wasestablished at the beginning of 1990 in order to enhance the international competitiveness ofmachinery industry in Japan and has been active in studying, and contributing to, thedevelopment of domestic and foreign international taxation systems.
URL：http://www.jmcti.org/jmchomepage/english/index.htm
JMC is submitting its opinion on Action 1 of the Action Plan on BEPS because it potentiallyhas a significant impact on the members of JMC that are engaged in the export of, andinvestment in, wide-ranging machinery.
The comments of JMC<General comments>
JMC recognises that the digital economy has widely and deeply permeated the economic
activities surrounding ‘hardware’ machinery and requests that the outcome of possible solutions
presented in Public Discussion Draft on BEPS ACTION 1 ： ADDRESS THE TAXCHALLENGES OF THE DIGITAL ECONOMY will contribute to keeping compliance costs
under control. JMC hopes that it will help resolving the unfairness in competition between

1
310resident and non-resident businesses due to the different tax treatment of VAT/GST.
Furthermore, JMC believes that solutions to BEPS issues should not only lead to more taxationby every tax authorities but also to the realisation of fair taxation on businesses and theresolution of double taxation.
JMC would like to thank the OECD for assembling the background the context on
information and communication technologies and the digital economy related to Action 1 as
the development of the digital economy could have an important implication to international
taxation.
The development of the digital economy makes economic activities more efficient and, even
if there are issues that should be addressed by the BEPS project, they should be regarded as theside effects of the digital economy. There should be recognition that the development of thedigital economy is desirable. Then, it will be very important that any possible tax measures
should avoid imposing excessive compliance costs that could hamper the development of thedigital economy. If a country imposes, for example, periodical reporting and withholding tax
obligations excessively, businesses could move to a country where there are no such
unnecessary regulatory obligations.
JMC observes that some of the proposed measures in the draft, such as the expansion of theconcept of PE and the creation of withholding tax on electronic transactions, do not seem to be
useful from a practical point of view, or could impose excessive administrative burden on
businesses for compliance, and that they could have an impact on the treatment of othertransactions or have an distorting effect that could result in new double taxation.
<Specific comments>(1) Whether it is possible to ring-fence the digital economy from the rest of the economy,
and if not, whether specific types of digital transactions could be identified andaddressed through specific rules
It is impossible to ring-fence the digital economy in an appropriate manner because thedigital economy has permeated widely and deeply to the economic activities of the
traditional and hardware sector as machinery.
In reality, some business models are hard to be classified in or outside the digital
economy. For example, the most valuable part of an internet shopping site could be2311

secure settlement or the development and maintenance of a logistics network. In thatbusiness model, a traditional sales and service model is mixed with the digital economy.
Thus, arbitrary ring-fencing of the digital economy could result in distortion in taxation.
Let us take cloud computing services as another example.

As a variety of intangible

assets are employed in a complex manner, it is inevitable that some intangible assets are
employed both in the digital economy and in the rest of the economy. Any taxation on
the consideration for such use of intangible assets should, therefore, be consistent and fairbetween the digital economy and the rest of the economy.
In addition, from the point of view of flexibility, one of the five principles endorsed in
the 1998 Ottawa Ministerial Conference, ‘the systems for taxation should be flexible anddynamic to ensure that they keep pace with technological and commercial developments’,a harm could be done by separating the two economies because the digital economy andthe rest of the economy are being increasingly integrated as technology develops.
As the paragraph 120 of the draft states, the nature of the strategies used to achieve
BEPS in digital businesses is similar to the nature of strategies used to achieve BEPS in
more traditional businesses. It should be, therefore, unnecessary to take measures
specifically targeting the digital economy.
It is necessary, however, to set a certain rule in order to address the existing competitive
unfairness resulting from the different VAT treatment when digital contents aredownloaded from the internet website of a resident business or a non-resident business.
Furthermore, the treatment of transactions in services that do not depend on the internet,that are commissioned by a resident business to a non-resident business and that are
executed outside the country should be maintained as services provided outside thecountry.
(2) The key features of the digital economy identified by the Task Force and whether
there are other key features that should be taken into account
JMC does not have specific comments.
(3) The examples of new business models in the digital economy and whether (and if so
which) other business models should be considered

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JMC does not have specific comments.
(4) The ability of the measures developed in the course of the BEPS Project and thecurrent work on VAT/GST to address BEPS concerns in the digital economy
Although some of the measures developed in the course of the BEPS Project and thecurrent work on VAT/GST may be applicable to BEPS concerns in the digital economy,
JMC believes that the highest priority should be given to setting a certain new rule in orderto address the existing competitive unfairness resulting from different VAT treatment when
digital contents are downloaded from the internet website of a resident business or a
non-resident business.
(5) Whether other measures should be developed during the course of the work on otheraspects of the BEPS Action Plan to address BEPS concerns in the digital economy
and if so which ones
Other measures in the BEPS Action Plan can be applied to address BEPS concerns in
the digital economy. It is understood that the digital economy has been raised in Action 1
in order to present typical issues in the current BEPS concerns as a whole. If the work in
Action 1 is carried out as stand-alone, it could lead to inconsistency in a larger picture.
The approach to the digital economy, therefore, should be a synthesis of individual issues
such as the definition of PE, intangible assets and CFC rules.
For example, it appears that Action 2 (Neutralise the effects of hybrid mismatcharrangements), Action 3 (Strengthen CFC rules), Action 7 (Prevent the artificial avoidanceof PE status), Action 8 (Assure that transfer pricing outcomes are in line with value
creation: intangibles) and Action 12 (Require taxpayers to disclose their aggressive tax
planning arrangements) are applicable to the digital economy.

Concerning transfer

pricing taxation, particularly the issue of intangibles that is discussed in other Action andthe concept of a distinction between intangibles and service provisions that is part of theformer, should be discussed in common.
Except for transactions concerning the downloading of digital contents from an internet
website, measures specific to the digital economy should not be hastily adopted.
Although the deadline of the output of Action 1 is September 2014, instead of giving adefinitive conclusion of Action 1 by then, it will be more appropriate to seek an output thatis consistent with work done in other Actions.

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(6) The broader tax challenges raised by the digital economy which have been identified
by the Task Force and how these challenges should be addressed, taking into accountboth direct and indirect taxation (Section VI)
Concerning direct taxation, an expansion of the concept of PE status or the creation of awithholding tax on digital transactions should not be lightly introduced. Because it is
impossible to ring-fence the digital economy from the rest of the economy, measures toprevent BEPS applicable to the traditional economy should also be applicable to the digital
economy.
Concerning indirect taxation, it is necessary to set a certain new rule in order to address
the existing competitive unfairness resulting from different VAT treatment when digitalcontents are downloaded from the internet website of a resident business or a non-resident
business. In addition, it will be necessary to create a mechanism to prevent double
taxation because there is no treaty relief for indirect taxation and the amount of double
taxation could be large due to gross taxation.
(7) The options to address these broader tax challenges discussed by the Task Force andsummarised in the discussion draft (Section VII)
JMC believes that the options to expand the concept of PE that are discussed in 3.1
Modifications to the Exemptions from Permanent Establishment Status, in 3.2 A New
Nexus based on Significant Digital Presence and in 3.3 Virtual Permanent Establishment
are not viable options. The Business Profit TAG worked on the concept of PE in thedigital economy meticulously since 1998, which resulted in the changes to theCommentary on Article 5 of the OECD Model Tax Convention. In addition, work on PE
status will also be done in Action 7 of the BEPS Action Plan as explained in the paragraph
150 onwards.

By taking the above context into consideration, it is dangerous to try toreach a conclusion on the Article 5 of the OECD Model Tax Convention or a new conceptof PE by Action 1 that is related only to the digital economy. Action 1 should not go
beyond analysing these issues and summing up main points.
JMC is against the creation of a withholding tax on digital transactions (option 3.4)
because it is fundamentally difficult to make a distinction between digital transactions andthe other transactions and thus it will not be feasible.
creating new economic distortions and double taxation.

5314

If it were created, it would risk

Concerning 3.5 Consumption Tax Options, it is necessary to introduce a rule to require
the non-resident supplier to register and account for the VAT on cross-border B2C service
supplies in the jurisdiction of the consumer.
(8) The potential cost of compliance arising from the options proposed to address the tax
challenges of the digital economy and suggestions for more cost efficient alternatives(Section VII)
Concerning the options 3.1 Modifications to the Exemptions from Permanent
Establishment Status, 3.2 A New Nexus based on Significant Digital Presence, 3.3 Virtual
Permanent Establishment, and 3.4 Creation of a Withholding Tax on Digital Transactions,because the recognition and valuation of attributable profits is complex and difficult, it will
be extremely difficult and burdensome for many businesses to recognise such PEs andgrasp attributable profits to them regularly and continuously.
(9) Whether the Ottawa taxation framework principles identified above are an
appropriate framework for analysing options to address the tax challenges, andwhether and how they should be supplemented
They are an appropriate framework. As the framework for analysing options toaddress the tax challenges, the tax principles in the Ottawa framework conditions centredon neutrality would be appropriate. Action 1 is more general and comprehensive thanother Actions and contains various elements. Action 1 should, therefore, position itself as
the general remarks on the entire BEPS project and focus on summing up issues. It may
be mostly the case that concrete policy options could be delegated to other Actions of the
BEPS Action Plan.
JMC submits the above comments to the OECD Public Consultation because the theme is ofsignificant importance for many Japanese companies exporting machinery and investing.
JMC appreciates the opportunity that has enabled JMC to provide these comments.

Japan Machinery Center for Trade and Investment
Kikai-Shinko Kaikan
3-5-8 Shiba Koen, Minato-ku, Tokyo 105-0011, JAPAN
Tel: +81-3-3431-9348 / Fax: +81-3-3436-6455
E-Mail: taniguchi@jmcti.or.jp / shibaoka@jmcti.or.jp

6315Japan Machinery Center for Trade and Investment
International Tax Committee
Member Companies
Chair: Canon Inc.
Vice Chair: Hitachi, Ltd.
Itochu Corporation
Olympus Imaging Corporation
Kawasaki Heavy Industries, Ltd.
Komatsu Limited
Sharp Corporation
SINFONIA TECHNOLOGY CO., LTD.
Sumitomo Corporation
Seiko Epson Corporation
Sony Corporation
Toshiba Corporation
Nikon Corporation
NSK Ltd.
NEC Corporation
Pioneer Corporation
Panasonic Corporation
Fujitsu Limited
Fujitsu General Limited
Marubeni Corporation
Mitsubishi Heavy Industries, Ltd.
Mitsubishi Electric Corporation

7316

April 14, 2014
Secretariat
Committee on Fiscal Affairs
Organisation for Economic Co-operation and Development
Comments on the Public Discussion Draft on
BEPS Action 1 (Address the Tax Challenges of the Digital Economy)
Keidanren hereby submits its comments on the Public Discussion Draft “BEPS Action
1: Address the Tax Challenges of the Digital Economy” published by the OECD on
March 24, 2014.
1. As pointed out by the OECD, it is true that some aspects of the current international
taxation system are lagging behind the economic reality amid the progress ofglobalization and development of digital technologies, and clarification of rules on
taxation, particularly taxation in the digital economy that is the subject of the Action
Plan 1, is highly hoped for, whether there is base erosion and profit shifting (BEPS)
or not. The initiative of the OECD in summarizing the background for the
information and communication technologies and digital economy in relation to the
Action Plan 1 is thus highly appreciated.
2. It is difficult to segment the digital economy from the rest of the economy (paragraph59), and we support the conclusion that applying tax rules on the digital economy
that are separate from conventional tax rules would be neither appropriate nor
feasible (paragraph 205).
3. In the Public Discussion Draft are mentioned the five principles of the taxation
framework presented at the 1998 Ottawa Conference: namely, neutrality, efficiency,
certainty and simplicity, effectiveness and fairness, and flexibility. We believe thatthese are useful for evaluating options on a wide range of tax issues presented in
Section VII, and we support the idea that options should be evaluated based on theseprinciples (paragraph 204).
4. In consideration of our descriptions in paragraphs 2 and 3 above, we believe that theissue to be studied immediately is value-added tax (VAT) among the various tax
issues related to electronic transactions.
In particular, most of the options on tax issues presented in 3.1 through 3.4 in Section
VII are not consistent with the ideas in paragraphs 2 and 3 above. Moreover, these
options are questionable in terms of usefulness and could place excessive burdens on
1317

corporations. They may also affect the treatment of other transactions.
A very cautious study should be required on the proposals for expansion of theconcept of permanent establishment (PE) presented in 3.1 (Modifications to the
Exemptions from Permanent Establishment Status), 3.2 (A New Nexus based on
Significant Digital Presence), and 3.3 (Virtual Permanent Establishment), because
we are concerned that it may cause the source country to strengthen the tax
imposition and double taxation may arise between the residence country and thesource country. Concerning the treatment of PEs in the digital economy, detailed
studies were carried out actively from 1998 by the Business Profits TechnicalAdvisory Group, and the Commentary on Article 5 of the OECD Model Tax
Convention was revised as a result. In addition, PEs will be further studied in the
BEPS Action Plan 7 (due September 2015). Under these circumstances, it is not
appropriate to draw conclusions on the ideal Article 5 of the Model Tax Convention
or new PE concepts within the framework of the Action Plan 1 on digital economy
alone. Instead, the Action Plan 1 should focus on raising and clarifying issues.
Concerning 3.4 (Creation of a Withholding Tax on Digital Transactions), because it
is not appropriate to segment digital transactions from other transactions in the firstplace, it is not necessary to introduce a withholding tax on digital transactions alone.
If anything, it may create distortions, such as double taxation.
As seen above, we believe that the issue to be studied immediately is VAT among
the various tax issues related to electronic transactions.
5. With regard VAT, it is necessary to introduce measures that fully take into
consideration the compliance costs to be incurred by corporations. In addition, werequest the following:(1) Concerning the business-to-consumer transactions, we support the proposals thata non-resident supplier be registered in the jurisdiction of its consumer, and thata simple registration be devised in order to ease the burden on such suppliers. At
the same time, it is necessary to promote the establishment of an international
structure for realizing appropriate taxation such as an appropriate tax declaration
by a non-resident supplier and an improvement on the capture rate of tax
payments from the viewpoint of fairness.
(2) It is necessary to create internationally harmonized rules for the “place theservice was supplied” and “simplified procedures and mechanisms.”
6. We believe that measures in other BEPS Action Plans are also applicable to the2318

digital economy. The issues of the consumption taxation (VAT) on cross-borderservice transactions are being discussed by Working Party 9, and the definition of a
PE will be studied in the Action Plan 7 (due September 2015). We believe that
Action Plans 2 (Neutralise the effects of hybrid mismatch arrangements), 3(Strengthen controlled foreign company [CFC] rules), 8 (Assure that transfer pricing
outcomes are in line with value creation: intangibles), and 12 (Require taxpayers todisclose their aggressive tax planning arrangements), in particular, are also
applicable.
7. Changes to the international taxation rules involve complicated issues. Accordingly,
it is not right to jump to hasty conclusions within the framework of the Action Plan 1
alone. Instead, it will be appropriate to see how studies in other fields are progressing,and to determine the direction that is consistent with the directions of these studies.
Even in such a case, it is imperative to examine the issues carefully, taking into
consideration the impacts and burden on corporations.
Sincerely,
Subcomittee on Taxation
KEIDANREN

3319

King & Wood Mallesons
Association d’Avocats à responsabilité
professionnelle individuelle
92 avenue des Champs-Elysées
75008 Paris
T +33 (0)1 44 34 63 46
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Memorandum

To

OECD, Centre for Tax Policy and Administration, BEPS Project

From

Anne Quenedey

Date

14 April 2014

Subject

Comments on the Public Discussion Draft entitled “BEPS Action 1: Address the
Tax Challenges of the Digital Economy”

Dear Sir,
We are pleased to respond to the OECD request to send comments on the Public Discussion Draft entitled“BEPS Action 1: Address the Tax Challenges of the Digital Economy” dated 24 March 2014 (hereafterreferred to as the “Draft“).
We are thankful to the OECD for initiating an international and public discussion on the broader tax
challenges raised by the digital economy and on possible options to address BEPS and tax challenges of thedigital economy.
The tax challenges of the digital economy are a complex and sensitive subject.
In that context, we welcome the work that has been done by the OECD to take into consideration theconcerns from the business community and would like to make the following comments.
1

Information and communication technology and its impact on the economy
Comments are welcome on whether it is possible to ring-fence the digital economy from the rest of the economy, and if not,whether specific types of digital transactions could be identified and addressed through specific rules

We do not believe that it is possible to ring-fence the digital economy from the rest of the economy.
On the one hand, if tax authorities try to ring-fence the digital economy, the tax laws and criteria will
be most of the time late and not adapted to the issues at stake. Digital economy is indeed fastchanging. Business models have already changed a lot but they are going to change again in the
future.
Tax laws in order to be efficient and arm’s length need to be more oriented on principles and on
King & Wood Mallesons AARPI is an Association d’Avocats à Responsabilité Professionnelle Individuelle, regulated by the Paris Bar under no R278.
TVA number: FR14 438 807 760. Siret: 438 807 760 00022
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Asia Pacific | Europe | North America | Middle East

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rules that can be applied to the largest number of cases and situations rather than to try to identify
and ring-fence specific situations.
For example, the Directive 2002/38/EC of 7 May 2002 amending Directive 77/388/EEC as regards
the value added tax (VAT) arrangements applicable to radio and television broadcasting services
and certain electronically supplied services tried to issue specific rules for internet services.
However, discrepancies created by this Directive were identified soon after its signature, such as
VAT regime applicable to the provision of financial services through internet, the provision of press
services through internet or the sale of books through internet.
On the other hand, information and communication technologies have spread all over businesses,
across all sectors. Therefore, we fully agree that segmenting the digital economy is increasingly
difficult and that arbitrary lines to be drawn between what is digital and what is not would certainly
not achieve a successful outcome.
2

The digital economy, its key features and the emergence of new business models
Comments are welcome on:- the key features of the digital economy identified by the Task Force and whether there are other key features thatshould be taken into account.
- the examples of new business models in the digital economy and whether (and if so which) other business models
should be considered

The key features of the digital economy that are described in the Draft are comprehensive as oftoday.
However, it is impossible to ascertain that there will be no additional major changes in the futureand even more than that, it is most probable that there will be such new changes. Therefore, theidea that "digital economy" is now mature and will not change cannot be considered as reasonable.
3

Broader tax challenges raised by the digital economy
Comments are welcome on the broader tax challenges raised by the digital economy which have been identified by the
Task Force and how these challenges should be addressed, taking into account both direct and indirect taxation

In our opinion, the description of the tax challenges raised by the digital economy is sufficiently
broad.
4

Potential options to address the broader tax challenges raised by the digital economy
Comments are welcome on the options to address these broader tax challenges discussed by the Task Force andsummarised in the discussion draftThe options that have been briefly described in the Draft are the following:-

Modifications to the Exemptions from Permanent Establishment Status,-

New Nexus based on Significant Digital Presence,-

Virtual Permanent Establishment,-

Creation of a Withholding Tax on Digital Transactions,-

Consumption Tax Options.

Business is taxed when doing transactions in another country, either through the existence of apermanent establishment in the other country or through withholding taxes in that other country. All
the elements of the transactions are already taxed in the normal international taxation system.
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2

Tax rules relating to digital economy should be general and should be able to adapt to existing
situations and to the evolution and emergence of any new business models in the future.
Therefore, in order to ensure stability and a maximum security for the taxpayers, potential options
to address the broader tax challenges raised by the digital economy shall not lead to specificlegislation but rather lead to general adjustments.
In addition, creating new concepts for taxation such as:“an enterprise engaged in certain fully dematerialised digital activity would have a permanentestablishment if it maintained a significant presence in the economy of another country. [...] asignificant digital presence could be deemed to exist in a country when, for example: [...] Digital
goods or services of the enterprise are widely used or consumed in the country;”
could be a source of double taxation and discrepancies.
For example, if a company is implemented and carries out all its activity in a country A and sells
digital goods that are widely used and consumed in the country B, why and on which basis would
country A accept not to tax all the profits of the company?
For the reasons mentioned above, we therefore suggest:-

to renew and adapt the Exemptions from Permanent Establishment Status. The actual
definition is probably old and would need to be modified to include any kind of transactions,-

not to create new taxes i.e. withholding taxes, consumptions taxes etc. Creating new taxes
would add an excessive tax burden for businesses,-

not to create new situations of taxation i.e. New Nexus based on Significant Digital
Presence of the creation of a Virtual Permanent Establishment. Creating new situations oftaxation would appear to be rapidly obsolete and would trigger double taxation situations.

Comments are welcome on the potential cost of compliance arising from the options proposed to address the tax challengesof the digital economy and suggestions for more cost efficient alternatives

It is a sensitive subject for the business community. Efforts must be undertaken not to lead toburdensome formalities for companies in order to implement the possible options to address BEPS
concerns of the digital economy.
5

Annex 1. Prior work on the digital economy
Comments are welcome on whether the Ottawa taxation framework principles identified above are an appropriate
framework for analysing options to address the tax challenges, and whether and how they should be supplemented

We fully agree with the principles developed by the 1998 CFA Report “Electronic Commerce:
Taxation Framework Conditions”.
In particular, compliance costs for taxpayers should be minimised as far as possible and the tax
rules should be clear and simple to understand.

***
We are at the disposal of the OECD in order to contribute further.

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3

Very truly yours,

Anne Quenedey,
Partner

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4

Comments on the OECD Discussion Draft on
the Tax Challenges of the Digital Economy
14 April 2014324

Contents
1

Background1

2

Summary Observations

1

2.1

Ring-Fencing the Digital Economy

1

2.2

Other Aspects of the BEPS Action Plan Addressing the Tax Challenges of the Digital
Economy1

2.3

The Discussion Draft’s Options to Address the Tax Challenges of the Digital Economy

2

2.4

Specific question answered:4

3

Potential Options to Address the Broader Tax Challenges Raised by the
Digital Economy
5

3.1

Modifications to the Exemptions from Permanent Establishment Status

5

3.2

A New Nexus Based on Significant Digital Presence

6

3.3

Virtual Permanent Establishment

7

3.4

Creation of a Withholding Tax on Digital Transactions

8

3.5

Consumption Tax Options

8

3.6

Whether the Ottawa taxation framework principles identified above are an appropriate
framework for analysing options to address the tax challenges, and whether and how theyshould be supplemented.
94Conclusion

9325

To: Committee on Fiscal Affairs’ Task Force on the Digital Economy
From: KPMG’s Global International Tax Services Group
KPMG’s Global International Tax Services Group professionals (KPMG) very much appreciate theopportunity to present our collective feedback to the OECD on the Public Discussion Draft BEPS
Action 1: Address the Tax Challenges of the Digital Economy.

1

Background

The Public Discussion Draft on ‘BEPS Action 1: Address the Tax Challenges of the Digital Economy’(Discussion Draft), published on March 24, 2014, responds to the OECD charge set out in Action 1 of
the OECD’s Action Plan on Base Erosion and Profit Shifting (‘BEPS’). Specifically, to:1.
2.

Identify the tax challenges presented by the digital economy; andDevelop detailed options to address these challenges.

Both direct and indirect taxes are to be considered. The Action Plan identifies specific issues to beaddressed in the Action 1 Report, including:
1.
2.
3.
4.
5.

The ability of companies to have a significant digital presence in the economy of another country
without being liable to taxation because of a lack of nexus;
The attribution of value created from the generation of marketable location relevant data throughthe use of digital products and services;
The characterisation of income derived from new business models;The application of related source rules; andHow to ensure the effective collection of VAT/GST with respect to the cross-border supply of
digital goods and services.

The Task Force’s work should include a thorough analysis of digital economy business models.

2

Summary observations

2.1

Ring-fencing the Digital Economy

We commend the Task Force for concluding that it is “neither appropriate nor feasible” to ring fence
the digital economy to create a separate set of rules for digital economy businesses. The task force
appropriately observed that there is no separate digital economy, but that the overall global economy
is increasingly digitized. Consistent with the Task Force’s conclusion that it is not feasible to ringfence the digital economy, the only options addressing the tax challenges of the digital economy thatshould be pursued are those that apply to all taxpayers.

2.2

Other aspects of the BEPS Action Plan addressing the tax
challenges of the Digital Economy

The principal BEPS concern is “... practices that artificially segregate taxable income from the1
activities that generate it,” creating no, or low, taxation. The OECD’s work under the other aspects of
the BEPS Action Plan is expected to address this concern generally and therefore can be expected toaddress BEPS across all sectors of the economy. As a result, no separate rules need be created for
digital businesses.

1

BEPS Action Plan, page 10

326

1

2.3

The Discussion draft’s options to address the tax challenges of
the Digital Economy

Modifications to the Exemptions from Permanent Establishment Status

KPMG recommends further exploration of the option of modifying the exemptions under paragraph 4of Article 5 of the OECD Model Treaty as a solution to the tax challenges of the digital economy aswell as BEPS across all sectors. Specifically, the exceptions of paragraph 4 should be retained, but
modifications could be considered that would provide that if an otherwise exempt activity is a ‘core
activity’ for the taxpayer, the exception may not apply. Detailed guidance on what constitutes core
activities will be necessary. KPMG believes that this action, coupled with the other aspects of the
BEPS Action Plan, should fully address the tax challenges of the digital economy.

A new Nexus based on significant Digital PresenceThis option should not be pursued as it is impractical and opens the door for significant risk of double
taxation – impractical because of the difficulty in ring-fencing digital aspects of any enterprise; andgives rise to substantial risk of double taxation due to the difficulty of defining the fact patterns thatwould trigger a ‘digital presence’ and the attribution of profit or loss to the digital presence (particularly
where the OECD transfer pricing guidelines emphasize important functions in terms of Significant
People Functions).

Virtual Permanent Establishment

This option should not be pursued for the same reasons as mentioned above with regard to the
proposal to create a new nexus for a significant digital presence. Further, these options would
generally create a taxable nexus without regard to consideration of whether such presence is asignificant element of the enterprise’s value creation activities.

Creation of a Withholding Tax on Digital Transactions

KPMG does not recommend that this option be further pursued because of the complexities inadministration identified in the Discussion Draft as well as the fact that, from KMPG’s experience,
many of the enterprises offering digital goods and services are either loss making or generating
relatively low margins that would not support a final gross basis withholding tax (even a withholding
rate as low as five percent). Digital goods and service are not equivalent to high-profit payments thattypically draw withholding tax (e.g., dividends, interest and royalties) and should not be taxed
similarly. Introduction of a specific withholding tax would have an immediate effect of restricting
growth and development of the digital (global) economy itself. A gross basis tax imposed on ‘businessprofits’ payments from the source country should be a value added tax, not a final withholding tax.

Consumption Tax options

KPMG is supportive of the Task Force’s further pursuit of options to improve the efficiency ofcollecting and reporting VAT and agree that doing so is essential to reducing exemption thresholds.
We are also supportive of efforts to develop workable solutions to VAT collection and remittance on
cross-border B2C digital transactions. We expect that this issue will be dealt with by Working Party 9
as part of the VAT TAG.

Discussion draft summary and background

The Discussion Draft spends the initial 47 pages outlining the evolution of Information andCommunication Technology (‘ICT’) and its impact on the economy; discusses the emergence of new
business models and the key features of the digital economy; identifies opportunities for BEPS in thedigital economy and reviews how the other action areas within the overall Action Plan could addressconcerns raised in the digital economy. The final 14 pages cover the broader challenges raised by thedigital economy and actions so far presented for discussion to the Task Force.
Not surprisingly given the substantial work already performed within the EU on the VAT issues
associated with the digital economy, in contrast to the other work-streams VAT/GST is given equal
footing with direct tax matters. Indeed, there appears to be clear acceptance that in the context of
VAT/GST as it relates to digital services, the place of taxation should be linked to the location where
the service is consumed. Notwithstanding the clarity gained form such a decision, there is still plenty
to determine, what factors are used to ascertain location of consumption, who is liable to account for
the tax due, what simplified processes should be considered to reduce compliance burdens on
business and make collection feasible.

327

2Finally, due to the complexity of the issue, the Discussion Draft is seeking input on the best way toaddress the issues raised by the digital economy and a number of detailed questions on both direct
and indirect tax are raised.

The OECD context of what defines BEPS

To address the overall question posed by the Discussion Draft (i.e., what should be done to address
the tax challenges of the digital economy), we first step back to review the BEPS problem generally
and then the specific tax challenges of the digital economy. With this background, we conclude thatthe other aspects of the BEPS Action Plan should address the tax challenges of the digital economy.
In the February 2013 OECD Report on Base Erosion and Profit Shifting, a number of strategies wereidentified as being responsible for BEPS in the context of direct taxation which can be summarised
into four areas:■ Minimisation of taxation in the market country by avoiding a taxable presence, or in the case of ataxable presence, either by shifting gross profits via trading structures or by reducing net profit bymaximising deductions at the level of the payer;■ Low or no withholding tax at source;■ Low or no taxation at the level of the recipient (which can be achieved via low-tax jurisdictions,preferential regimes, or hybrid mismatch arrangements) with entitlement to substantial non-routine
profits often built-up via intra-group arrangements; and■ No current taxation of the low-tax profits at the level of the ultimate parent.
From the perspective of VAT, to the extent that Guidelines 2 and 4 of the OECD’s ‘Guidelines onplace of taxation for B2B Supplies’ are not implemented, BEPS concerns may be summarised as:■ Remote digital supplies to exempt businesses; and■ Remote digital supplies acquired by multi-location enterprises that are engaged in exempt
activities.

As well as the above two specific examples of how BEPS may occur in the context of VAT, the draft
also notes that connectivity afforded by the global adoption of ICT, puts two additional pressures on
the correct accounting for and collection of VAT, namely undeclared VAT on B2C supplies and theability of businesses to deliberately structure their operations to take advantage of a country’s low
2value thresholds and sell goods to consumers without the payment of VAT.

Tax challenges of the Digital Economy

The Discussion Draft notes that many of the key features of the digital economy exacerbate theopportunities for BEPS.
Specific examples are drawn out such as:■ The importance of intangibles in the context of the digital economy, combined with the mobility ofintangibles for tax purposes under existing tax rules;■ The mobility of users creates substantial challenges and risks in the context of the imposition of
VAT; and■ The ability to centralise infrastructure at a distance from a market jurisdiction and conduct
substantial sales into that market from a remote location.

However, many of these features are found throughout all industries and amongst most modern
enterprises as a result of the digitization of business in the modern world. Indeed, para 2.2.8 of theUN ‘Practical Manual on Transfer Pricing for Developing Countries’ notes that:2

Many VAT jurisdictions apply an exemption from VAT for imports of low value goods as the administrative costs associatedwith collecting the VAT on the goods is likely to outweigh the VAT that would be on those goods.

328

3

“The key features of MNEs (multi-national enterprises) are that they are integrated (global)
businesses. Globalisation has made it possible for an MNE to achieve high levels of integrationand the ability to have control centralised in one location. Modern Information andcommunication systems also provide increased horizontal communications across geographic
and functional business lines...”3

Business will generally outsource activities in which they do not have a competitive advantage .
Outsourcing has been driven by advances in computing power and the growth and development of
the internet. These same factors allow for the realization of efficiencies from centralizing key functions
within an enterprise. Indeed, not only is technology pervasive throughout business but throughout
major consumer markets. In para 30 of the Discussion Draft, it is noted that within the OECD area,
households alone have approximately 1.8 billion connected devices, with estimates that this could
reach 14 billion by 2022. Rightfully, the Discussion Draft concludes that,“As digital technology is adopted across the economy, segmenting the digital economy isincreasingly difficult. In other words, because the digital economy is increasingly becoming the
economy itself, it would be difficult, if not impossible, to ring-fence the digital economy from therest of the economy. Attempting to isolate the digital economy as a separate sector would
inevitably require arbitrary lines to be drawn between what is digital and what is not. As a result,
the tax challenges and BEPS concerns raised by the digital economy are better identified andaddressed by analysing existing structures adopted by MNEs together with new businessmodels and by focusing on the key features of the digital economy and determining which of
those features raise or exacerbate tax challenges or BEPS concerns, and developing
approaches to address those challenges or concerns.”
We strongly endorse the Task Force’s conclusion stated above and encourage the OECD to develop
solutions through other aspects of the BEPS Action Plan to address the tax challenges of the digital
economy—challenges manifest more clearly through innovative and modern business models
adopted across all sectors.

2.4

Specific question answered:

The paper states that, “comments are welcome on any of the issues addressed in the Discussion
Draft and in particular on specific issues highlighted in the draft”. We provide comment on several ofthese issues:

Whether it is possible to ring-fence the digital economy from the rest of the economy,
and if not, whether specific types of digital transactions could be identified andaddressed through specific rules

We commend the Task Force for concluding “that ring-fencing the digital economy as a separate
4
sector and applying tax rules on that basis would be neither appropriate nor feasible .” We are incomplete agreement. Indeed, para 208 of the draft, notes that if the issues noted above are fully
addressed through the measures envisaged in the BEPS Action Plan, addressing the challenges
posed by the digital economy may become less pressing. The danger will be pressing on with specificdigital solutions before the full impact of other work streams can be assessed. We strongly endorse
the Task Force’s recommendation to address the challenges of the digital economy through the othermeasures of the BEPS Action Plan. As the modern economy is a digitized economy, the otheraspects of the BEPS Action Plan should address the concerns identified by Action 1 of the BEPS
Action Plan.

The key features of the digital economy identified by the Task Force and whether
there are other key features that should be taken into accountWe believe that one aspect of the digital economy that is over emphasised by the Discussion Draft is
the reliance on intangible property. Along with many other industries that rely on intellectual property,

3

Dunning, JH & Lundan, SM, Multinational Enterprises and the Global Economy, 2nd edition (Cheltenham: Edward Elgar,
2008)

4

Discussion Draft, Para 205

329

4

it is the combination of people, functions, finance, assets and risk that should determine the correct
allocation of reward. A sale may be made by a remote server but there are a lot of people who havesupported the creation and maintenance of a business that enables a remote server to make suchsales. We suggest that the ongoing work concerning Transfer Pricing Guidelines and Attribution ofProfits to a Permanent Establishment could address this concern.

Whether other measures should be developed during the course of the work onother aspects of the BEPS Action Plan to address BEPS concerns in the digital
economy and if so which ones

We endorse the view of the Discussion Draft that other key work streams can address the BEPS
concerns of the digital economy, given the breadth of the action plan addressing so many aspects of
the BEPS concerns, and given the digital economy is inseparable from the general economy we areconfident that the other actions should address the concerns within the digital economy. That said we
would recommend that the digital economy Task Force addressing BEPS Action 1 is maintained andcoordinates closely, going forward, with the groups responsible for other aspects of the BEPS Action
Plan to ensure that the digital economy concerns are adequately considered.

3

Potential options to address the broader tax
challenges raised by the Digital Economy

The Discussion Draft presents five options to address the broader tax challenges raised by the digital
economy—covering (i) modifications of the permanent establishment threshold, (ii) the imposition of awithholding tax on certain types of digital transactions, and (iii) improvement of the indirect tax system
relative to digital transactions.

3.1

Modifications to the Exemptions from Permanent Establishment
StatusKPMG recommends further exploration of the option of modifying the exemptions under paragraph 4of Article 5 of the OECD Model Treaty as a solution to the tax challenges of the digital economy aswell as BEPS across all sectors. Specifically, the exceptions of paragraph 4 should be retained, but
modifications could be considered that would provide that if an otherwise exempt activity is a ‘core
activity’ for the taxpayer, the exception may not apply.
The Discussion Draft states that the ability of companies to maintain some level of businessconnection ‘within a country’ without being subject to tax on business profits from sources within thatcountry is the result of particular policy choices reflected in domestic law and tax treaties, and is not inand of itself a BEPS issue. (Para. 124). The purpose of the concept of permanent establishment is toprovide guidance to taxpayers and tax authorities on the allocation of taxing rights. These guidelines
must also facilitate the resolution of disputes under the Mutual Agreement Procedure of treaties that
embody these concepts and therefore require clear guidance rather than broad concepts. Article 5:
Permanent Establishment has been one of the areas of international taxation where countries haveoften struggled to arrive at a common interpretation and KPMG has seen many challenges on
permanent establishment issues due to differing interpretations of Article 5. As far as possible theOECD should seek to eliminate the use of subjective tests to determine permanent establishments.
Post-World War I, there was a rapid expansion in world trade driven through manufacturing andtransport. The consideration of double taxation in earnest commenced in 1921, when the League of
Nations appointed a committee of economists (Committee of Experts) to undertake a theoretical studyof double taxation. From the first report issued by the Committee of Experts in 1923, through to thedevelopment of The London Model in 1945, the term permanent establishment was an enduringfeature and concept. The London Model defined in Article V that a permanent establishment exists
when there is a fixed place of business in the host country where the place of business contributed tothe enterprises income. If a permanent establishment does not exist, then the activity is ‘trading with acountry’ and no taxing rights arise on the sale.
The considerable body of work by the League of Nations over a period of 24 years laid the foundation
for managing the competing taxing rights of source and residence countries and are reflected in the330

5current UN and OECD Model Tax Conventions. The current exemptions listed in Article 5 paragraph 4of the OECD Model Tax Convention are the reiteration of the second condition for a permanentestablishment detailed in the London Model—that the business located in the host country must
contribute to the enterprise’s income; core activities where value is created for the enterprise.
The imposition of a net income tax on a foreign enterprise is an intrusive exercise that requires
disclosure of significant and sensitive financial and other detailed information of the foreign enterprise.
The possible imposition of a net income tax is a consideration for many enterprises in evaluating
cross-border trade decisions. A source country net income tax imposed upon a foreign enterprise is
not only intrusive, but also places the enterprise in a position of net basis taxation from both theresidence and source countries and the associated issues related to avoiding double taxation (not tobe taken lightly as residence countries often dispute the existence of a foreign permanentestablishment and the amount of profit attributable to such establishment). These concerns have long
driven the policy considerations behind the permanent establishment concept as well as the specified
exceptions to permanent establishment status.
Although innovative business models making particular use of ICT may raise less familiar fact
patterns relevant to where value is created and whether a foreign enterprise’s source-country
presence is of a preparatory and auxiliary nature, these concerns should not warrant an abandonmentof over 70 years of sound tax policy. We therefore recommend that the exemptions to permanentestablishment contained in paragraph 4(a) through (d) be retained. We support the development of aqualitative standard that clarifies when these exceptions would be inapplicable based on the identified
activity as ‘core’ to the foreign enterprise’s business. Potential modifications to the definition of
permanent establishment are part of Action Item 7 which is due by September 2015. KPMG will
provide detailed comments at the appropriate time on Action Item 7. However, we note that any
modifications should include bright line guidance that provides certainty for business and tax
administrators.

3.2

A New Nexus Based on Significant Digital PresenceThis option should not be pursued as it is impractical and opens the door for significant risk of double
taxation—impractical because of the difficulty in ring-fencing digital aspects of any enterprise; andgives rise to substantial risk of double taxation due to the difficulty of defining the fact patterns thatwould trigger a ‘digital presence’ and the attribution of profit or loss to the digital presence (particularly
where there OECD Transfer Pricing Guidelines emphasize important functions in terms of Significant
People Functions).
This option considers the need to establish an alternate concept of nexus in which businesses are
conducted wholly digitally. A two part assessment is discussed, first ascertain whether an enterpriseis engaged in “fully dematerialised digital activities” and then assess whether it maintained asignificant digital presence in the economy of another country.
With regard to the first test the Discussion Draft identifies eight potential indicators that could be
included in a test for when a fully dematerialised digital activity was conducted. Two variants are thenproposed and examples given to ascertain whether a significant digital presence has been breached.
In the first “significant digital presence test,” a permanent established would be deemed to exist if theforeign enterprise has a significant market presence for its digital goods or services. In the second“significant digital presence test” a permanent establishment would be deemed to exist if the foreign
enterprise, engaged in a fully dematerialised digital activity, conducts a significant business in acountry using personal data obtained by regular and systematic monitoring of internet users in thatcountry through the use of multisided business models.
To begin with, this proposed nexus standard appears to contradict the Discussion Draft’s conclusion(see paragraph 205 referenced above) that ring-fencing the digital economy is neither appropriate nor
feasible. This approach is impracticable not only because of the difficulty of identifying digital goods
and services offered across multiple sectors, but because of the difficulty of defining terms such as“significant” and “substantial,” as well as the thorny issue of attributing profits to a Digital permanentestablishment. This problem was acknowledged by the Task Force. (Para. 216).
Additionally, this approach would be a major shift from three fundamental long-standing tax policy
concepts – (i) the ability to ‘trade with a country’ without creating a taxable presence, (ii) the
acceptance of a force of attraction principle, and (iii) a presumption that value is created at thelocation of consumption. As a relevant example, the 2010 Report on the Attribution of Profit to331

6Permanent Establishments states, “. . . since a server-PE will not be carrying out any significant
people functions relevant to the attribution of economic ownership of assets and/or the assumption ofrisks in the absence of personnel acting on behalf of the enterprise, no asset or risk could be
attributed to it under the authorised OECD approach, supporting the conclusion that little or no profit
5
would be attributed to such a PE” . We reiterate that the OECD should carefully consider theconsequences of abandoning long-standing principles that establish jurisdiction to tax rights
predicated on the existence of a core physical presence.
The proposals relating to the creation of a Digital permanent establishment as a result of gathering
consumer data is particularly troubling. This proposal pre-supposes market data alone is sufficient totrigger a taxable nexus and that such raw data is a key value driver to the enterprise. We see nosupport for such a conclusion. It is difficult to get an estimate of how much data is created every day
but an often quoted estimate puts it at 2.5 quintillion bytes per day, with 90% of the data generated in
6
mankind’s existence having been created in the last two years . There is no doubt that modern
computers can process massive amounts of data and through statistical analysis identify potential
correlations between data, however the value lies in the identification of causation and that involves
the development of highly complex algorithms, software tools, and expensive research anddevelopment. Raw data is being produced at a rate that is driving its unstructured value to aminimum; the value can only be attributed to the activities that turn that data into something
meaningful, and profits should be attributed to the location where that occurs, not the raw production.
This leads us back to one of the more troubling aspects of this proposal as mentioned briefly above—
attribution of profit to a Digital permanent establishment. It appears inconsistent to posture that
income from intangibles should be allocable to Significant People Functions (e.g., where the researchand development activities occur) and ignore the people functions that drive value for businesses
offering digital goods and services (e.g., the people functions that create the digital content, performthe supporting research and architect the necessary IT infrastructure). The digital content andfunctionality of these offerings is ultimately created by people. If this analysis were to follow thecurrent emphasis on people functions in the draft Chapter VI Transfer Pricing Guidelines, there is nobasis to find significant value based on consumption activity.

3.3

Virtual Permanent Establishment

This option should not be pursued for the same reasons as mentioned above with regard to the
proposal to create a new nexus for a significant digital presence.
The discussion draft notes that over recent years a number of alternative options for PE thresholds
have been discussed. The most recent work being performed by the Business Profits TAG which
considered three broad alternatives:■ A virtual fixed place of business PE – created through the maintenance of a website on a server ofanother enterprise located in a jurisdiction ad carries on business through that website.

■ A virtual agency PE – extend the habitual conclusion concept when this is performed throughtechnology and not a person■ On-site business presence PE – created through on-site services or other business interface at thecustomer’s location

The Discussion Draft states the above are only mentioned for completeness – which implies they are
not proposing to pursue any of the options at this time. This is presumably on the basis that existing
principles, such as selling into a market without presence or a dependent agent, are accepted as notcreating a PE, and for the reasons outlined above are not changed by the adoption or expansion oftechnology into the economy.

5

Part 1: General Considerations, para 66, (July 22, 2010)6

http://www.ibm.com/smarterplanet/us/en/business_analytics/article/it_business_intelligence.html

332

7

3.4

Creation of a Withholding Tax on Digital Transactions

KPMG does not recommend that this option be further pursued because of the complexities inadministration identified in the Discussion Draft as well as the fact that, from KMPG’s experience,
many of the enterprises offering digital goods and services are either loss making or generating
relatively low margins that would not support a final gross basis withholding tax (even a withholding
rate as low as 5 percent). Digital goods and service are not equivalent to high-profit payments thattypically draw withholding tax (e.g., dividends, interest and royalties) and should not be taxed
similarly. Gross basis source country tax imposed on “business profits payments” (clearly a point
made in the Discussion Draft’s lengthy discussion of business models), if imposed at all, should bevalue added taxes, not withholding taxes. This position is consistent with long standing tax policy.
It is interesting to note that the income payments currently subject to withholding tax relate to primarily
passive forms of income associated with capital investment in the form of equity or debt (dividend andinterest withholding) and income from rights that have been transferred be they protected underpatent or copyright or process knowledge such as know-how. A common feature of such items is thatthey represent a return from an asset that subsists within the economic framework of the country
making the payment and therefore can be considered to have a source within that country. Anothercommon feature of such passive investments is that as a general rule nothing further is required of
the investor, they have given up the right to enjoy the money or asset and have to do nothing more to
enjoy the interest, dividend or royalty. As such, absent possible sundry expenditure the gross
payment is an adequate estimate of the income generated from the underlying asset. This is in directcontrast to the sale of (digital) goods or services that give rise to business profits. There is all mannerof expenditure incurred by the selling party to get the good or service to the point of consumption and
it is impossible to ascertain what level of profit is associated with the good or service in question andthe application of a withholding tax could push even an otherwise profitable transaction into economic
loss. Assessing the rate of withholding to be applied would be a monumental task as well as aneffective collection mechanism as the bulk of purchases will be B2C.
This proposal also raises serious complexities around income characterization. What would constitutea digital good or service? Further, would DVDs, CDs, and other digitally embedded media/hardware
constitute a digital good? What about future goods and services we cannot envision today? This issue
further illustrates the administration complexities of this proposal.
Further, B2C transactions present significant administrative concerns. It is unlikely that individual
consumers will collect and pay over a withholding tax. Imposing a withholding tax on thesetransactions will create significant burdens for the financial system—a concern of the Ottawa principleof neutrality. Such administrative issues appear to be essentially the same as those applicable to theindirect tax system for cross-border digital transactions.
In our opinion, not only are there similarities in administration for this proposed gross basis
withholding tax and VAT, both taxes appear to have the same end result—i.e., a tax levied on
consumption, not value creation. This has historically been the role of indirect taxation. In other words,
long standing tax policy holds that net income tax is imposed on the location of value creation
whereas VAT is imposed on the location of consumption—notwithstanding that value may have beencreated elsewhere. Given the similarities of this proposal to a VAT and the difficulties of imposing a
new digital withholding tax as discussed above, we discourage the OECD from pursuing this option.

3.5

Consumption Tax Options

A constant theme in the Discussion Draft is the impact of ICT in the economy and the observation thatfor goods and services that may be digitised business has embraced these technologies and incertain circumstances adopted a business model that enables them to market and sell goods andservices from remote locations to consumers in foreign jurisdictions. Automatic credit checking andbilling platforms have facilitated the growth in online shopping by consumers. These developments
have presented challenges to VAT collection as these supplies often result in no or an inappropriately
low amount of VAT collected and create potential competitive pressures on domestic suppliers.

Exemptions for Imports of Low Valued Goods

In an attempt to optimise the costs of collection and administration requirements, many countries
have implemented a VAT exemption on the import of low value goods. The thresholds for these
exemptions vary widely across jurisdictions. Many of the exemption systems were introduced before

333

8the on-line sales and the year on year growth in digital sales may require a review of the exemption
systems to ensure that they are still appropriate.
It is proposed that if improvements to the efficiency of processing low value imports were made by tax
authorities, it would be more feasible to lower VAT exemption thresholds and increase the relative
VAT revenue collected. The discussion draft concedes that a key element of the solution is for nonresident vendors of low value parcels to be able to efficiently charge, collect and remit the tax on theimports of these goods in the importing jurisdiction. This will likely only be achieved through simplified
registration and compliance mechanisms, using the possibilities offered by new technologies (e.g. online registration and filing, electronic payment).
KPMG agrees that governments should take all necessary measures to protect their tax base and toensure competitive distortions are avoided. However, this must be in the context of ensuring that thecost of collection and compliance is commensurate with the VAT collected.

Remote digital supplies to consumers

As noted above a key element to the solution is to require the non-resident supplier to register andaccount for the VAT on these supplies in the jurisdiction of the consumer. Many jurisdictions, mostnotably the EU have announced proposals that will set out to achieve this aim.
Whilst this remains the most viable option, it is recognised that requiring non-resident suppliers toregister in countries to which they remotely deliver services may impose significant complianceburdens. It is recommended therefore that countries should consider the use of simplified registration
regimes and registration thresholds to minimise the potential compliance burden on businesses.
KPMG recommends that in order to minimize the administrative burden in this area that OECDdevelops recommendations on these points so that countries can adopt uniform rules that apply on a
global basis.
To assist in managing the challenges in enforcing compliance from non-resident suppliers, improved
international co-operation between jurisdictions is likely to be required and should consider enhanced
exchange of information, assistance in recovery and simultaneous audits.

3.6

Whether the Ottawa taxation framework principles identified
above are an appropriate framework for analysing options toaddress the tax challenges, and whether and how they should be
supplemented.

We have some concerns about the explanation for “neutrality” in the Ottawa principles. The principles
were put together in 1998, which predate by nine years the launch of the smart phone (around 2007)
and the explosion in on-line businesses in the last ten to fifteen years. Digital businesses often do nothave an analogous non on-line equivalent – for example social networking sites do not have ananalogous non on-line equivalent. We are concerned about statements that taxation should be neutral
between “conventional and electronic forms of commerce” may cause inappropriate comparisons of
unique digital businesses and non-similar conventional businesses. Furthermore, is it reallyappropriate to say that a business selling computer game discs in a particular country throughphysical shops should be tax neutral with a business selling computer games on line, or providing thegame for free and allowing users to pay for advantages within the game or particular features? We
think not. We feel the concept of neutrality as outlined in the Ottawa principles is now outdated, andshould be replaced by a concept of neutrality that provides for tax guidance that treat all businessfairly through uniform broad based rules that do not single out a particular sector or business modelfor “special treatment”.

4

Conclusion

Para 59 of the Discussion Draft summarises the challenge faced by trying to address this particularissue in isolation:“As digital technology is adopted across the economy, segmenting the digital economy isincreasingly difficult. In other words, because the digital economy is increasingly becoming the334

9economy itself, it would be difficult, if not impossible, to ring-fence the digital economy from therest of the economy. Attempting to isolate the digital economy as a separate sector would
inevitably require arbitrary lines to be drawn between what is digital and what is not. As a result,
the tax challenges and BEPS concerns raised by the digital economy are better identified andaddressed by analysing existing structures adopted by MNEs together with new businessmodels and by focusing on the key features of the digital economy and determining which of
those features raise or exacerbate tax challenges or BEPS concerns, and developing
approaches to address those challenges or concerns.”
We endorse the conclusion that there is no separable digital economy without reservation andencourage the Task Force to address the tax challenges of the digital economy through the otheraspects of the BEPS Action Plan. The principles of international trade that started in the late 19th
century, were tackled by the League of Nations over a 24 year period from 1921, and embodied in theOECD Model Tax Convention are as relevant today as they were when first considered by the Leagueof Nations’ Panel of Experts.

335

10

Contact Us
Brett A Weaver
KPMG USAT +1 206 913 6697
E bawearver@kpmg.com
Russell Hampshire
KPMG UK
T +44 118 9642108
E russell.hampshire@kpmg.co.uk
Ignacio Longarte
KPMG Switzerland
T +41 58 249 3530
E ilongarte@kpmg.chWillemJan Paardekooper
KPMG Netherlands
T +31 206 56 1471
E Paardekooper.willemjan@kpmg.nl
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firms of the KPMG network of independent firms are affiliated with KPMG International.
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336

Mr Jesse Eggert
Senior Advisor, BEPS ProjectCentre for Tax Policy and Administration
Organisation for Economic Cooperation and Development
2, rue André Pascal
75775 Paris Cedex 16
France13 April 2014
Digital Economy Discussion Draft

Dear Mr. Eggert:
Liberty Global appreciates the opportunity to submit these comments to the OECD on the
Discussion Draft on the tax challenges of the digital economy dated 24 March 2014. We agree tohave our comments posted on the OECD website.
Liberty Global is the largest international cable company with operations in 14 countries. We
connect people to the digital world and enable them to discover and experience its endlesspossibilities. Our market-leading triple-play services are provided through next-generation
networks and innovative technology platforms serving 25 million customers with 48 million
television, broadband internet and telephony services. Liberty Global’s consumer brands include
Virgin Media, UPC, Unitymedia, Kabel BW, Telenet and VTR. Our operations also include Liberty
Global Business Services, and Liberty Global Ventures, our investment fund. We employ 36,000
people. Our headquarters are located in Denver, Amsterdam and London. For more information,
go to www.libertyglobal.com.
Taxation principles
Our view is that potential tax challenges of the digital economy should be analyzed in a structured
way. Therefore, it is important to deal with the challenges within a robust framework. We strongly
support the 1998 Ottawa Taxation Framework Principles, referenced by the Discussion Draft, as
it provides a good framework to perform the analysis. Further, we believe the right balance should
be struck between the principles mentioned. In this complex world, it is very important that therules are clear and simple to understand, and simple to apply for both taxpayers and tax

337

authorities. It is also very important that taxation is neutral and does not discriminate between
digital transactions and conventional commerce. Taxation should not disturb the development of
the digital economy. It is not possible to ring-fence the digital economy from the rest of theeconomy and, because of the neutrality principle, we are also of the view that it should not bering-fenced.
Reliance on Data
The Discussion Draft lists a number of key features of the digital economy, including the relianceon data. We agree with the importance of data in today’s economy. We also agree with thestatement made in the report that the use of data to improve products and services is not uniqueto the digital economy. The Discussion Draft continues that the gathering of information iscreating challenges for tax policy makers. The data may be collected using technology developedin a second country.
The BEPS action plan in general focuses on value creation as an important factor when allocating
profit. On the other hand, action point 1 of the plan and the Discussion Draft introduce thegeneration of data or the use of data as a (new) value creating factor. The Discussion Draft
seems to imply that (part of the) profits should be allocated to the country where the customers
from which the data is collected are based, notwithstanding that the functions are being
performed in another country. These two factors – the mere use and the value creation throughfunctions - are inherently contradictory, and can and should not be used simultaneously.
The introduction of specific rules for the taxation of the use of data would potentially challenge theneutrality principal referred to above. For example, a company selling physical goods into anothercountry without physical presence in that other country would be taxed for corporate income tax
in his home country, while a company selling digital goods might also be taxed in the country ofuse of the data. In addition, the practical implications (compliance burden and profit allocation)
would be considerable.
Finally, it follows from the above that this would mean a significant shift towards source taxation
which will have broader consequences than the mere taxation of the use of data: certain
countries may broaden the concept of making use of their markets to increase the level ofcorporate income tax. Therefore, we wonder whether the OECD should further explore thisdirection.

2338

Nexus and Permanent establishments
The Discussion Draft indicates it does not only deal with BEPS related topics, but also addresses
other tax challenges of the digital economy. Some of these relate to fundamental discussions withrespect to taxation rights. The suggested options to address the broader challenges include theintroduction of a new nexus concept and the modification of the Permanent Establishment (PE)status. First, we would like to note that any reconsideration of the definition of PE and/or the
introduction of a new nexus concept should go hand in hand with an analysis of the allocation of
profits to a PE. Broadening the definition of taxable presence, or reduction of the exemptions in
the PE definition, would in itself not result in attribution of (significant) profits to the PE. However,
it would lead to an increase in situations where taxable nexus /PE would exist, and therefore to
an increase in the administrative burden for international business.
In the current rule set for allocating profits, the role of (significant) people functions is
preponderant. This is aligned with the focus on value creation in the rest of the BEPS action plan.
Shifting to another methodology, like physical or even virtual presence without people functions
would – similar to the use of data as commented above – imply a significant shift with broader
consequences. The starting point should be that the digital economy is not treated differently from
regular commerce. Therefore, we would recommend the OECD not to change the allocation of
profits methodology, given the broader impact.
VAT, consumption tax and withholding tax
Liberty Global agrees with OECD’s statements in paragraph 171 that implementation of theOECD’s Guidelines on place of taxation for B2B supplies of services and intangibles seems theappropriate way to minimize any unwanted BEPS results as indicated in paragraph 170.
Furthermore, for our business it is even more important to have as the main principle that B2B
cross-border services are taxed in the country in which the customer is established and that these
are taxed through the self-assessment mechanism (main rule). This mechanism is the leastburdensome for business and at the same time it reflects the key principles of a consumption tax.
Whilst Liberty Global recognizes the need for certain specific rules for determining the place of
supply, we believe that these specific rules should be kept as minimal as possible. In order toavoid double or non-taxation, alignment of definitions of the main rule versus specific rules, aswell as establishment criteria (between direct and indirect tax as well as countries) is a key
requirement.
With regard to cross border B2C services by a non-resident supplier, Liberty Global agrees thatthe most viable option to ensure an appropriate VAT-collection is the vendor collection
mechanism through the mini One Stop Shop as implemented in the European Union. We also

3339

agree with the OECD that countries should consider the use of simplified registration schemes tominimize the potential compliance burden on businesses. At the same time, in our view it isimportant administrative requirements and audit procedures are aligned to avoid that differing
positions of tax authorities would result in an uneven burden for business.
The Discussion Draft does not explicitly discuss the option of introducing new consumption taxes.
However, it does make reference to the potential introduction of a withholding tax on digitaltransactions. Liberty Global is of the view that the existing taxation system provides a robust
basis for countries to levy taxes. Simplified procedures may reduce the administrative burden forbusiness and may enhance the enforcement of the existing rules. The introduction of
consumption taxes or withholding taxes for digital transactions - if double tax treaties would notprovide a credit for the tax withheld - would increase the tax burden, thereby harming theneutrality between digital transactions and conventional forms of commerce. It might also
increase the compliance burden if new administrative requirements would be introduced, e.g. forfiling tax returns for the new taxes or procedures to credit the withholding tax.
Features of the digital economy and its implications
The Discussion Draft contains an extensive description of the features of the digital economy. It
addresses various important topics, like network effects, first mover advantages and market
position. The Discussion Draft does not yet provide guidance on how to deal with these topics.
Specifically from a transfer pricing perspective, Liberty Global would welcome concrete andpractical guidance on how to deal with these features.
If you have any questions or would like further elaboration of any of these comments, pleasecontact us.
Yours sincerely
On behalf of Liberty Global

Marcel van den Berg
Global Head of Tax
T +1 303 784 4586
mvdberg@libertyglobal.com

4340

Centre for Tax Policy and Administration
Organisation for Economic Co-operation and Development
2 Rue André Pascal
75016 Paris
France14 April 2014
Our ref

MJZ/MJZ/MJZ

Dear Sirs
We write in response to the request for comments on the Public Discussion Draft on BEPS Action 1:
Address The Tax Challenges Of The Digital Economy 24 March 2014. We are pleased to offer ourcomments as follows.
In respect of the specific issues on which you have requested comments:•

Whether it is possible to ring-fence the digital economy from the rest of the economy, and if not,whether specific types of digital transactions could be identified and addressed through specificrules;

It is fair to say that today’s economy has digital features which in some areas determine the way
business is conducted. In other business activities digital features merely alter certain processes but do
not change the business model fundamentally. As such there is no separate digital economy just as
there is not a separate economy for other technological innovations. However the way that business is
now carried out does render certain aspects of international tax law outmoded. This does not mean thatlong established and widely recognised concepts such as the residence principle and the arm’s lengthprinciple need be set aside. We therefore feel that solutions should be developed within the existing
framework of international tax principles that underlie the OECD Model Tax Convention.

•

The key features of the digital economy identified by the Task Force and whether there are otherkey features that should be taken into account;•

The examples of new business models in the digital economy and whether (and if so which) otherbusiness models should be considered;

The discussion draft provides a useful summary of the key features of the digital economy and many new
business models that have arisen as a result of changes in technology. One striking feature of current
progress has been the acceleration of the speed of change in information technology and related fields.
There is a need to find solutions which are sufficiently flexible so that they are not quickly outdated. While
it is never easy to speculate on what the future holds it should be possible to introduce rules suitable forthe medium rather than the short term.

27971426.1

341A feature that should be recognized is the highly speculative nature of much development in this field.
For every business initiative that has a successful outcome with commercial value, many initiatives fail. It
should therefore be recognised in tax arrangements that not all ventures will be profitable andgovernments should not expect tax revenues to ensue from all activities. Tax incidence at an early pointin the value chain, irrespective of commercial outcome, will stifle investment returns. This will discourage
investors from taking the risks necessary to generate the economic benefits that flow from technologicalprogress.

•

The ability of the measures developed in the course of the BEPS Project and the current work on
VAT/GST to address BEPS concerns in the digital economy;

As the discussion draft recognises, many jurisdictions with a value added tax or other consumption taxes
use a destination principle to determine whether VAT should be charged. In our view, business tobusiness supplies create few BEPS concerns from a VAT perspective, with the exception thatbusinesses that carry out exempt activities may achieve a VAT saving in some cases. For example,
where the destination country does not operate a reverse charge, or if the supplier can charge VAT at alower rate than applies in the destination state.
Within the European Union, specific rules governing the place of supply of electronically supplied
services, coordinated at the EU level, have existed since 2002, with substantial changes in 2010, andagain from January 2015. In the case of business to business supplies, VAT is usually accounted for by
the customer in the jurisdiction where they are based, under the reverse charge mechanism. In the caseof business to consumer supplies, from January 2015, all suppliers will be required to account for VAT
based on the rates applicable where their non-business customers are based. They will either register for
VAT in each EU jurisdiction where they have customers, or in one place under a special "one stop shop"
scheme.
Compliance for consumption taxes on cross-border supplies is also a problem. The draft recognises thatthe excessive cost of collection can justify exemptions from VAT for the import of low value parcels, butheavy use of the exemptions by suppliers moving operations overseas can have a significant revenue
cost and distort competition with domestic suppliers. Similarly, it is difficult to collect VAT on the remotedelivery of services by non-established businesses (for example, software downloads, or streaming ofmusic or films). Adopting a source principle would allow suppliers to establish in low-tax jurisdictions,and individual consumers cannot be expected to self-assess under a destination system. Vendor
collection (as adopted in the EU) is perhaps the best route, but relies to an extent on enforcing
compliance extraterritorially. Compliance can be encouraged by adopting simple online registration andaccounting systems, backed by exchange of information and mutual assistance.
We believe that a solution based on consumption tax options will give rise to double taxation because
consumption taxes, such as VAT, GST, sales and purchase taxes, are particularly poorly coordinatedacross jurisdictions compared to direct taxes.

•

Whether other measures should be developed during the course of the work on other aspects of the
BEPS Action Plan to address BEPS concerns in the digital economy and if so which ones;

We believe there needs to be a close connection between the allocation of taxing rights and the ability tomeasure the amount of profit, or other tax base. For example BEPS Action Point 8 (Assure that transfer
pricing outcomes are in line with value creation: intangibles) will be of particular relevance. The
discussion draft recognises that the digital economy is characterised by an unparalleled reliance on
intangible assets. It also recognises that many areas of the digital economy rely heavily on the mobility of342
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intangibles. This mobility should not be limited by tax policies that infringe the neutrality principle andthereby create a disincentive for businesses to deploy them internationally. This would nullify much of thesocial gain that has arisen from technological progress. For example, a jurisdiction claims taxing rights
based on cash flows in relation to an intangible and then deems the intangible to be subject to an exit
charge, based on future cash flows. Those future cash flows will be taxed again in a second jurisdiction
causing double taxation, both juridical and economic, likely to extinguish the commercial viability of suchtransactions in the future.
A consensus on whether a PE has arisen will be of little value unless it is accompanied by agreement on
how to attribute taxable profit. The OECD’s 2010 Report on the Attribution of Profits to Permanent
Establishments was a helpful document in that it set out how the approved method could be applied tothree specific businesses, banking, global trading of financial instruments and insurance. A similar
approach would prove very helpful in this work too. Otherwise we are concerned that in the BEPS projecta considered and detailed approach to the practical issues could be sacrificed in order to meet tightdeadlines.
Similarly BEPS Action Point 9 covering risks and capital and BEPS Action Point 10 covering other highrisk transactions will also be important points of convergence.

•

The broader tax challenges raised by the digital economy which have been identified by the Task
Force and how these challenges should be addressed, taking into account both direct and indirect
taxation;•

The options to address these broader tax challenges discussed by the Task Force and summarisedin the discussion draft;

A distinction between those business models that have evolved as a consequence of digital technology
and those enterprises that have merely enhanced their existing business models will be useful indeveloping solutions. It would not make sense for a business that has digitally enhanced an existing
business model to face significantly different tax outcomes.
As noted above, residence based taxation has been the approach underlying much of the work done todevelop an international consensus in tax matters. While source based solutions “bridge the gaps” theyshould not predominate. We are therefore concerned lest the options outlined cause a move to taxing abusiness merely because it has customer cash flows arising in a jurisdiction but no actual part of its value
chain.
We feel that eliminating paragraph 4 of Article 5 entirely would represent a large step backward in thehistory of the OECD Model Tax Convention. Similarly to remove paragraph 4 (a) through (d) only, would
expose many enterprises to an unjustified change of tax outcome. If the feeling is that the “preparatory or
auxiliary exemption” is being abused then this should be addressed by clarifying the guidance in thecommentary. Interpretation of Article 5 has been problematic even though the guidance has been
expanded. Since there is much uncertainty on to how to apply Article 5 in practice, this is often
considered by recourse to cases in jurisdictions other than the country in question. Such cases are ofinterest because the point under consideration has been litigated there, but usually they cannot be reliedon as determinative. There are, therefore, good grounds to develop the Article 5 commentary muchfurther.
We have misgivings about the idea of a ‘virtual PE’. In any case, it would be important that a ‘virtual PE’
test should be interpreted in the same way across different countries. The factors in such a test would
need to be are applied consistently across jurisdictions. Questions such as whether all or only a numberof factors would need to be present also require similar uniformity.

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We also have concerns on the comments on the value of “Big Data”. Data itself has limited value as it is
only when data can be converted into useful information that it provides commercial advantages. The
focus should therefore be on information rather than data collection.

•

The potential cost of compliance arising from the options proposed to address the tax challenges ofthe digital economy and suggestions for more cost efficient alternatives;

Some of the greatest advances in technology come from smaller and medium-sized international
businesses. Often this is from the vision of one or more individuals who are prepared to take risks to test
and develop ideas that may not appear reasonable to larger organisations at first sight. This is especiallytrue of the information technology and communications sector. We propose that exemptions should be
extended to SMEs, especially in growth markets, to encourage innovation and to avoid stifling thecommercial application of advances in technology. This should particularly assist those economies thatare yet to fully engage with the digital economy, where capital and specialist skills may be scarce.
Many of our concerns, in fact, relate to a question of balance. A business may have some degree ofpresence, whether digital or otherwise. However it is inefficient to tax this unless that presence issufficiently significant to make it worthwhile to measure the attributable value and to incur the costs ofmaking a local tax filing. To find the right balance will always involve a challenging compromise but topush too far in either direction is neither in the interest of international development nor in the long-term
interests of governments.

•

Whether the Ottawa taxation framework principles identified above are an appropriate framework foranalysing options to address the tax challenges, and whether and how they should be
supplemented.

We agree that the Ottawa framework principles serve as a good guide with which to approach possible
solutions. We would add the ability to pay principle and the benefits principle insofar as they are notspecifically covered by the principle of ‘fairness’.

More generally we would like to make the following comments on this discussion draft:
The reform of the definition of a permanent establishment, how and when one arises and how profit
should be attributed for the special features of the digital economy should be part of a separate process.
This is partly because the BEPS timetable is a tight one and partly because it involves issues beyondbase erosion and profit shifting. Any work to produce a new Article 5 and /or commentary should involve
specifying as much detail as possible. The same is true of Article 7.
There must be a connection between the definition of a PE and the amount of profit that will be attributed
to the PE. These two issues should not be divorced. A number of model business cases should be
examined in further work. These would trace though the process from how a PE would be defined to how
a profit attribution would work.
It would be helpful to classify digital business transactions further, expanding some of the references inthe discussion draft such as “cloud services”, “fully dematerialised transaction” etc. For each one, themodel itself and the terms used to express it could be defined. Some examples could then set out the
key digital facets of the model, how these give rise to the challenges seen, how each of these would fit a
proposed solution and, for each solution, how the attributable profit would be determined under an‘OECD approved model’.

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The discussion draft acknowledges the complexity of the issues. There may be a danger that the extent
of work needed to provide practical solutions that are clear and are widely accepted may beunderestimated. Superficial guidance with widely differing interpretations between jurisdictions on digitalcommerce issues will only prove counterproductive. We believe there are many points at issue that need
to be worked through beyond the immediate priorities of the BEPS project.
Please contact the undersigned with any questions or comments.

Yours faithfully
Martin Zetter
Head of Transfer Pricing and Senior Economist
on behalf of Macfarlanes LLP
DD +44 20 7849 2945
Martin.Zetter@macfarlanes.com

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Meridian Global Services
Tallaght Business Park,
Tallaght,
Dublin 24,
Ireland

CTP.BEPS@OECD.org
OECD

14th April 2014
Comments to:
Public discussion draft,
BEPS Action 1: Address The Tax Challenges Of The Digital Economy.
Dear Sir, MadamThank you for providing the opportunity for Meridian to contribute with comments on
the BEPS Action 1 document “Address The Tax Challenges Of The Digital
Economy”.
Meridian has over 25 years’ experience in working with some 15,000 international
businesses (Multinational & SME) in providing assistance with international VAT
issues and have a staff of some 400 people dealing solely with international VAT
issues and declarations.
We are currently a member of HMRC’s group on the Standard VAT Return and aforum member of the OECD Technical Advisory Group on International VAT / GST
Guidelines (TAG).
Meridian is currently responsible for filing over 30,000 VAT/GST declarations into
multiple jurisdictions per annum for clients from predominantly Europe, North
America & Asia. We also work closely with companies that facilitate access to theglobal digital economy such as eBay, ChannelAdvisor, Digital River and many others
to raise awareness among their users of the need to be VAT / GST compliant in all
jurisdictions.
After reviewing the public discussion draft document in detail, we would like toprovide you with the following feedback based on our practical experience and day to
day discussions with businesses regarding the indirect tax challenges they experience.
We hope this feedback will aid you in your process and if you have any further
briefing or request for feedback we would appreciate the opportunity to attend and orcomment.

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Consumption Tax Challenges:
From a business perspective
•
•
•
•
•
•

Lack of awareness of current requirements
Lack of understanding of the vast array of requirements in each jurisdiction
Complexity and variety of different methods required in each jurisdiction
Filing requirements in addition to VAT / GST declarations
Increased IT Costs
Focus on running what are often relatively new businesses and the otherchallenges associated with managing geographically expanding enterprises

We have a lot of experience of clients who already find it difficult to provide thenecessary information and correct filing, on time and remit the appropriate monies tothe correct location. Indeed as the party representing these companies, we ourselves
find it an extremely onerous and burdensome task to keep up to date with all of theminute details required to successfully file VAT / GST returns and associateddocuments with each authority.
While this is the area we have specialised in for over 25 years our clients and the vast
majority of businesses we engage with on a daily basis around the world have not andare busy trying to run and manage their own enterprises.
We would suggest that as part of the options being considered to try and address thetax challenges of the digital economy, consideration should also be given to reducing
the burden on third party service providers of international tax services for these
digital economy businesses. For the following reasons;•

Lack of awareness of current requirements

In our daily experience the vast majority of businesses we engage with are completely
unaware of the VAT / GST obligations they may have in any country outside of theirown location. We find that we and other third party service providers are regularly the
first source of this information for these businesses. Through our associations withother businesses in the e-commerce sector like eBay, ChannelAdvisor etc, and ourown communications we are far more likely to have raised the issue of cross border
VAT / GST compliance than any other source. The business themselves does notknow to look for this information and is normally distracted with many other more
obvious and prominent pressures like marketplace listings, translations, payment
systems, fraud, logistics, product sourcing, customer service etc.

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•

Lack of understanding of the vast array of requirements in each jurisdiction

Indeed even those businesses we engage with who are aware of their obligations often
find the intricacies of meeting all the requirements for making a VAT / GST filings in
multiple jurisdictions to be overwhelming. Some of the most frustrating elements tend
to be around the different country specifics they need to keep abreast of e.g. in one
country you must make filing then pay, in another you must make payment then file,in some countries you must provide additional detailed invoice listings etc.
For a business engaged in the modern global digital economy they will not havegrown over a long time period and hence, not have built up internal experienced
finance and tax teams. In fact the digital economy has brought about the ability forsmall companies to grow big quick and expand without having to take on a lot of
traditional activities which would have been the norm.
•

Complexity and variety of different methods required in each jurisdiction

A medium sized e-commerce business is now very likely to be doing business withcustomers in several other countries and because of the innovative solutions available
to them they are also likely to be moving goods closer to these markets in bulk
(fulfilment solutions such as FBA from Amazon). Therefore it is very plausible for a
mid-size business to have VAT / GST filing obligations in several different countries.
In our experience where this is the case the majority will look to have a third party
provider or several third party providers manage their obligations on their behalf. The
main reason being that the business themselves does not have and has no interest in
maintaining internal resources to keep up to date with the requirements in all
jurisdictions and complete the on time filings for each jurisdiction. In nearly all cases
the business is looking for a cost efficient outsourced solution that they can trust.
•Filing requirements in addition to VAT / GST declarations

The challenges for business do not confine themselves to the filing of the VAT / GST
return. In a number of jurisdictions there are several other non-VAT / GST return
filings that must be submitted as a consequence of the VAT / GST filing. These
additional filing requirements appear to be increasing.
•

Increased IT Costs

There is a difficulty experienced among many e-commerce businesses in accessing
the required data from their systems, especially where additional specific information
on transactions is required. As these businesses expand globally they face not only theburden of making themselves aware of what additional information is required but
adapting their systems to be able to capture and report. As many work off a single
platform for all markets it is not always possible to make these changes without
incurring large costs. Third party service providers are often required to extract and348

work with raw data to produce the necessary information in the required format tosubmit. As the number of markets entered by businesses increases it is just notcommercially viable to make the changes within their systems for every jurisdiction
and manual intervention is the only option.
In our experience there is a large amount of non-compliance among e-commercebusinesses. Some of which is conscious and mainly due to the fact that they believethat no one is policing the non-compliance (or can’t). But the vast majority is due tolack of awareness or just being unable to work out how to comply. From what wehave observed in previous examples of simplification of processes by authorities forforeign businesses, the aim is not always achieved and in some cases the burden is
inadvertently increased.
For the reasons above and specifically the fact that in our experience engaging withthousands of these digital economy businesses, addressing the tax challenges that they
face directly themselves will only address part of the possible solution.
The fact remains that a large number of these businesses use third party service
providers because they do not want to maintain this expertise in-house and want thisas an option to help them grow and expand their businesses globally. The current
situation for third party service providers who specialise in international VAT / GST
services is that they are further burdened by many countries. This situation createsanother barrier to providing the digital economy with commercially competitive
solutions for businesses to choose from as a viable and attractive alternative tomaintaining international VAT / GST expertise in-house.
We would therefore suggest that another option to be considered in addressing the tax
challenges of the digital economy is the additional burden placed on third party
service providers. This segment is a potential willing and experienced contributor
through whom the necessity to be tax compliant can be communicated to the market
and from whom the concerns and pressures of businesses can be acquired. By
reducing the additional burden on third party providers as well as any burden
reduction for business directly, the costs to business will be reduced, the choice of
viable options will be increased and the overall compliance level will be increased.
Finally we would like to express our interest in attending any arranged discussion
concerning this topic.
If in the meantime you require any further information please don’t hesitate to let me
know.
Best regards____________________

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Mark O’Riordan
Chief Executive Officer
Meridian Global Services

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Patrick Breslin Comments in Response to the
Public Discussion Draft
BEP Action 1: Address the Tax Challenges of the Digital Economy(hereinafter, the “draft”)

Issued by the OECD Committee on Fiscal Affairs and Country Delegates
under the OECD Base Erosion and Profit Shifting (BEPS) Action Plan
(Comments submitted April 14, 2014)
Once again, I would like to thank the OECD Committee on Fiscal Affairs, country
delegates and other participants in the OECD BEPS initiative for the opportunity to continue
to provide comments on this important project. As noted in my prior comments relating tothis project, my views are informed by my experience as an economic consultant, which has
focused on transfer pricing, including intangibles-related transactions, as well as non-taxrelated intellectual property (IP) matters.
I also relate my experiences as an entrepreneur and business executive for a digitaltechnology company (Relatable) that participated in early stages of the market for digital
distribution of music over the Internet. With Relatable, I also testified in related copyright
infringement litigation matters and consulted for technology providers on such matters. In
addition, I weigh my experience as a consulting expert in litigation involving intellectual
property, as well as IP valuation and related issues. This consulting experience often directly
relates to the digital economy, including Internet and mobile technology-related businessmodels. I believe all of these experiences are contextually relevant to this BEPS initiative, as
it focuses on international tax issues in the digital economy.
These direct experiences with developing business models in the digital economy
spanned formative periods in the markets for digital music and media distribution andforeshadowed their continuing evolution. In these contexts, I have also negotiated multiple
arm’s length technology license agreements and other transactions involving intangibles,such as rights to copyrighted works, and valued technology solutions and enterprises.
My comments focus on the prominent role that technology development plays increating value in the digital economy. This discussion considers software intangibles
development as a primary example.

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Technology development in the digital economy: Software as an example
The draft provides a useful and comprehensive discussion on the key features andbusiness models pertaining to the digital economy. This detailed description facilitates usefulreferences to other issues handled later in the draft. Of note with respect to my comments tofollow are these observations regarding the “Evolution of Information and Communication
Technology” (ICT), paraphrasing from paragraphs 11-14:•

ICT has been characterized by rapid technology progress;•

Pressure for constant innovation results in constant cycles of price decreases andcommoditisation as newer premium technologies supersede old ones—constantly
expanding consumer access to technology;•

There is frequent movement of technology innovation to new areas in the value chain
as older elements (e.g. PCs) become standardized and lower priced;•

There is growth in specialisation in hardware devices on the part of businesses
formerly specialized in software or other parts of the value chain;•Innovative integrated packages of hardware and software, such as smartphones andtablets are becoming commonplace.

As noted in my prior comments, it is my view that a focus on technology investment
and innovation itself as a business activity (along with its corresponding risks) is essential tounderstanding value creation in these contexts. This is the case even as enterprises develop
and pursue very different business models and supply chain structures. The contributions ofparties that undertake, manage and control risky technology investments greatly impact value
creation in the digital economy, notwithstanding other potential contributions that may also
exist.
Software development (including software embedded in devices) plays a central rolein the digital economy, in part by increasing the productivity of humans and machines alike.
In examining Figure 4.A (“Layered View of ICT,” page 19), every layer is inoperable
without software. Infrastructure is supported and controlled using software. On top of it aresoftware resources—primarily software used to create more software. Accessibility tools
operate similarly for software development, as software applications are created in thisenvironment—moving directionally from development and infrastructure tools toward end
user applications. Finally, the end users must use software to access a user interface.
Furthermore, in order to function, computer hardware relies upon the software
applications relevant to its purpose. These two elements are interdependent; there is no
meaningful purpose in having one without the other. The same may be said for data and theirPage 2 of 5
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interdependence with databases, database software and, naturally, hardware. These items
operate collectively and do not have much use separately. In fact, it is increasingly the casethat automation of any equipment, computer or otherwise, is performed by embedded
software or its equivalent (i.e. on the device itself). 1
Software essentially represents a series of instructions, devised by the programmer,that are later performed (i.e. “executed”) by hardware devices compatible with the software
application. Thus, software accounts for a significant shift toward increased automation,
which gradually allows machines to perform functions formerly done by humans. The earlystages of artificial intelligence are manifest in the software development process. As noted inparagraph 179,
Advances in computing power have also meant that certain functions, including decisionmaking capabilities, can now be carried out by increasingly sophisticated software programs
and algorithms. For example, contracts can in some cases be automatically accepted bysoftware programs, so that no intervention of local staff is necessary.

Such advances will only continue. As the draft presciently notes, “as robots embedmore software and are connected to cloud-based resources, it will become both easier andcheaper to program them...” (Paragraph 36) It also foretells that “robots learn to do jobs that
previously were solely done by humans.” (Paragraph 37)
These are not purely futuristic notions. In many cases, software has long performed
functions that were once “solely done by humans” – such as automated calculations in
spreadsheet and tax preparation software, for example. None of this discussion diminishes
the value contributions of hardware and other programmable devices themselves, or the otheressential layers in Figure 4.A. The intent here is simply to focus the comments on value
creation in one key context that pervades ICT and the digital economy.
The mobility of software intangibles exceeds that of users and key business personnel
The question then arises, when and where does value creation occur when using
software that functions through the ICT chain? Most often, the software’s value is generated
at a different time and place than it ultimately functions. That is, the value is created when
and where the investments in software technology development are made, managed andcontrolled.
As the draft effectively notes in paragraph 92,
Development and exploitation of intangibles is a key feature of the digital economy. This
investment in and development of intangibles is a core contributor to value creation andeconomic growth for companies in the digital economy. For example, digital companies often
1

Note paragraph 14 which states “A relatively recent development is the advent of innovative integrated
packages of hardware and software, such as smartphones and tablets (and increasingly, connected wearable
devices).”
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rely heavily on software, and will expend substantial resources on research and development
to upgrade existing software or to develop new software products.

This view contrasts with assertions that substantial value creation takes place when
and where software functions are executed, such as when software interfaces (e.g. websites)
are accessed by consumers in the market and user data is collected. By this point, theprogrammed functionality of the software and its ability to collect, manage and process data
has already long-existed, regardless of any raw data elements it may later collect from acertain location. Thus, it is important to recognize that the mobility of intangibles does not
speak directly to the locus of their value creation.
In fact, the mobility of intangibles such as software extends far beyond the mobilityof software development managers and programmers, as well as software users. The mobilityof software intangibles is magnified by the potential for widespread distribution of copies atvery low cost (through the ICT), such as when a popular game app is downloaded bymillions of end users. However, the mobility of the skilled personnel responsible forprogramming such software is quite limited. 2 Meanwhile, the mobility of users has increased
as well. But, like the skilled programmer, the single consumer cannot replicate her/himself
and/or be present in multiple jurisdictions at the same time, though this is true for copies ofexecutable software and other intangibles.
The mobility of business functions (other than those executed by software) also arises
due to increasing use of ICT. Often, this is “as a consequence of the decreased need for local
personnel to perform certain functions.” (Paragraph 91)
Implications for value chain analysis
At arm’s length, the role and the value of a particular activity is often diminished bytechnology advances, as it becomes integrated with the activities of upstream or downstream
parties at other steps along the value chain (or becomes altogether unnecessary). As
described in the draft, new business models in the digital economy tend reduce or eliminate
steps along the supply chain through such disintermediation. For example, as noted inparagraph 64 regarding B2C models:Through digitisation of information, including text, sound, and visual images, an increasing
number of goods and services can be delivered digitally to customers increasingly remotefrom the location of the seller. B2C e-commerce can in many cases dramatically shorten
supply chains by eliminating the need for many of the wholesalers, distributors, retailers, andother intermediaries that were traditionally used in businesses involving tangible goods.
2

See paragraph 102, which notes, “First, skills and talent remain a critical resource in the digital economy.
Although many functions can be performed with limited personnel, managers, developers, software architects,
and designers, among other key functions, remain instrumental.” It also notes other limitations on thegeographic location of intangible development.
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Meanwhile, as ICT enables multinationals to reduce their reliance on personnel andphysical presence in market jurisdictions they sell into (see paragraph 123), they often
organise their supply chains by integrating activities within centralized and/or intermediarystructures. However, the draft notes it is possible for such structures to “spread [activities]
among multiple jurisdictions, away from the market jurisdiction.” (Paragraph 179) Such a
response may contradict the observed ability to disintermediate, raising questions whenstructures introduce new intermediaries in digital economy-focused supply chains.

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Organisation for Economic Cooperation and Development
2 rue André Pascal
75775 Paris Cedex 16
France14 April 2014

Via email: CTP.BEPS@oecd.org
Dear Sirs,
Comments on the Discussion Draft on Addressing the Tax Challenges of the Digital
EconomyWe appreciate this opportunity to provide our input on The OECD’s Public Discussion Draft on BEPS
Action 1: Address the Tax Challenges of the Digital Economy. The response in the pages that follow
reflects the views of the PwC network of firms, and we offer our observations on several key aspects of
the Discussion Draft. As an initial matter, we welcome the growing consensus reflected in the
Discussion Draft that the digital economy cannot be ring-fenced from the rest of the economy and thatbusinesses should not be subject to a different set of rules of taxation simply by reason of the use of
information and communications technology (ICT). We fully endorse this principle of neutrality. In
that regard, the Ottawa Taxation Framework principles are still relevant today and should constitutethe basis to evaluate options to address the tax challenges of the digital economy.
The Discussion Draft provides a good background summary concerning the development andwidespread use of ICT, and shows that nearly all sectors of the economy rely on advances in ICT todeliver their products and services, digital or otherwise. It seems to us that where the Discussion Draft
speaks of a “digital business”, it is referring to businesses which make more extensive use of ICT, i.e.,any difference between a digital versus other business is a quantitative difference in the use of ICT, notqualitative. Therefore, because the rest of the economy cannot be separated from the digital economy,
any option for addressing digital economy tax challenges should consider not only neutrality, but also
should avoid creating unintended collateral consequences for the rest of the economy.
We recognise that the BEPS Action on the digital economy is driven by a concern as to whether
existing international tax rules have kept pace with emerging new business models enabled by the
rapid development of ICT. However, we caution that these concerns should not lead to the discardingof long-established principles of international taxation on which there is international consensus.
OECD treaties are valuable to support and encourage trade in goods and services. Any perceived
concerns with, and any potential changes resulting from, the work on the digital economy should
neither endanger this nor stifle innovation and the continued use of ICT which increases both businessefficiency and productivity.
The remainder of this comment letter sets forth (A) our general observations (B) our answers to thequestions in Para. 10 of the Discussion Draft, and (C) our comments on potential options in Part VII of
the Discussion Draft.
PricewaterhouseCoopers LLP, 1 Embankment Place, London WC2N 6RH
T: +44 (0) 20 7583 5000, F: +44 (0) 20 7212 4652, www.pwc.co.uk
PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The registered office ofPricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH.PricewaterhouseCoopers LLP is authorised and regulated by the Financial Conduct Authority
for designated investment business.

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A. Our general observations
1.

The BEPS efforts on the digital economy have been driven by a concern from some states that thecurrent rules of international taxation do not give fair allocation of taxing rights. This is a question
which individual states are clearly entitled to raise. However, we urge great caution in separating
questions of base erosion and profit shifting from questions of allocation of taxing rights which are
best dealt with as part of a much broader discussion.

2. As discussed above, the economy cannot be separated into digital versus non-digital because
almost all sectors of the economy use ICT to deliver products and services. Consequently, anychanges or options that are proposed will affect all businesses and must be evaluated accordingly.
3. A common theme among the digital economy tax issues raised in the Discussion Draft is the ability
to sell into a territory without creating a taxable presence. The use of data, characterisation of
payments for services and collection of VAT are also commented upon (para. 177).
4. Looking at the examples in the paper some disquiet seems to come from the “fragmentation ofbusiness activities” and the collection of data. “Fragmentation” is not clearly defined and insofar as
it refers to the performance of business activities through different locations and entities, it seems
to us that it does not necessarily implicate BEPS concerns. In addition, the conduct of activities
through different locations and entities can occur across all sectors, not just internet or “digital”
companies. Similarly, all businesses collect customer data and many will analyse data using thetechniques allowed by modern computing. These are not new business phenomena. As the OECD
have acknowledged, any attempt to “recharacterise” transactions is fraught with difficulty.
Accordingly any “anti-fragmentation” policy would be likely to create considerable uncertainty andtherefore we question its effectiveness as an approach. If however, such an approach were to be
pursued, it would be essential that very clear principles were established to reduce that uncertainty
as far as possible.
5.

We believe the OECD should not move away from the long-standing concept within permanentestablishment of carrying on business through a fixed place of business. We would not havethought that it is possible to redefine that basic nexus standard to apply just to companies thatmake more extensive use of ICT.

6. Over the last 15 years, the OECD has undertaken significant work in defining permanentestablishment in the context of distance selling, including the work done by the Business Profits
Technical Advisory Group. The conclusion drawn from that work has been that merely selling intoa market without a physical presence or a dependent agent within the market is not sufficient tocreate a permanent establishment allowing that country to tax a share of the enterprise’s profits.
7.

We support this long established consensus. It seems to us that an individual or business based in
one territory which sells into another territory, whether by use of catalogue, telephone or internet,
should not be taxable in that other territory if they have no physical presence or dependent agent
in that other territory.

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In summary, we believe that there is no digital economy that is separate from the rest of the economy.
Nearly all businesses leverage advances in ICT and, in this sense, constitute a part of the digital
economy. As a result, any changes to existing international tax rules ought to be considered as part ofthe other BEPS workstreams, and not separately, consistent with the suggestions made in the
Discussion Draft.
B. Our answers to questions raised in Para. 10

1. Whether it is possible to ring-fence the digital economy from the rest of the economy, and if not,whether specific types of digital transactions could be identified and addressed through specificrules.

We do not believe that it is possible to ring-fence the digital economy because the digital economy
encompasses almost all sectors of the economy and to formulate different standards for the digital
economy would not satisfy the Ottawa Taxation Framework principles, including the principle ofneutrality.
2. The key features of the digital economy identified by the Task Force and whether there are otherkey features that should be taken into account.
The key feature of the digital economy is the use of ICT which nearly all businesses across all
sectors of the economy rely on to improve their businesses, increase efficiency, and reduce costs.
3. The examples of new business models in the digital economy and whether (and if so which) otherbusiness models should be considered.
We think that very few, if any, of the business models described in the report are new or novel. In
the vast majority of cases there are parallels in business models that existed long before the adventof the internet and ICT. What is different about them is the ability to conduct business throughthe use of ICT to achieve greater flexibility, efficiency, and geographical reach. This can apply in
any industry or sector.
4. The ability of the measures developed in the course of the BEPS Project and the current work on
VAT/GST to address BEPS concerns in the digital economy.
There are, as identified in the OECD’s paper, specific issues which need to be addressed in thisarea – essentially to do with compliance and identification of the supplier and/or customer. Of
the four models suggested (to determine the place of taxation and the location of the taxpayer issues currently being examined within the TAG on VAT/GST Guidelines), we agree that the mostappropriate model is likely to be the model where the supplier has the obligation to account for
VAT/GST in the country of residence of the customer, whilst acknowledging the practicaldifficulties that this may create for business. However, the requirement for non-resident suppliers
to register in the taxing jurisdiction is feasible only if facilitated through the use of de minimis
thresholds, simplified registration/compliance procedures and easy access by business to
information about the VAT-rules and obligations in the taxing jurisdiction.

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358

There is, in addition, a clear need for precision as to what services are considered to be ‘digital
services’ to which the general rules above would apply (and are not exceptions to the ‘general’
rule, e.g., land related services). Although the definitions used by both the EU and the OECD arevery much aligned in this area, identical definitions must be applied globally to prevent double
taxation. Non-digital services must be specifically excluded where the underlying service suppliedis consumed at a physical location – e.g., transport. Within the EU, substantial progress has been
made to provide a clear set of guidelines and rules for business. There may be some assistance theEU could give to other countries in respect of drafting effective rules. Enforcement, complianceand collection will remain issues and could be dealt with through greater global cooperation, in
the way that they are dealt with within the EU.
5.

Whether other measures should be developed during the course of the work on other aspects of
the BEPS Action Plan to address BEPS concerns in the digital economy and if so which ones.
We believe that the digital economy is not separate from the rest of the economy and therefore thetransformation of business from the increased use of ICT is more appropriately addressed within
the framework of the other workstreams in view of the Ottawa Taxation Framework principles,taking into account both direct and indirect tax considerations.

6. The broader tax challenges raised by the digital economy which have been identified by the Task
Force and how these challenges should be addressed, taking into account both direct and indirect
taxation.
Please see our comments above in Part A. In addition, we refer to the four areas of challenge
specified in Para. 177 as follows:






Nexus: anything done in respect of nexus could affect all businesses, not just digital, andtherefore needs to be effected through the PE Working Party.
Data: All companies collect and use data and we are not seeing any new challenges arisingthat are specific to “digital” businesses.
Characterisation: We see no new issues pertinent to “digital” businesses alone. The proper
treaty characterisation of transactions in digital products and services, including cloudcomputing, has been subject to detailed and thoughtful analysis by existing OECD
guidance.
VAT collection and compliance: See our comments below.

7, 8 The options to address these broader tax challenges discussed by the Task Force andsummarised in the discussion draft. The potential cost of compliance arising from the options
proposed to address the tax challenges of the digital economy and suggestions for more cost
efficient alternatives.
Regarding our comments on questions 7-8, please see our discussion below concerning Part VII of
the Discussion Draft.

Page 4 of 10

359

9

Whether the Ottawa Taxation Framework principles identified above are an appropriate
framework for analysing options to address the tax challenges, and whether and how theyshould be supplemented.
We strongly believe that the Ottawa taxation framework principles remain an appropriate basis foranalysing options to address any perceived tax challenges. The application of the framework
principles should be supplemented by a consideration of unintended collateral consequences.
Because the digital economy is not separate from the economy as a whole, any attempt to provide
rules that specifically target the digital economy will affect broad cross sections of the overall
economy. Please see our comments in the introductory part of this letter for our overall
comments, as well as our discussions of various potential options discussed elsewhere in thisletter.

C. Our comments on potential options in Part VII of the Discussion Draft
Part VII of the Discussion Draft merely presents options that have been raised to the Task Force, anddoes not fully analyse or evaluate their pros and cons or whether they satisfy the criterion of the
Ottawa Taxation Framework principles. We would suggest that, in further considering the options, theTask Force should evaluate them based on these framework principles and would recommend that any
perceived issues that led to these suggested options be addressed as part of the ongoing work in otherworking groups, taking into account the significant body of work that the OECD has done in the past 15
years or so, including the work done by the Business Profits Technical Advisory Group.
1. Modifications to the Exemptions from Permanent Establishment status (Part VII,section 3.1)
We are in favour of retaining the “preparatory or auxiliary exclusion” and believe that withdrawing
it would cause considerable uncertainty and potentially controversy. However, we acknowledge
that governments may feel the need to reconsider the scope of this exemption and, in particular,
whether each category mentioned in Article 5.4 of the Model Treaty needs to be of a preparatory or
auxiliary nature. If any such change were to be pursued it would be essential that it was very clear
in scope and introduced over a period of time to allow businesses to adjust their operations asnecessary. In any event, this issue will potentially affect all businesses and is a question for Action
7 rather than a digital economy only question. In addition it should be made clear that theexistence of a VAT number in a territory does not of itself create any form of PE.
2. A New Nexus based on Significant Digital Presence (Part VII, section 3.2)
This new nexus would be an alternative for businesses that are completely conducted digitally andwill be based on a significant digital presence and engaged in “fully dematerialised activity”. We
believe that this option seems to be largely a different version of similar questions that arose
several years ago with respect to business models arising from the use of radio, television, andmail-order. The conclusion has long been that merely selling into a market without physicalpresence or a dependent agent within the market is not sufficient to create a permanentestablishment allowing that country to claim a share of the enterprise’s profits. This would be a
substantial departure from those principles. We do not believe that the increased use of ICT bybusinesses warrants a departure from these long established principles.

Page 5 of 10360

Another important shortcoming of the significant digital presence PE option is that it is highly
subjective and will likely lead to double taxation and increased controversy. For example, an
economic presence PE is triggered based on certain vague and subjective standards, e.g.,“significant” number, “widely” used or consumed, “substantial” payments, etc. (para. 214). In
addition to our concerns regarding neutrality, we believe that such a new PE standard would notsatisfy the Ottawa Taxation Framework principles of efficiency (due to the potential increase incontroversy), certainty and simplicity, and effectiveness and fairness. If, despite the concerns
raised, such a change were to be pursued, it would need to be very carefully and, we would suggest,very narrowly defined.
3. Virtual permanent establishment (Part VII, section 3.3)
The Discussion Draft presents certain “virtual PE” options but indicates that they are included “forthe sake of completeness”. It is unclear whether this means that the Digital Economy Task Force is
not proposing to take forward these suggestions at this time. In any event, many of our comments
above regarding economic presence PE are also relevant to virtual PEs, including concerns from aneutrality standpoint. In addition, as more and more businesses utilise advancements in ICT,
these options will also raise the issue of unintended collateral consequences across the entire
economy. Finally, creating a new form of PE in this fashion could widely increase PE assertions,controversy, significant compliance burdens, and incidences of double taxation. It would also
create significantly increased compliance costs and burdens for business and tax authorities.
4. Withholding tax on “digital transactions” (Part VII, section 3.4)
We would suggest that the issue regarding whether withholding tax should be imposed on
payments for digital products and services should be determined under existing OECD guidanceon characterisation of income from e-commerce transactions, and we would also suggest that most“cloud computing” business models in fact are not “new” business models that should warrant achange to existing rules concerning the types of payments that are subject to withholding tax. The
Discussion Draft itself acknowledges that such business models have existed for decades (para.
26). Also, hosted software business models and other online products and services are alreadyaddressed in the 2001 OECD report on tax treaty characterisation issues arising from e-commercetransactions.
The broad international consensus for many years has been to try to minimise or eliminate
withholding taxes because taxes imposed on gross income do not take into account profitability
and can act as a deterrent to international commerce by making expansion across borders
unprofitable. In addition, this option would create important potential collateral consequences by
imposing withholding tax on broad categories of “conventional” commerce that previously were
not subject to withholding tax, for example, traditional software products, music discs and movies,
which are all digital products.
We agree with the observation in the Discussion Draft that various considerations must be taken
into account in relation to this proposal, such as trade obligations, and the practicalities ofcollecting such a tax, especially in the case of individual customers. Clarification would also beneeded as to which payments would be subject to the tax, and whether the decision for this, andthe rates of tax, would be at international or local territory levels.

Page 6 of 10361

5. Comments on consumption tax options (para. 219-224)
The Discussion Draft identified four main issues in applying indirect taxes to the digital economy– the two other issues involving exempt entities and distortions created by the use of multilocation entities (MLEs) are not specific to the digital economy and whilst they are referred to in
the Discussion Draft are not specifically commented upon here – as the work being done on theOECD’s guidelines on the place of supply of B2B services (to be formally launched at the Global
Indirect Tax Forum in Japan) and the VAT treatment of MLEs (as well as the institution of aGAAR) would, in our view, deal with the issues raised.
The specific issues identified (in relation to both digitally supplied services and low value goods
and which relate solely to B2C transactions) are:••••Identification of the supplier.
o Difficult to implement and enforce taxation at this level, for a number of practicalreasons.
Determining the extent of activities.
o This will require consistent and effective global cooperation between tax
authorities.
Information collection and verification.
o As above, with respect to global information sharing.
Identification of customers.
o Will be onerous to implement and monitor.

Our more detailed comments on these issues are provided in Appendix 1 to this letter.
The solution adopted within the EU for the application of VAT to B2C supplies of services which
are supplied digitally and which do not lead to ‘physical’ consumption, such as transport (in otherwords non-tangible services), is a good model to pursue globally and is one with which the EU andthe OECD and business through the Technical Advisory Group on VAT/GST Guidelines have beenvery much involved. In this work, business has very much insisted on the need for flexibility whenit comes to developing the appropriate proxies regarding the place of taxation. (In particular theneed on tax audit to be able to evidence these proxies to the tax authorities where it is practically
impossible for business to identify the actual residence of its customers.)
Further work within the TAG is needed in this area in order to be able to develop a robust, yet
flexible system which is satisfactory to both taxpayers and tax authorities.
Additional Comment
In Section V, para 169, the report suggests considering a CFC rule that specifically targets income
earned from the sale of digital goods and services. This proposal is at odds with the principle ofneutrality. Under such a rule, a CFC that sells electronic books would generate taxable income toits ultimate parent company, unless certain exceptions are met, while a competitor CFC that sells
the same books printed on paper would be unaffected. A CFC that sells both the electronic andprinted versions of the same books – even if both are sold to the same customer – could cause its
parent to be subject to tax on one sale but not the other. Such change should be considered by the
CFC Working Party.

Page 7 of 10362

If you would like to discuss any of the specific comments in our response please do not hesitate tocontact me or Pam Olson (pam.olson@us.pwc.com, mailto:+ 1 (202) 414-1401) or Stephen Dale
(stephen.dale@fr.landwellglobal.com, +33 156574161).
Yours faithfullyJohn Steveni
Partnerjohn-steveni@uk.pwc.com
T: +44 (0) 721 3 3388

Page 8 of 10363

APPENDIX 1: Consumption Tax Options
The specific challenges identified in the Discussion Draft, in relation to both digitally supplied
services and low value goods and which relate solely to B2C transactions, are:••••Identification of the supplier.
Determining the extent of activities.
Information collection and verification.
Identification of customers.

1.

The identification of the supplier. This is complex, as by their very nature such digital
services can be supplied from outside of the jurisdiction of the taxing authority (assumingthat the ‘model’ of taxation in the country of residence of the customer is accepted – ie
destination principle). Any destination based taxation system will have to rely heavily on
self-disclosure and registration. In this regard any taxation system must be simple tocomply with, documentation must be readily available in multiple languages, and therequirements must be communicated and updated regularly to ensure that nonestablished suppliers are made fully aware of their obligations and responsibilities. The
need for a very precise definition of a digital service is clearly key for suppliers to be able toappreciate whether they need to register, file returns etc and in which location. The issueof the identification of the supplier and ensuring its compliance is even more problematicparticularly where there are long supply chains of the services involved and where thesystems for compliance in the country of the usual residence of the customer are complex,
not available in English and non-automated.

2. Determining the extent of activities. A tax authority needs information to be able todetermine the extent of the activities carried out by a non-established supplier within the
tax authority’s jurisdiction. This issue is not specific to the digital economy as in the nondigital economy the same issues arise, but probably on a smaller scale, with goods being
sold within a territory within which the supplier is not established. The solution here, as isforeseen in relation to the B2C changes within the EU from next year, being an automatic
sharing of information between tax authorities at least on the levels of globalised
information. This cooperation between countries is essential, as the EU system for non-EU
suppliers of digital services has shown, as it has apparently recorded less than 1000
companies registered for VAT in the EU, for a system in place since July 2003.
3. Information collection and verification. This issue is directly related to the above issue, inthe sense of being able to determine not only the extent of the activity carried out in thetaxing state but also the nature of the transactions – and the applicable tax rates – how thenotion of proxies is applied etc.
4. Identification of customers. As the OECD notes in the Discussion Draft “There are inprinciple a number of ways in which a business can identify the country of residence of its
client and/or the country in which consumption occurs. These could include …tracking of
IP and card billing addresses. However, this could be burdensome for the business andwould not work where customers are able to disguise their location.” Any solution

Page 9 of 10364

proposed must achieve a balance between the amounts of VAT/GST at stake that have to
be collected and the administrative costs for business and governments related to thecollection of that VAT/GST. Getting this balance wrong discourages compliance and willlead to a distortion of competition for business engaged in cross-border B2C supplies.
The requirement which results from the application of the ‘destination’ system for nonresident suppliers to register in the taxing jurisdiction is feasible only if facilitated through theuse of de minimis thresholds, simplified registration/compliance procedures and easy accessby business to information about the VAT rules and obligations in that jurisdiction.
There is, in addition, a clear need for precision as to what services are considered to be digital
services to which the general rules above would apply (and are not exceptions to the ‘general’
rule, e.g., land related services). Although the definitions used by both the EU and the OECDare very much aligned in this area, identical definitions must be applied globally to prevent
double taxation. Non-digital services must be specifically excluded where the underlying
service supplied is consumed at a physical location – e.g., transport or other tangible service.
Another aspect of the work of the TAG on ‘rulings’, to ensure that there is consistency in thetreatments applied, is vital in this area and this work must be urgently pursued to ensure that
the VAT/GST system is neutral. Within the EU there is no problem with the VAT rules per sebut enforcement can be an issue. There may be some assistance the EU could give to othercountries in respect of drafting effective rules. It may be possible to address the enforcement
issue through greater global cooperation, in the way that it will be dealt with within the EU.
Low-value imports of goods
1.

The Discussion Draft also deals with the treatment of ‘low value’ importations of goods
which create potential distortions of competition with businesses located within the same
territory as the customer. Whether this issue is directly related to the digital economy or
more generally to the globalisation of business and even C2C trading is debatable.

2. The issue here is again one of identification of the supplier and the person liable for thepayment of the VAT due. The OECD has identified that if the tax due could be collectedfrom the suppliers, as for digital services, with a simple compliance obligation (and withde minimis thresholds) this would allow the exemption thresholds to be reduced andhence remove some of the current distortions of competition. However, the proposal by
the OECD will represent a significant burden on suppliers, the costs of which will be borneby the end consumers in higher charges, potentially creating adverse distortions ofcompetition and limiting the growth in international trade. If the existing system ismaintained, there are economic arguments which suggest that reducing the thresholds is
potentially not justified as the burdens on tax/Customs authorities are disproportionately
large compared to the tax revenues collected. Countries should be able to decide to keep
(or remove) the thresholds on a case by case basis.
As for the further work required on B2C digital supplies, the TAG should pursue work in thisarea.

Page 10 of 10365

14th April 2014

Centre for Tax Policy and Administration
Organisation for Economic Co-Operation and Development
Paris, France
Via Email: CTP.BEPS@oecd.org

RE: Discussion Draft on BEPS Action 1: Address the Tax Challenges of
the Digital Economy
We are writing in response to the OECD’s request for comments in relation to the Public
Discussion Draft on the tax challenges of the Digital Economy.
Reed Elsevier is a world leading provider of professional information solutions. We operate
across several professional market segments through five business divisions comprising of
Elsevier, LexisNexis Legal and Professional, LexisNexis Risk Solutions, Reed Exhibitions
and Reed Business Information. Reed Elsevier operates in more than 30 countries andemploys approximately 28,500 people worldwide. Reed Elsevier is the world’s fourth largest
provider of paid-for digital content.
We appreciate the serious efforts which have been made in the Public Discussion Draft toenquire into the underlying characteristics of the digital economy which cause difficulties in a
tax context and to explore options for further consideration. We have focused our
representations on the key practical issues for our businesses.
1. Challenges for international taxation
We agree, as noted in paragraph 2 of the Public Discussion Draft, that “the spread of thedigital economy also poses challenges for international taxation.” Quite apart from concerns
regarding BEPS, it is necessary and timely for the OECD to develop further guidance on thetreatment of digital business models under double tax treaties and for transfer pricing

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purposes. There are difficult issues to be addressed but we believe that these can all be
dealt with in the course of the on-going project on the chapter of the Transfer Pricing
Guidelines on intangibles, as well as some revision of the chapter on cost contribution
arrangements, and under the other BEPS action items. We feel that the key objectives, inaddition to addressing the BEPS concerns, should be to provide clarity, to avoid uncertainty
and to minimise the risk of double taxation.
2. BEPS concerns
Paragraph 122 of the Public Discussion Draft describes certain strategies associated with
BEPS including minimization of taxation in the market country by avoiding a taxable
presence, low or no withholding tax and low or no taxation at the level of the recipient. Whilethese features may be associated with BEPS, there are clearly cases where there may be
no local presence, no withholding tax or no taxation at the level of the recipient where BEPS
is not a relevant consideration. It is essential to consider the full facts and circumstances.
Example:A digital information provider based in a European jurisdiction with a tax rateof 25% provides data to hospitals throughout the world. The company will
have no presence in any country other than its home country, is providing abusiness service on which there should be no withholding tax (under OECD
principles) and there is no taxation at the level of the recipient because theseare mostly non-taxable publicly funded bodies.

The Public Discussion Draft identifies BEPS opportunities in relation to VAT in the case of
remote digital supplies to exempt businesses. Importantly, however, this is only half of theissue. Where a business provides digital services to entities which are not subject to VAT it
is very important that mechanisms exist whereby the recipient can claim appropriate
treatment.
Example:In country X digital services are not currently subject to indirect taxation. A
new indirect tax is introduced to ensure that the consumption of digital
services is appropriately taxed and foreign suppliers are required to register.
Hospitals have fixed budgets and are not able to recover all of their input tax
because their outputs are partially exempt. They would now have to either
pay the indirect tax to the foreign supplier, who registers and collects the tax,or have to apply the reverse charge and account for the tax. Either way, they
will have a reduced budget available for the actual services which theyrequire. The solution is to provide a mechanism whereby the hospitals (andother publicly funded bodies e.g. Universities, Charities) are relieved from

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applying the reverse charge or the supplier is relieved from charging theindirect tax.
It is important to deal with this issue in a balanced manner so that as well as the BEPS
concerns, the treatment of publicly funded bodies, where indirect tax on digital services is areal cost to their budgets, can be addressed. It is also important not to create distortion
between the treatment for VAT purposes of physical goods and digital services e.g. print
medical journal containing papers of the latest research into cancer treatment compared toan electronic equivalent.
3. Tackling BEPS in the digital economy
We agree that the other actions of the BEPS Action Plan will address BEPS in the context ofthe digital economy and we agree that this is a better approach than devising special
measures for digital businesses. We comment in the following paragraphs on the options
discussed in Section VII of the Public Discussion Draft. We consider that most of the options
are likely to be unworkable in practice. However, recognising that solutions have to be foundto the problem areas we then suggest an approach to applying existing international tax
principles to complex digital business models.
We comment first on the option to recognise a permanent establishment where a digitalbusiness maintains a “significant digital presence” but conventional rules would indicate thatit has no permanent establishment in the territory in question.
Example:A digital information provider, the taxpayer, based in a European jurisdiction
with a tax rate of 25%, provides data to hospitals throughout the world. It
meets the criteria set out in paragraph 213. A significant number of hospitals
in a foreign jurisdiction subscribe for data services. The customers submit asigned contract to the European home office where they are signed by the
taxpayer. As a matter of contract law the contracts are regarded as made in
the European home jurisdiction. Substantial payments are made for use of
the services.
If a digital permanent establishment is considered to exist two questions arise.
How is revenue to be attributed to the permanent establishment and how are
costs to be allocated? Revenue could be allocated according to the countryof origin. In other words revenues received in the European home country
from customers in the foreign jurisdiction would be the starting point for thetax base in the foreign jurisdiction. The foreign jurisdiction would also need toReed Elsevier
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be assured that revenues received by other legal entities within themultinational enterprise, but of a similar nature, were included in thecalculation in order to avoid artificial splitting of revenue streams. This meansthat every taxing jurisdiction would need to have a full analysis of all revenues
received by every entity in the enterprise. As a practical matter it would bequite challenging to agree on the segregation of revenues into relevant
categories and then the allocation between jurisdictions.
In order to allocate costs it would be necessary to identify which categories ofcost related to which categories of revenue, to identify appropriate allocation
keys for each category of cost and to provide every tax authorities with acomplete breakdown of costs so that they could satisfy themselves that theallocation was appropriate. The allocation key is likely to at least include thelocal proportion of global revenues. This would mean that the foreign
jurisdiction would need to know the amount of revenues received from every
country in the world, in this case there being nearly two hundred countries inwhich hospitals subscribe for data. Again, it seems extremely challenging toagree on the cost allocations without a great deal of difficulty. This
presupposes that it has been possible as a practical matter to provide thepotentially enormous quantity of information to every tax authority and thatonce received it has been possible for them to process the data.
Other difficulties arise. For example it may be possible for a hospital topurchase certain data directly from the supplier or, in the alternative, fromintermediaries or agents in other countries. Would revenues earned from an
independent agent in a third country be allocated to that country in taxing thedigital enterprise or to the country in which the ultimate purchaser, thehospital, was based? If the answer is the country of the agent, the taxation of
the revenue in that country rather than that of the hospital would clearly be a
distortion. If the answer is the country in which the hospital is located, thecompliance process would be even more tortuous.
This example is just one illustration of the extreme complexity, uncertainty and administrative
difficulty which could arise from the recognition of a significant digital presence as apermanent establishment.
Other difficulties arise in relation to “virtual fixed place of business PEs” where, for example,
a server is located. Leaving aside the difficulties of identifying which particular server carries
out a particular function in the era of cloud computing, there would be scope for abuse or
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distortion, for example where traffic might be directed to servers in particular jurisdictions fornon-business reasons.
Withholding taxes would create a number of difficulties. Withholding taxes cannot becalibrated to the profitability of a particular line of business so low margin businesses arelikely to suffer significant disadvantages while high margin businesses might be insufficiently
taxed. One consequence may be that contracts typically include “gross-up” clauses
whereby the withholding tax is, in effect, borne by the consumer so that these become
merely additional taxes on consumption rather than taxes on the profits of business activities
through which the services are provided.
4. VAT and indirect taxation
There are difficult theoretical questions as to the appropriate balance between direct andindirect taxation which need to be carefully considered. At this point, we would simply
suggest that the solution to BEPS is not to substitute additional taxes on consumption inplace of taxes on business profits which have not been collected. It would be a reasonable
presumption that, in any particular jurisdiction, consumption is already being taxed at a level
which is felt to be appropriate.
5. Application of the existing international tax principles to the digital economy
We believe that the sound application of existing principles will provide a framework for thedigital economy once further guidance has been developed to deal with difficult cases. We
agree that value chain analysis and profit methods can be effective as indicated inparagraph 166 of the Public Consultation Document. Techniques that may be helpful
include:-Developing a model of a digital business by analogy with traditional businesses-

Functional analysis which recognises the relative contribution of small numbers ofindividuals who are responsible for key IP creation-

Accepting that where there is no physical presence in a jurisdiction, profits are notearned there for tax purposes.

Example:A company collects data on widget manufacturing and distribution and sells
this data to manufacturers, distributors and consumers of widgets throughout
the world. A manufacturer in Norway provides data free of charge to thecompany in the UK where the head of global widget research is based. He
incorporates the data in his global database which is held on a server in the

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US. The software was designed by a team in the affiliated company in France
and written by software engineers in the affiliated company in India. The data
is sifted and tagged in the production centre in the affiliated company in thePhilippines. The sales contracts are negotiated with global customers andentered into by the affiliated company in the Netherlands. There is a sales
office in Tokyo which provides support to a customer in Australia which
contracts directly with the Dutch subsidiary. The customer’s global head ofwidgets is on holiday in China when he downloads the latest data. Although
he is on holiday he sees an immediate opportunity and telephones his head
office and secures a valuable contract.
The tax treatment of the various activities can be ascertained by reference tothe equivalent traditional business activities and a value chain analysis.
Norway:Although certain data originates in Norway the taxpayer has noactivity in Norway and should not be taxed there. In the
traditional environment the data might have been posted or
faxed by what is clearly a third party. The collection of data in
Norway is clearly valuable for the taxpayer but entirely outside
his control.

UK:The head of global widget research is located here. This iswhere a large part of the value is created and should be taxed.

US:

The servers are located here but this is a routine service forwhich a routine return is appropriate.

France:The software was designed here. A value chain analysis isrequired to determine how much value is attributed to thesoftware and how much to the data.

India:

Coding is a routine service and a routine return is appropriate.
(If higher value functions take place here the transfer pricing
analysis should reflect that).

Philippines:

Tagging is a routine service and a routine return is appropriate.

Netherlands: The appropriate return will reflect the degree to which risk isassumed by the Dutch company and the functions carried on
there.

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Japan:The return will be appropriate to a sales support function.

Australia:

The taxpayer has no activity in Australia and should not be
taxed there.

China:

Although the data was downloaded in China the taxpayer has
no activity in China and should not be taxed there. It may not
be apparent that the data was downloaded in China if theindividual used his company’s VPN which would route therequest for the data through the Australian customer’s servers.

The key principles that might be applied are:-to identify in each jurisdiction the analogous non-digital business, taking into
consideration the functions, assets and risks;-

to recognise, where relevant, that very small numbers of individuals might represent
the heart of the value creation in a particular business (in this example, in the UK);-not to apply a “force of attraction” principle to attribute additional value to routine orsecondary activities where these are, in substance, routine or secondary in nature.

6. Specific comments
Is it possible to ring fence the digital economy?
No because every digital business is at least to some extent traditional and every traditional
business is at least to some extent digital. It is not possible to identify a clear boundary.
Are there other key features?
In the digital economy, technology platforms are increasingly costly and are likely to be
jointly developed by members of a multinational enterprise. Work is urgently needed to
update the Transfer Pricing Guidelines for cost sharing arrangements involving the joint
development of intangibles such as technology platforms. One area which requires
particular attention is that of assets which are developed over a long period of time where
the allocation of costs to a jurisdiction in which the asset is brought into use may take place
long after the original costs were incurred. There may be no mechanism for adjusting thecost allocation once periods of assessment in the original jurisdiction are closed. Other
areas of difficulty include the identification of appropriate allocation keys where theReed Elsevier
Group plc

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Fax +44 372(0)20 7166 5799
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Registered Office 1-3 Strand, London
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reasonably anticipated benefit is highly uncertain and the treatment of changes in ownershipinterests or cost shares of cost-shared assets like technology platforms.
Are the Ottawa taxation framework principles still appropriate?
Yes.
Are there more compliance cost efficient alternatives?
Despite the difficulties in applying the arm’s length standard in the digital economy, we
strongly agree with the OECD that the alternative of formulary apportionment would result ina much higher degree of uncertainty and a risk of multiple double taxation. While it is difficult
to apply the conventional approaches to the digital economy it is even more difficult to devise
a satisfactory basis on which to allocate revenue and costs to all relevant jurisdictions on thebasis of formulary apportionment. This problem will be exacerbated by the way in which thedigital economy facilitates trade with larger numbers of jurisdictions than was possible in thepast. The traditional allocation keys of revenues, employees and physical assets are
extremely hard to apply in businesses where the revenues cannot easily be allocated tojurisdictions, employees are highly mobile and there are no physical assets. Although it may
be difficult for tax authorities to agree the allocation of profits according to conventional
methodologies, it will be far more difficult for large numbers of jurisdictions to agree to theoutcome of formulary apportionment.

Paul Morton
Head of Group Tax
Reed Elsevier Group plc

Reed Elsevier
Group plc

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LondonWC2N 5JR

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Revenue Department of Thailand
I am very impressed with the work of the OECD.
It is well known that profit shifting impacts not only on the work of tax jurisdictions andgovernment budgeting but also on ordinary taxpayers, including SMEs, and ultimately on themacroeconomic stability and social cohesion of a country.
It is widely felt, across all sections of society, that the tax system should be fair andcomprehensive, where economic activities create value in accordance with the principles oftax legislation.
On the topic of OECD BEPs, I would appreciate it if your organisation could comment on thefollowing points:
1.

Regarding the concept of permanent establishment (PE) which at present does notdifferentiate between businesses(one size fit all). Therefore, in numerous cases, thedefinition of PE as a place of management or people can easily be abused and create
many loophole which does not match with real business economic activities,
Thus, if it is possible for the OECD and member countries to refine its definition inaccordance with the nature, business purpose, result from significant value chain
analyst to distinguish which function is profit center or support(cost) center and also
economic value creation of the taxpayer’s business, which may all differ frombusiness to business.
For instance, by refining the elements that are value chain analyzed in order toestablish whether a taxpayer qualifies for PE status according to its online, database, place where customer are, manufacturing and distribution activities. Value chain
analyst for PE, it may be the case that the definition of PE for trading may consider
manufacturing and distribution activities and physical flow (rather thandocumentation flow) as elements in arriving at a definition of PE (group PE for thebusiness), which may differ from the concept of PE for construction or e-commercebusinesses.
At present, the definition and the mechanics for establishing PE are prone to abuse
through loopholes which are exploited by MNEs, because a crucial element in thecurrent definition centres on the location of management rather than the real businesspurpose which could include the location of manufacturing and distribution activities.
Thus, adding business purpose as one of the criterias for PE recognition may also help
to close loophole of avoiding tax law principle.

2. Regarding a tax standard, the OECD and developed countries may wish to set up an
International Tax Board to develop best practice for each tax issue/area.

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This Board would have responsibility for setting up international tax standards for eacharea, for example responsibility for definying PE or for setting up an international tax
standard, similar to the International Tax Reporting Standards. This Board would also
assume responsibility for developing tax audit methodologies, rule of CPA for tax auditing
which may be applied to developing countries to comply within the same standard as
developed economies.
Lastly, I wish to express my appreciation for all of the OECD work on BEPS and othertopics.
Best Regards,
Mr. Chalermphong Tungboriboonrat
CPA-Thailand, Tax Economist
Revenue Department of Thailand
c.tungboriboonrat@gmailcom

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SAP AG
Dietmar-Hopp-Allee 1669190 Walldorf
Deutschland
T +49 6227 7-47474
F +49 6227 7-57575
www.sap.com

OECD
2 rue André Pascal
75016 Paris
FRANCE
14 April 2014

Public Discussion Draft − BEPS Action 1: Address the Tax Challenges of the Digital
EconomyDear Mr. Russo,
We appreciate the opportunity to comment on the OECD Public Discussion Draft “BEPS
Action 1: Address the Tax Challenges of the Digital Economy”. SAP is one of the leadinginternational providers of enterprise applications and one of the largest independent software
manufacturers. Headquartered in Germany, we have more than 253,500 customers in over 180
countries and more than 66,500 employees in more than 130 countries worldwide.
We welcome the discussion draft’s thorough look at the digitalization of the economy and related
tax implications, given the globalization of the economy which implies an increasing“virtualisation” of the trade and business. Considering the proposals made in the draft for direct
and indirect taxation, we would highlight the following:
Regarding direct taxation
 From a general perspective, we do not share the view, that the taxation of digital activities
requires a separate set of tax rules. In our view, the other actions addressed in the BEPS
Actions Plan are sufficient in this regard.
 Nevertheless, if the OECD wants to increase the taxation right for digital activities in a market
country, from our perspective, option (1), i.e. the amendment of the exception catalogue in
Article 5 par. 4 of OECD Model Tax Convention, seems to be the only feasible approach
which can be effective, fair and simple, provided that an obligatory arbitration process isintroduced in case of issues of double taxation. The other three options i.e. a new nexus basedon significant digital presence, a virtual permanent establishment or the creation of awithholding tax on digital transactions, are, in our view, not appropriate to distinguishtraditional activities from digital activities, lack legal certainty, would significantly increase
the administrative burden and also lead to significant double taxation. Therefore, we strongly
recommend to not introduce options (2), (3) and (4).
 Finally, the discussion draft is very focused on the pure definition of a permanentestablishment, while the relating profit allocation is underrepresented. However, what all three

SAP AG
Vorstand: Bill McDermott (Co-CEO), Jim Hagemann Snabe (Co-CEO), Werner Brandt, Gerhard Oswald, Vishal Sikka
Vorsitzender des Aufsichtsrats: Hasso Plattner, Registergericht Mannheim HRB 350269
Deutsche Bank AG, Heidelberg (BLZ: 672 700 03) Konto: 0912030, SWIFT-BIC: DEUT DE SM 672, IBAN DE78 6727 0003 0091 2030 00

376

permanent establishment relevant options have in common is a missing alignment between thedefinition of a permanent establishment and the significant people functions approach. If theOECD intends to retain this standard as it is, the proposed permanent establishment definitions
would have no significant impact on the market countries’ tax revenue. However, if the OECD
intends to modify or even suspend the significant people functions approach in certain areas
like the digital economy, this would weaken the overall coherence. We would welcome further
insights from the OECD on this topic.
Regarding indirect taxation
 In our view, the two measures proposed, i.e. exemptions for imports of low valued goods andremote digital supplies to consumers, are acceptable.
 However, when implementing the measures, it should be considered that compliance andadministrative burdens for the businesses will arise which will result in higher costs for the
suppliers. If such burdens will not be minimised, it is inevitable that such increased costs will
be passed on to the customers. If this is not possible, depending on the business model, somebusinesses might be endangered by the cost of such measures.
Attached please find our detailed comments on the key aspects of our concern. We would bepleased to discuss our considerations at your convenience.

Best regards
Ina Schlie
SVP Global Tax / SAP AG

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Comments on the Public Discussion Draft − BEPS Action 1: Address the Tax Challenges of
the Digital Economy

I.

Introduction

We refer to the “Public Discussion Draft − BEPS Action 1: Address the Tax Challenges of theDigital Economy” and the opportunity to comment on such Discussion Draft. Given the
globalization of economy which goes in line with increasing “virtualization” of trade and business,
the taxation of the digital economy is rapidly gaining importance in practice. Accordingly, SAP as
one of the leading international providers of enterprise applications and one of the largest
independent software manufacturers is very interested in a sustainable international framework ofdefinitions and regulations. We therefore very much appreciate your efforts in developing
guidance in this highly relevant tax matter and, in particular, the release of the present interim
discussion draft. We are pleased to provide our comments on the draft and, hopefully, tocontribute useful thoughts from our practical view.
Our comments are not intended to be comprehensive but are focused on the key aspects of ourconcern. Our comment letter concentrates on the following options:
Direct taxation:•

Option (1): “Modifications to the Exemptions from Permanent Establishment Status”•

Option (2): “A New Nexus based on Significant Digital Presence”•

Option (3): “Virtual Permanent Establishment”•

Option (4): “Creation of a Withholding Tax on Digital Transactions”.

Indirect taxation:•

Option (1): “Exemptions for Imports of Low Valued Goods”•

Option (2): “Remote Digital Supplies to Consumers”.

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II.

General remarks

Taxpayers are particularly interested in a stable regulatory framework. Changes to the existing tax
systems require adjustments of existing processes and usually lead to a high administrative
burden. Against this background, we appreciate that none of the proposals in Section VII.
Subsection 3. of the discussion draft aims at introducing a completely new and separate tax regime
for the digital economy, as has been proposed e.g. in the “Collin-Colin-Report” 1. Instead of ringfencing the digital economy, any options to reform the taxation of digital activities should take theexisting tax rules as a starting point and changes should be kept to a reasonable minimum.
We would expect that any design of specific tax rules for the “digital economy” would start with adefinition of the scope. In this regard, it is essential to reach an alignment on the term “digital
economy”. However, the economy as a whole is digitized. Thus, we see it critical to determine
rules for the so-called digital economy that are compatible with the overall economy.
From a methodological standpoint, we agree with the OECD’s approach to evaluate potential
options to address the broader tax challenges raised by the digitized economy by referring to a setof pre-defined principles, namely neutrality, efficiency, certainty, simplicity, effectiveness, fairness
and flexibility (par. 204-208; referred to as “Ottawa-principles”). Instead of a pure “best-practice
approach”, we share the OECD’s view that a principle-based framework is an adequate starting
point for deriving an internationally accepted and systematically sound consensus. However, as
any principle is subjective by its nature and therefore discussable, we recommend a clear
hierarchy, i.e. relative weighting of these principles, if two or more principles conflict. From thestated principles, we consider “fairness” as the most subjective one. In order to have an objective
starting point, we would appreciate a definition this term.

1

Cf. Collin, P./Colin, N., Mission d’expertise sur la fiscalité de l’économie numérique, Janvier 2013,
http://www.economie.gouv.fr/files/rapport-fiscalite-du-numerique_2013.pdf

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III. Direct Taxes
1.

Comments on Option (1): Modifications to the Exemptions from Permanent
Establishment Status (par. 211)

While preparatory and auxiliary services are not being qualified as permanent establishments(PEs) according to the current version of Article 5 par. 4 of the OECD Model Tax Convention (socalled exemption clause), option (1) proposes to grant the market/source country a general right totax also those kind of services. Technically, this would essentially require a significant
amendment of Article 5 par. 4 lit. (a) – (d) or even of par. 4 in its entirety.
The general question whether such services should be taxed in the source country cannot beanswered in pure economic terms. Instead, such a decision is normative and therefore also
depends on the political will of the governments. Hence, only under the assumption that the
granting of an additional taxation right to the respective market country is desirable from anormative (tax political) standpoint, option (1) may be regarded as effective as well as fair. Also,
as compared to the other options proposed in the draft (please refer to the following sections of
this comment letter), a modification of Article 5 of the OECD Model Tax Convention appears tobe the least complex measure as regards the implementation. Furthermore, it seems to be relatively
advantageous in terms of simplicity, albeit existing double tax treaties would need to be adjusted
accordingly. In addition, neutrality across industries would be safeguarded, because no distinction
between digital activities and “other activities” would be made under option (1).
However, there are also critical aspects associated with option (1). In essence, we note a
fundamental dilemma between the definition of a permanent establishment (PE) and the allocationof profits (and losses) based upon the “significant people functions approach”. Since thesignificant people functions approach is increasingly gaining importance in other areas of transfer

5380

pricing, most notably in the context of intangibles 2, we assume that the OECD, in general, still
regards this approach as appropriate and therefore intends to hold on to it.
However, we suspect that the introduction of the PE concepts newly proposed in the discussion
draft is of limited use in light of the significant people functions approach. For instance, if thefunctional and risk profile of the local service providers remains limited to “routine functions”, as
it is the case with auxiliary and preparatory services, the profit (or loss) portion allocable to such a
PE should be insignificant due to a lack of significant people functions located in that PE.
For sure, this dilemma could be solved by developing alternative allocation keys which are fully
decoupled from people functions. However, any deviation from this currently applied OECD
standard would question the credibility of the significant people functions approach as such andtherefore requires a convincing justification. Auxiliary activities that have been regarded for
decades as “routine functions” should from now on be classified as “core functions” (par. 152),
consequently requiring a compensation that exceeds a mere “routine compensation”. Such ajustification appears arbitrary and therefore not convincing as a similar (arm’s length) transaction
would not be found in practice. Also, there might be other areas where the appropriateness of asignificant people functions approach is doubtful. If one exception to the significant people
functions is being granted, it needs to be justified why others are rejected. The discussion draft
does not address any such fundamental questions. Furthermore, in terms of its practicalapplication, option (1) would increase the administrative burden.
Against this background, we are concerned that the establishment of a PE in case of auxiliary andpreparatory services would lead to significant additional administrative burdens on the taxpayer’s
side (filing of tax returns, calculation of tax attributable to the source country, calculation of2

Cf. the Revised Discussion Draft on Transfer Pricing Aspects of
http://www.oecd.org/ctp/transfer-pricing/revised-discussion-draft-intangibles.pdf.

6381

Intangibles,

30

July 2013;

creditable taxes in case of credit method in the resident country etc.), but not necessarily go alongwith a significant gain of tax revenues from the perspective of the respective market jurisdiction.
Overall, the introduction of a PE status due to preparatory and auxiliary functions in conjunction
with the existing significant people functions approach is neither efficient nor simple in terms of
its practical application.
Moreover, there is a high risk of double taxation, if the involved jurisdictions fail to align on thedetermination of a PE and the profit attributable to such a PE. Thus, an obligatory dispute
resolution mechanism is essential according to which national tax administrators are required tocope with each other and obliged to find a solution in a time-efficient way. Otherwise, (legal)
certainty would not be ensured under this approach.

2.

Comments on Option (2): A New Nexus based on Significant Digital Presence (par.
213-216)

Unlike the first option, the second option does not aim at a general modification of existing Article
5 of the OECD Model Tax Convention, but proposes to introduce a specific PE status. According
to the first alternative, a (“digital”) PE is deemed to exist, if an enterprise conducts a “fully
dematerialised digital activity” in the market jurisdiction (first test), and if this activity
additionally implies a “significant digital presence” (“nexus”) therein (second test).
In a first test, a digital activity is deemed “fully dematerialised” under the following conditions(criteria catalogue according to par. 213):(1) “The core business of the enterprise relies completely or in a considerable part on digital goods ordigital services.
(2) No physical elements or activities are involved in the value chain other than the existence, use, or
maintenance of servers and websites or other IT tools and the collection, processing, andcommercialisation of location-relevant data.

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(3) Contracts are concluded exclusively remotely via the Internet or by telephone.
(4) Payments are made solely through credit cards or other electronic payments using on-line forms or
platforms linked or integrated to the relative websites.
(5) Websites are the only means used to enter into a relationship with the enterprise; no physical stores oragencies exist for the performance of the core activities other than offices located in the parent
company or operating company countries.
(6) All or the vast majority of profits are attributable to the provision of digital goods or services.
(7) The legal or tax residence and the physical location of the vendor are disregarded by the customer anddo not influence its choices; or(8) The actual use of the digital good or the performance of the digital service do not require physicalpresence or the involvement of a physical product other than the use of a computer, mobile devices orother IT tools.

In a second test, a “significant digital presence” is assumed to exist in the following cases, which
are understood as “examples” (first alternative):(1) “A significant number of contracts for the provision of fully dematerialised digital goods or services
are remotely signed between the enterprise and a customer that is resident for tax purposes in the
country.
(2) Digital goods or services of the enterprise are widely used or consumed in the country.
(3) Substantial payments are made from clients in the country to the enterprise in connection with
contractual obligations arising from the provision of digital goods or services as part of the enterprise’score business; or(4) An existing branch of the enterprise in the country offers secondary functions such as marketing andconsulting functions targeted at clients resident in the country that are strongly related to the corebusiness of the enterprise” (par. 214).

According to the second alternative, “a significant digital presence could be found where an
enterprise engaged in a fully dematerialised digital activity does a significant business in the
country using personal data obtained by regular and systematic monitoring of Internet users in that8383

country through the use of multi-sided business models” (par. 215).
Option (2) would generally fulfil the requirement of effectiveness if the overall goal is to enablesource countries to tax certain digital activities. In addition, due to the BEPS debate, MNEs
engaged in the “digital economy” are expected to pay their “fair share of tax”. Hence, fairness
might be achieved under option (2) (again, depending on the interpretation of “fairness”).
However, option (2) has specific disadvantages. One of its most critical aspects is the violation of
the principle of neutrality. Obviously, option (2) is exclusively tailored to enterprises conducting
digital activities. One might likewise argue that this limited scope of option (2) is not fair (thisagain shows the vagueness of the fairness principle). Moreover, a special tax treatment of digital
activities is obviously not in line with the statement of par. 205, that “ring-fencing the digital
economy as a separate sector and applying tax rules on that basis would be neither appropriate nor
feasible”.
On a more technical level, assuming that the criteria listed in par. 213 need to be tested
cumulatively, it appears that the “criteria catalogue” is overly broad and thus not in accordancewith the principle of simplicity. As the criteria catalogue contains numerous undefined terms, suchas “physical elements”, “considerable part” and many others, it also lacks legal certainty.
Moreover, from our perspective, its appropriateness (efficiency) to distinguish fully dematerialized
digital activities from other activities is more than doubtful. For instance, “payments that are madesolely through credit cards or other electronic payments using on-line forms or platforms linked or
integrated to the relative websites” (criterion (4) of par. 213) have become the standard for the
economy as a whole and thus are not specific to so-called fully dematerialized digital activities.
Criterion (6) of par. 213 is somewhat circular. Whether “the vast majority of profits” should beallocated to local market activities (or not) is the overall question which needs to be solved, but
not a prerequisite for the existence of a PE. The definition of a PE on the one side and the9384

allocation of profits (losses) on the other side should be kept separate. Furthermore, one could
argue that the “legal residence and the physical location of the vendor”, as referred to in
criterion (7) of par. 213, is generally not decisive from a potential buyer’s angle, apart from e.g.
any “buy-local” considerations. Similarly, the appropriateness of a reference to the “actual use of
the digital good or the performance of digital service” (criterion (8) of par. 213) is questionable,considering that the “actual use” after a sale of a good or a provision of services is normally notunder the control of the seller or provider.
Not only the criteria for the identification of a fully dematerialised digital activity, but also therelevant criteria for testing the existence of a “significant digital presence” (“nexus”) are vague.
This especially holds true for the second proposed alternative, according to which “a significant
digital presence could be found where an enterprise engaged in a fully dematerialised digital
activity does a significant business in the country using personal data obtained by regular andsystematic monitoring of Internet users in that country through the use of multi-sided businessmodels” (par. 215).
Against this background we are concerned that option (2) would trigger significant administrative
burdens for multinational entities (MNEs), which may be passed on to the customers, while thepositive effect on the market country’s tax revenue is uncertain. First of all, one has to keep inmind, that e.g. start-ups in the digital economy are usually generating losses in the beginning of
their lifecycle. In this case, the question is more about an allocation of losses than of profits.
Even more problematic, however, is the systematic dilemma between the definition of a PE andthe allocation of profits and losses to the market/source country based upon the “significant people
functions approach”. This dilemma is most visible in the second criterion of par. 213. According
to this criterion, a fully dematerialised digital activity is assumed to exist only in cases where“[n]o physical elements or activities are involved in the value chain other than the existence, use,
or maintenance of servers and websites or other IT tools and the collection, processing, and

10

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commercialisation of location-relevant data” (criterion (2) of par. 213). Conversely, if any
physical element is part of the value chain (apart from the routine functions mentioned in par.
213), the fully dematerialised digital activity test would be negative and hence no digital PE would
exist.
We assume that (human) employees performing significant people functions would qualify as a“physical element” in the sense of par. 213. Hence, the definition of a fully dematerialised digital
activity and the allocation of profits referring to employees with a significant function are exactly
excluding each other. Although (or because) a digital PE is deemed to exist due to the lack ofphysical elements in the market country, the profit (loss) allocation to that PE would be
insignificant as no significant economic activity takes place.
Apparently, the problem that the significant people functions approach fails to deal with PE
concepts exclusively designed for digital activities is also recognized in the discussion draft. Par.
216 contains a brief indication that the digital PE concept proposed under option (2) would
potentially require a “modification of the current rules for the attribution of profits to PEs”.
Against this background, it would therefore be of particular interest to know how the OECD is
intending to resolve this dilemma. No further indication is given in this regard. Again, it needs tobe emphasized that any deviation from the significant people functions standard undermines theoverall coherence and therefore needs a convincing justification.
In summary, option (2) is likely to end up in disputes with local tax administrations not only about
the PE status of a digital activity, but also with regard to the profit portion that needs to beallocated to the market country. Due to the vagueness of the proposed criteria we see a high risk of
double taxation. For start-ups in the digital business this might create severe trade barriers forentering new markets due to a significant administrative and compliance burden including long
periods of litigation or mutual arbitration across multiple jurisdictions. Considering the mentioned
issues, we oppose option (2).

11

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3.

Comments on Option (3): Virtual Permanent Establishment (par. 217)

From our perspective, the three models which are briefly discussed under the third option, namely
a “virtual fixed place of business PE”, a “virtual agency PE” as well as an “on-site businesspresence PE”, are even more theoretical and therefore less feasible than the options (1) and (2).
The models consolidated under option (3) would not only lead to a further erosion of theconventional PE notion, but would also be ineffective with regard to the profit (loss) allocation, as
none of them would require a personal presence in the source country. Without any local
performance of significant people functions, it can hardly be argued that the significant part of the
profit should be allocated to such a PE in the market jurisdiction. Stated differently, there would
be a considerable mismatch between the additional administrative burden on the taxpayer’s sideand the real increase of tax revenue in the source countries.
Overall, we understand that the three models consolidated under option (3) are just mentioned “forthe sake of completeness” (par. 217). We agree with the OECD that the three models should not
be contemplated as an option. We therefore do not discuss these models in more detail in thiscomment letter.

4.

Comments on Option (4): Creation of a Withholding Tax on Digital Transaction (par.
218)

The last option proposed (4) is the imposition of a final withholding tax (WHT) on certain
payments made by residents of a country for digital goods or services provided by a foreign ecommerce provider (par. 218). Consequently, instead of directly taxing the provider of a digital
good or service, the respective service recipients would be in the scope of such a tax. Under thepremise that the country of the customers should receive a (greater) share of the profit basegenerated by digital activities, option (4) might be considered as fair. However, as explained in the

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next paragraph this is not the case. Additionally, a WHT is often considered a simple solution, as
it avoids e.g. lengthy discussions on the definition of a PE.
We, however, think that there are substantial arguments against such a WHT. First of all, a WHT
on digital transactions would obviously violate the neutrality principle. From an economic
perspective, it is not understandable why similar business models should be treated differently(“ring-fenced”) for tax purposes (e.g. sale of e-books versus hardcopies). We are concerned thatsuch a WHT would discourage investments in innovative business models (e.g. cross-border cloudservices). Such a ring-fencing cannot be desirable from an economic perspective.
Furthermore, in the past, withholding taxes were steadily abolished, thus giving the taxing right tothe country of residence instead of the country of source. For examples, the OECD Model Tax
Convention does not grant a taxing right for royalties to the source country but only to theresidence country (Article 12). This is justified insofar as the residence country had the burden of
the costs for research and development and thus should also be entitled to tax the income fromresearch and development.
Moreover, imposing a WHT very likely ends up in economic disadvantageous double taxation
scenarios. The first reason for such a double taxation is the common mismatch on determining the
WHT. While the WHT is generally determined on a gross basis in the source country, theresidence country determines the WHT on a net basis. This creates an extra tax burden if the tax
basis in the source country is higher than the tax basis in the residence country and creditable
taxes are determined according to domestic rules. Another reason for a double taxation is thegeneral fact that the residence country only accepts those foreign taxes to be credited, which areequivalent to the domestic taxes. In tax practice, it is often the case that not all foreign taxes canbe credited in the residence country, resulting in excess tax credits. Further issues occur if thesource country interprets its source taxation extensively.

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In addition, the imposition of a final WHT on certain payments made by residents of a market isfar away from being simple. In reality, a WHT would create a significant administrative burden.
Especially from the perspective of start-ups, such administrative burdens would certainly beperceived as factual trade barriers for entering new markets. It also needs to be kept in mind thatstart-ups are usually suffering from losses in the first periods of their existence. However,generally, no tax credit would be available for them in such cases in their residence country. In
conclusion, we strongly oppose option (4).

IV.

Indirect Taxes

1.

Comments on Option (1): Exemptions for Imports of Low Valued Goods (par. 220-221)

We appreciate that competitive distortions shall be eliminated. However, when reducing the(materiality) thresholds for VAT exemptions for imports of the “low valued goods”, the countriesof importation should implement administrative simplifications for the import of such goods.
Alternatively, these simplifications can also be established in the country of residence or countryof export. When allowing the suppliers e.g. to declare such imports in their country of residence,
the local fiscal authorities would forward the import declaration and the respective import duties
to the country of destination.

2.

Comments on Option (2): Remote digital supplies to consumers (par. 222-224)

Generally, the taxation at the place of consumption is appreciated. Nevertheless, it must be
acknowledged that the obligation of the suppliers to register and account for VAT in as many
foreign jurisdictions as they have consumers of remotely delivered services will definitely impose
compliance burdens and increase administrative efforts on these suppliers (instead of “may impose
compliance burdens” according to par. 223). Such burdens will lead to increased costs which may

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be passed on to the consumers. Simplifications (e.g. registration regimes or registrationthresholds) will neither compensate the fact that businesses will have to deal with increased
compliance cost nor that the local VAT law of each jurisdiction is applicable to the taxable supply
at the place of consumption.
The applicability of different VAT jurisdictions could result in several audits conducted at thesame time. In total, this leads to increased administrative costs in comparison to the taxation at theplace where the supplier is established and where he would only need to deal with the local tax
authorities. Overall, depending on the business model, some businesses might be endangered by
the cost of such measures.

V.

Conclusion

1.

Direct Taxes

From a general perspective, we do not share the view, that the taxation of digital activities requires
a separate set of tax rules (Action 1 of the BEPS Action Plan). We think that the other actions
addressed in the BEPS Actions Plan, which are also addressed in par. 143-171 of the draft, aresufficient in this regard.
If the OECD, however, wants to increase the taxation right for digital activities in a market
country, from our perspective, option (1), i.e. the amendment of the exception catalogue in Article
5 par. 4 of OECD Model Tax Convention, seems to be the only feasible approach which can beeffective, fair and simple, provided that an obligatory arbitration process is introduced in case ofissues of double taxation. The other three options, i.e. a new nexus based on significant digitalpresence, a virtual permanent establishment or the creation of a withholding tax on digitaltransactions, are, in our view, not appropriate to distinguish traditional activities from digital

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activities, lack legal certainty, would significantly increase the administrative burden and also leadto significant double taxation. Therefore, we strongly recommend to not introduce options (2), (3)and (4).

2.

Indirect Taxes

We think that both measures are acceptable. However, when implementing the measures, it should
be considered that compliance and administrative burdens for the businesses will arise which will
result in higher costs for the suppliers. If such burdens will not be minimised, it is inevitable thatsuch increased costs will be passed on to the consumers. If this is not possible, depending on thebusiness model, some businesses might be endangered by the cost of such measures.

*****

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OECD Secretariat
Per e-mail:CTP.BEPS@oecd.org

Basel, 14 April 2014
St. 30 / JBR

Discussion draft on Action 1 (Tax Challenges of the Digital Economy) of the
BEPS Action Plan
Dear Sir or Madam,
The Swiss Bankers Association, the leading professional organisation of the Swiss financial centre, would like to take the opportunity to comment on Action 1 of the BEPS
action plan.
We recognize that the Task Force has received a difficult mandate and that it does its
best to present solutions. We note that the draft does not offer any definition of the“digital economy”. This lack of definition creates some confusion and uncertainty. We
are of the opinion that a distinction should be made between the two following trends:(i) the increased impact of information and communication technology (ICT) on traditional business models leading to a digitalized economy and (ii) the development of
new business models not linked to the traditional economy. We suggest that the draft
gives a definition of the “digital economy” that we would rather call “virtual economy”.
As far as the digitalization of the existing real economy is concerned, we strongly advise to refer to the other actions of the BEPS action plan and not create new rules forthe purpose of Action 1. Concerning the virtual economy, there might be a need for a
deeper discussion and an evaluation on whether or not a new action point is necessary.
For the financial sector, cost could be reduced thanks to digitalization: for example outsourcing is possible typically in the fields of IT development, call centers and backoffice. Outsourcing takes place mainly from high cost countries to emerging countries
such as India, Poland and the Philippines, to the benefit of the customers and of theseemerging economies. In order to comply with consumer protection policies, the financial sector has to perform data mining: this allows a better assessment of consumer
needs, of consumer product knowledge and of consumer risk profiles. To comply withvarious regulatory initiatives (in particular in the field of money laundry), the financial
sector must also invest in data mining to prevent and detect money laundry activity. In
addition, recent developments towards automatic exchange of information, e.g. FATCA,
require substantial new efforts in the collection of client/consumer data. Similar devel-392

opments in the area of consumer protection are also observed in other economic sectors as well and not only in the highly regulated financial sector.
Taxation is traditionally levied on the proceeds of flows of goods and services, on laborand assets in a real economy. When and where the e-commerce interfaces with thereal economy then there is taxable substance. The interface between the e-commerce
and the exchange of goods or services is generally linked to a payment. For example
when the result of e-commerce is the cross-border flow of goods, such a delivery is
subject to VAT when entering the country of the customer and sale proceeds are subject to direct tax at the place of incorporation of the provider.
For payments on the Internet the consumer can choose between credit cards or debit
cards. To a certain extent there is a combination between the use of debit cards andvouchers like units (like iTunes cards). All these cards have in common the fact thatthey are linked to a legal tender or a bank account. The account is credited and thedebit card is charged with a reference to a legal tender.
Latest developments in the digital world have however created opportunities to develop
business in a completely virtual environment. These developments are primarily supported by a payment system using “credit-units” that are independent from any legal
tender. Conventional payment systems including credit and debit cards are always
linked to a real “account”. Credit-units like “Bitcoin” are created or “mined” in a pure
digital environment. Whereas a legal tender reflects to a certain extent the value of a“real” national economy, virtual credit units do not. The detachment of a virtual credit
unit from any real national economy is to a certain degree manifested in the “hypervolatility” of for example Bitcoin vs. a legal tender like the EURO. As an effect of thesedevelopments the question of the link to a tax residence might arise.
We therefore recognize that there might be an actual “virtual economy”, dematerialized
and with basically no link or interface with the “real economy”. Such activities might
have to be examined carefully and there might be a need in this respect for a new setof rules for taxation purposes. Action 1 should not address however traditional activities, which have been digitalized thanks to ICT; for those activities, BEPS concerns are
better dealt with in the framework of other actions.
You will find in the annex a more detailed analysis of selected issues contained in thediscussion draft.
We thank you for taking due consideration of our submission.
Yours sincerely,
Swiss Bankers Association

Urs Kapalle

Jean Brunisholz

Annex

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Annex

Discussion draft on Action 1 (Tax Challenges of the Digital Economy) of the
BEPS Action Plan
1. Comments on point 10., page, 7•Whether it is possible to ring-fence the digital economy from the rest of theeconomy, and if not, whether specific types of digital transactions could be identified and addressed through specific rules;
It seems to us that, basically it is not possible to ring-fence the digital economy fromthe rest of the economy according to the understanding of the digital economy that
seems to be adopted in the discussion draft.
We did not find a clear definition of what one should understand under “digital economy”. Is it an “economy” that is purely digital (“virtual”) with no link to the physical world(i.e. no physical delivery of goods or services happen, but typically transactions would
only take place over the Internet) no stream of payments, or is it a “classical economy”
enhanced by technology, in particular information and communication technology(ICT)?
If we take the example of the delivery of goods: goods could be ordered by mail orby telephone, long before the Internet was widely spread. Does it mean that ordering goods over the Internet makes the whole process including the physical deliveryof goods an activity of the digital economy? We recognize that the use of ICT greatly facilitates the ordering of goods, and enhanced this kind of transactions (volume
increased dramatically), we however strongly put into question the fact that the very
nature of the transactions themselves changes because a new technologicalmeans is available to perform them.
In the finance industry, financial orders where traditionally given in writing by mail,or by telephone. Nowadays financial orders can be given over the Internet. Like forthe delivery of books, we do not see that the very nature of the financial orders haschanged. Here again, the use of ICT has greatly influenced the way the transactions are performed, the nature of the transactions however is still the same: a bankneeds to process the order received, regardless of the fact that this order was
mailed, e-mailed or given over the phone.
We therefore call for a clear definition of the digital economy, which according to us is
not an ICT enhanced classical economy.

•

The key features of the digital economy identified by the Task Force and whether
there are other key features that should be taken into account;
We prefer a clear definition of the digital economy (see above).

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•

The examples of new business models in the digital economy and whether (andif so which) other business models should be considered;
We need to know first what digital economy is precisely meant with.

•

The ability of the measures developed in the course of the BEPS Project and thecurrent work on VAT/GST to address BEPS concerns in the digital economy;
Issues to be addressed in the current work of VAT/GST should be addressed regardless of the work related to Action 1: measures to prevent VAT avoidance. For example,
deliveries performed from abroad to avoid VAT/GST should be tackled properly; this is
not only or specifically related to the use of ICT to perform the order of the delivery.

•

Whether other measures should be developed during the course of the work onother aspects of the BEPS Action Plan to address BEPS concerns in the digital
economy and if so which ones;
See above.

•

The broader tax challenges raised by the digital economy which have been identified by the Task Force and how these challenges should be addressed, taking
into account both direct and indirect taxation;
We recognize that ICT has generally contributed to increase the volume of businessperformed in a number of sectors. With increased volumes the need to address properly some issues may appear more clearly (VAT/GST collection/avoidance). The principles on which such issues have to be addressed should not be technology driven but
based on principles also valid for the economy at large.

•

The options to address these broader tax challenges discussed by the Task
Force and summarised in the discussion draft;
The basic question is to define what is exactly meant by digital economy. We think thatthe definition should be narrow. Once the concept is clearly defined, it should be examined whether special taxation rules are needed to tackle issues such as VAT/GST
avoidance for example.

•

The potential cost of compliance arising from the options proposed to address
the tax challenges of the digital economy and suggestions for more cost efficient
alternatives;
We cannot give any estimate on this.

•

Whether the Ottawa taxation framework principles identified above are an appropriate framework for analysing options to address the tax challenges, andwhether and how they should be supplemented.
We think that the Ottawa taxation framework principles are still valid and should not be
supplemented each time a new technological step occurs. We in particular support theneutrality principle according to which “Taxation should seek to be neutral and equitable between forms of electronic commerce and between conventional and electronic
forms of commerce. […] Taxpayers in similar situations carrying out similar transac-

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tions should be subject to similar levels of taxation.” (see discussion draft, point 203.,
page 63).
2. Comment on point 59., page 24“59. […] Attempting to isolate the digital economy as a separate sector would inevitably
require arbitrary lines to be drawn between what is digital and what is not. As a result,
the tax challenges and BEPS concerns raised by the digital economy are better identified and addressed by analysing existing structures adopted by MNEs together withnew business models and by focusing on the key features of the digital economy anddetermining which of those features raise or exacerbate tax challenges or BEPS concerns, and developing approaches to address those challenges or concerns.”
We are of the opinion that it is necessary to be able to draw a line, which is not arbitrary, between what is digital and what is not. For that reason a clear definition of what
is a digital economy is necessary. If no clear definition of what is a digital economy canbe given, then arbitrary tax treatment might prevail.
3. Comment on page 28, before (2.2. App Stores)
We think that a definition of “digital economy” vs. “virtual economy” or “shadow economy” (including its implication for example in the field of black labor) should be inserted.
4. Comment on point 128., page 44“128. Once a taxable presence in the market country has been established, anothercommon technique to reduce taxable income is to maximise the use of deductions forpayments made to other group companies in the form of interest, royalties, service
fees, etc. […] Many structures put in place by digital businesses appear to make use of
these techniques, with the taxable income from the local operations being reduced to
extremely low amounts.
Tackling tax avoidance is a concern of BEPS, which is not specific for a sector or atype of business, including what is referred here as digital business. These issues,
which are relevant, should be handled in the appropriate BEPS actions.
5. Comments on Part VII. Potential options to address the broader tax challenges
raised by the digital economy
To point 211., pages 64-65 (3.1. Modifications to the Exemptions from Permanent Establishment Status)“211. One potential option discussed by the Task Force would modify the exceptions
contained in paragraph 4 of Article 5 of the OECD Model Tax Convention. […]”
As long as the digital economy has not been clearly defined, it is unwise to modify the
exceptions contained in paragraph 4 of Article 5 of the OECD Model Tax Convention.

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To points 212-216, pages 65-66 (3.2. A New Nexus based on Significant Digital Presence)
We recognize the difficulty of trying to define a nexus based on a digital presence andits potential arbitrary nature. The criteria set out in the bullet points of point 213. mightserve as a basis for a definition of the digital economy. According to us the issue of thepayment is one of the key element to be able to state that one is confronted with a truly“digital economy”, that we have designated as “virtual economy”. When dematerialized
goods and services are paid with a virtual currency, then we have an issue to be addressed, because there are no traceable flows that could be taxed. Such activities
might have to be examined carefully and there might be a need in this respect for a
new set of rules for taxation purposes.
To point 217, pages 65-66 (3.3. Virtual Permanent Establishment)
As long as the digital economy has not been clearly defined, it is premature to develop
a concept of virtual permanent establishment in that context.
To point 218, pages 66-67 (3.4. Creation of a Withholding Tax on Digital Transactions)
We doubt that the introduction of a withholding tax would be appropriate to serve BEPS
purposes. Such a tax would create an additional burden and might not lead to taxing
the customers fairly: it would in particular not respect the neutrality and equitability criteria set out in Ottawa.

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Thomas Kipka
Maastricht University
Bouillonstraat 1-3
Maastricht, 6211 LH
The Netherlands

Maastricht, 14.04.2014

OECD
Centre for Tax Policy and Administration
2, rue Andre Pascal
75775 Paris
FranceComments on the discussion draft on Action 1 of the BEPS Action Plan
Dear Sir or Madam,

I appreciate the opportunity to comment on the OECD Discussion Draft on Action 1 (Taxchallenges of the Digital Economy) of the BEPS Action Plan published on the 24 March
2014. 1
I am connected to the Maastricht Centre of Taxation of Maastricht University as
an external PhD researcher and my research is to a certain degree related to the issues
raised in the draft. The comments below are meant to solely convey my personal
opinion and do not reflect the opinions of the Maastricht Centre of Taxation.
The growing importance of the digital economy necessitates a coherent approachin applying the long-standing international tax laws that is also fit for the changes thatare going to emerge within the near future. Merely a quick fix of the problems related tothe digital economy should not be desired.
My comments are raised on a selection of issues pointed out in para. 10 of thedraft.
1. Whether the Ottawa taxation framework principles identified above are an appropriate
framework for analysing options to address the tax challenges, and whether and how theyshould be supplemented.
The Ottawa taxation framework principles are appropriate as guiding principles whenseeking a solution to the taxation of the digital economy. The most prominent principle
should in fact be the principle of neutrality since the digital economy more and moretranscends into the non-digital economy. Trying to differentiate between the two wouldin that case only lead to patchy legislation and uncertainty. Furthermore, in line with theOECD Action Plan of 19 July 2013 the principle of effectiveness and fairness of the
1 Hereinafter referred to as the draft.

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Ottawa Taxation Framework should be extended to also include that taxation of profits
should be in line with actual value creation. 2
Additionally, when applying these principles to the digital economy it should be
kept in mind that the rise of the digital economy is based in the mere aim to gain
efficiency and simplicity that the participants of this economy expect. Therefore,
efficiency and simplicity also needs to be given when it comes to the taxation of it.

2. Whether it is possible to ring-fence the digital economy from the rest of the economy,
and if not, whether specific types oaf digital transactions could be identified and addressed
through specific rules.
When dealing with the digital economy some of the business models employed may
appear to be new, yet it is not to be forgotten that most of them are merely an
abstraction of existing real world business models. Furthermore, all of the transactions
undertaken digitally still need to be fitted into the existing framework provided for by
the different contract laws. So far this framework was capable of adapting to all the new
ways of conducting business that came along. Similarly, the basic principles of taxing
either corporations or transactions remain largely in tact also in the digital realm.
Ultimately the digital economy is still only about the sale of either goods or services.
Considering that in the digital economy the basis for levying a tax is a transactionthat is rooted in the regular contract/civil law, it is questionable whether it is necessary
to ring-fence it from the rest of the economy. Indeed, the main challenge that needs to be
dealt with is that the respective transactions taking place in the digital domain are nolonger purely revolving about tangibles but intangibles instead. The difficulties inclassifying, allocating and identifying the source of income stemming from an intangible
may sound like a good reason for placing these transactions into a framework separate
from the one applied in the non-digital world. Yet, considering that businesses in thedigital economy still function within the frameworks provided for by contract laws
conceived unaware of business being conducted digitally, ring-fencing the digital
economy from the non-digital economy is to be refused. Trying to fix the current
problems stemming from the digital economy with a different set of rules for the digital
economy will most likely only lead to a set of patchy rules that are not fit to deal withnew and upcoming developments in the digital economy. This will become particularly
apparent, considering the proposed options to tackle the broader Tax challenges
discussed by the Task Force.
3. The options to address these broader tax challenges discussed by the Task Force andsummarised in the discussion draft.

From the proposals made I would like to comment in particular on the elements that aresuggested for a establishing a nexus based on significant digital presence (para. 212 –216) and on the options for a Virtual Permanent Establishment (para. 217). In doing so I
focus on what is going to be the next network trend after cloud computing. This will be
fog or also called edge computing and has been made possible with the introduction of
IPv 6 and lies at the heart of the Internet of things. 3
Fog computing basically takes the internet back to its roots based on peers
instead of what could be observed in the past decade with a main focus on the divide
2 OECD, Action Plan on Base Erosion and Profit Shifting, 19.07.2013, p. 10.

3 Cisco Systems, http://share.cisco.com/internet-of-things.html (last visited 13.04.2014).

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2

between server and network clients which is in particular relevant for cloud computing
services. These two different network structures are pictured below:

Cloud computing compared to fog computing 4

More precisely fog computing can be defined in the following manner:

Fog Computing is a paradigm that extends Cloud computing and services
to the edge of the network. Similar to Cloud, Fog provides data, compute,storage, and application services to end-users. The distinguishing Fog
characteristics are its proximity to end-users, its dense geographicaldistribution, and its support for mobility. Services are hosted at the
network edge or even end devices such as set-top-boxes or access points.
By doing so, Fog reduces service latency, and improves QoS, resulting insuperior user-experience. Fog Computing supports emerging Internet ofEverything (IoE) applications that demand real-time/predictable latency(industrial automation, transportation, networks of sensors andactuators). Thanks to its wide geographical distribution the Fog
paradigm is well positioned for real time big data and real time analytics.
Fog supports densely distributed data collection points, hence adding afourth axis to the often mentioned Big Data dimensions (volume, variety,and velocity). Unlike traditional data centers, Fog devices are
geographically distributed over heterogeneous platforms, spanning
multiple management domains. 5

The Internet of Everything and fog computing go hand in hand. One needs to consider thefactors proposed for a significant digital presence in para. 214 and 215 in the light ofexactly these developments.

4 Graffi, K., lecture as part oft he course: Peer-to-Peer Networks and Applications - Defintions and Motivation, 2013;lecture slides can be obtained at: http://www.cs.uni-paderborn.de/fileadmin/Informatik/FGTI/Lehre/WS2011/P2PNets/UPB__WS2011__P2PNetworks__Topic-01__P2P-Definitions.pdf (last visit 13.04.2014).
5 Definition provided for by Cisco Systems; can be retrieved from:http://www.cisco.com/web/about/ac50/ac207/crc_new/university/RFP/rfp13078.html (last visit 13.04.2014).
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3.1. Paragraph 214
Regarding the four options for establishing a significant digital presence the following,rather vaguely formulated one is problematic:
Digital goods or services of the enterprise are widely used or consumed in
the country.

The mere usage or consumption of digital goods or services in one country is completely
alien to any sort of value creation and should therefore not result in a significant digitalpresence that in the end leads to source taxation. Applying the principles included in the
Ottawa Taxation Framework, this is also not in line with neutrality let alone certainty.
This does not only constitute a burden to the establishment of networks that are not as
centrally organized, like fog computing but also to the current digital economy.

3.2. Paragraph 215

As a consequence of the Internet of Everything about 50 billion devices will be connectedto the Internet by 2020. 6 Naturally this also results in the ability to collect vast amounts
of user data, so called big data. Even though the data collected from these devices is ofvalue it should not be used as a nexus for a significant digital presence in a certain
country.
It might be tempting to consider the collection of data effectively forming big data
as a nexus for a significant digital presence since the competitive advantage that can begained from it is tremendous. Nevertheless, the raw data collected from users is of notmuch use, unless one is able to analyse said data. Such an analysis is done centrally andnot on the end-user devices that originally provided the data. Therefore, the actual
added value of the collected data is to be seen apart from the locations it has beencollected in.
Limiting it to cases where a business makes use of the data collected in a multisided business model is comprehensible since the collection of data is put at a premiumin order to make this business model work. However, the mere collection of data should
not, regardless of the business model lead the establishment of a significant digitalpresence. Applying this would lead to the result that businesses would end up having apermanent establishment as a result of a “significant digital presence” virtually
everywhere. Especially considering the spread of the Internet of Everything withpotentially 50 billion devices linked together and collecting data. Even though not all of
the data will be used in the framework of a multi-sided business model the value
creation in a multi sided business model is also not derived from the mere collection ofdata itself but mainly from the ability to further process the data and thereby being able
to make use of the network effects.
Therefore, using this proposed standard in order to establish a significant digitalpresence would contravene the just principles established in the Ottawa Taxation
Framework. It would contravene neutrality since the collection of data in a multisided
business model is also done in none-digital businesses such as customer loyalty
6 Definition provided for by Cisco Systems; can be retrieved from: http://share.cisco.com/internet-of-things.html (lastvisit 13.04.2014).

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programmes 7 without resulting in a permanent establishment in the respective country.
Furthermore, the principles of efficiency as well as certainty and simplicity would not be
met when deriving from the systematic collection of data the presence of a permanentestablishment. Consequently, this leads to business having a permanent establishment
in virtually every country, taking into account current and future technologicalpenetration. Especially considering the creation of a lack of certainty that results fromthe possibility of a business having to deal with a permanent establishment in every
country hampers the development of new technologies. All in all, establishing analternative nexus of a significant digital presence would be as artificial as the long
discussed virtual permanent establishment.
3.3. Paragraph 217

In para. 217 of the draft the virtual permanent establishment is put up for discussion inthree different embodiments. The “virtual fixed place of business PE” and the “virtual
agency PE” still suffer from the fact that the content provider has only a very limited
influence on the Internet service provider on where the server providing the website or
the platform through which the business is carried out is located. Even though these two
proposed versions of a virtual PE try to differentiate between content and internet
service provider, it is still contrary to the logic of the Permanent Establishment wherewebsites and platforms only used as sales channels or as means to collect and feed backdata for further processing.
The proposal of an “on-site business presence PE” is closer to what an actual
permanent establishment is about since it considers at least economic presences in therespective jurisdiction and requires that on-site services are provided at the customers
location. However, presuming that the provision of on site services or other businessinterface is meant to focus on the provision of said activities digitally, would mean thatfog or edge computing would once again be included in this kind of PE and this would
lead to uncertainty, loss of efficiency and lack of neutrality, thereby hindering further
development of these technologies.
Conclusion

Thus, in order to tax the digital economy, of today and tomorrow by way of a system of
direct taxation, it is important to adhere to the most dominant and just nexus, which isvalue creation. Expanding source taxation to parts of the digital economy where there isactually no value created will only stall the further development of the digital economy
to the detriment of all market participants.

I am pleased to answer any questions that may arise regarding these comments. For
further clarification, please feel free to contact Thomas Kipka; by phone +31-643665494
or via e-mail: thomas.kipka@maastrichtuniversity.nl

Yours sincerely,

Thomas Kipka, LL.M.

7 A major part of the business model of customer loyalty programmes e.g. Payback (Germany, India), Airmiles(Netherlands, Canada) etc. is made up of the collection of data on consumer behaviour which are then sold to theparticipating businesses or even third parties.
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TAJ
We wish to contribute to the very dense work that has been made by the OECD on the BEPS n°1
project on the tax clallenges of the digital economy. We have tried to summarise some issues orcomments as followed:
Probably a general definition of what e:commerce is and whether it includes goods as well as
services in the OECD jargon. Indeed, in the EU, rules on e:commerce only related to telecom,
broadcasting and electronic services: they do not relate to sale of goods which are dealt for under the
distance selling rules or low value import scheme since 1993 (single market).
•
•
•
•
•

1°) The report currently outlines opportunities for BEPS with respect to VAT (paragraph 136 to
142).
This mainly addresses issues for remote digital supplies to exempt businesses and the remote digital
supplies to Multi-location entities (MLEs). We believe these are mostly issues resulting from various
tax audits (with some probably still on-going) more than hard-core issues from Digital businesses.
The paragraphs 136 and 170 address issues for the exempt sector: but this is a sectorial businessactivity. The scheme in the back of the mind there, is one with an EU supplier invoicing a Hong Kongbranch of an EU bank: this scenario incurs no VAT all the way through, because of the adjunction of
territorial rules and branch to branch (out of scope) transactions. In our view, this is NOT a the N°1
issue for the Digital economy in a BEPS environment: this is rather an “abuse of law” scheme onsome B to B practices implemented by some banks. Moreover, the scheme is quite old, has circulated
a lot in a non-digital business transactions: it is not specific to digital business although it canaccelerate in a digital business context: this should be an argument in the last position for BEPS andcertainly not to be addressed as the first opportunity for Digital BEPS in the VAT area.

In our view, the main opportunity for BEPS with respect to VAT lies with the location of a nonresident Vendor (or supplier) in a B to C transaction: particularly in the EU which has adeclaring platform for B to C transactions for non EU vendors, it seems that very few of the
non-EU suppliers have effectively registered and declared their VAT (less than 1000
companies in the world have spontaneously registered on the EU portal). This is “THE”
major concern of BEPS in a VAT environment. Failure to register by the non-resident suppliers
invalidates the VAT collection mechanism and creates harmful and unintended VAT
competition.
Only the OECD can address that issue because of its eminence and its International role.
Regional platforms can only provide technical rules but they have no impediment to force nonresident vendors to register otherwise than voluntarily. Therefore, we strongly believe that thepolitical commitment is the one that only OECD can and should take on-board.
This issue should be the N°1 opportunity for Digital BEPS with respect to VAT.

•

Most of the MLEs tend to be 100 % tax payers so that the VAT is not their major concern: rather, thetransfer price is their concern. VAT is due along the recharged invoices: VAT cascades down thevalue chain of services. This issue, although important comes after the non-resident vendor issue.

2) Collection of VAT in the digital economy (paragraphs 189 through 201):
The collection of VAT in the digital economy includes both exemptions for imports of low value goods
and remote digital supplies to consumers (services). Therefore, it is clear that the digital economy
has both goods and services as a basis for VAT to apply particularly in a B to C type transaction.

403

However, this would show the digital economy as a simplistic area where only a supplier and acustomer/consumer interfere. This is far from true…..
In practice, the digital economy entails complex structures with many intermediaries : very often, acontent owner, a data provider, an integrator, and App-store, a mobile operator, a bank collecting thecash, a web-portal operator, just to name a few.
The report currently addresses none of these scenarios where intermediaries are involved. We
believe it is of critical importance that the report addresses these intermediaries and determines towhat extent they are deemed to intervene in the transaction. Because failing to do that, any third
country supplier could easily “hide behind” one of those intermediaries which would hold any
conclusion ineffective. The EU has set forth presumptions to help operators determine whether they
are the entity deemed engaged in the digital transaction vis-à-vis the customer (B to C) or not. This isa matter of legal security for the businesses to understand what entity is liable to collection of VAT.
3°) Consumption tax options (paragraphs 220 through 224)•

Distance selling should be included in the paragraphs 220 and 221 pretty much as the low value
imports scheme (just like also in sub paragraph 189); indeed, it may happen that some countries haveset a customs Union or have no customs due because of free trade agreements in place or basically
goods are no longer subject to customs duties. Still the VAT/GST scenarios need be addressed as aresult of the “on-line shopping” habits from consumers. Most of the import value scheme address thecustomers as being the importer of records, rather than the supplier. Thus, it is of critical importancethat the distance selling is also mentioned together with the import of low value goods.

•

Finally, on paragraph 224 the OECD should propose specific enforcement agreements and dispute
resolution mechanisms (bilateral or multilateral) to cover the VAT. Those could be clauses to be
included in existing tax treaties or in newly negotiated ones. Businesses often suffer from the double
taxation on VAT, resulting from mismatches of qualification by the authorities or from diverging
interpretations by the authorities. Indeed the likelihood that Virtual PE will end up a VAT collection
reassessments is quite high.

Kind regards
Patrick FUMENIER
Avocat associéTaj - Société d'avocats
Member of Deloitte Touche Tohmatsu Limited
Tel : +33 (0)1 55 61 41 30
Fax : +33 (0)1 55 61 21 61
pfumenier@taj.fr
www.taj.fr
www.taj-strategie.fr
181 avenue Charles de Gaulle
F- 92524 Neuilly-sur-Seine Cedex4042013-2014 O FFICERSTERILEA J. W IELENGA

13 April 2014

President
Allergan, Inc.
Irvine, California

Centre for Tax Policy and Administration
Organisation for Economic Co-Operation
and Development
Paris, France

M ARK C. SILBIGER
Senior Vice President
The Lubrizol Corporation
Wickliffe, Ohio

C. N. (SANDY) M ACFARLANE
Secretary
Chevron Corporation
San Ramon, California

Via Email: CTP.BEPS@oecd.org
RE:

JANICE L. LUCCHESI
Treasurer
Akzo Nobel Inc.
CHICAGO , ILLINOISTo Whom It May Concern:

SHIRAZ J. N AZERALI
Vice President-Region I
Devon Canada Corporation
AlbertaCalgary,

THOMAS V. M AGALDIVice President-Region II
Pearson Inc.
Upper Saddle River, New Jersey

TIMOTHY R. GARAHAN
Vice President-Region III
Unifirst Corporation
Wilmington, Massachusetts

BRUCE R. THOMPSON
Vice President-Region IV
Nationwide Insurance Company
Columbus, Ohio

RITA M. M AKARIS
Vice President-Region V
Skidmore, Owings, & Merrill LLP
CHICAGO , ILLINOISSUSAN K. M USCH
Vice President-Region VI
AEI SERVICES LLC
H OUSTON , TEXAS

On 19 July 2013, the OECD published an Action Plan on Base
Erosion and Profit Shifting (hereinafter the Action Plan or the Plan) setting
forth 15 actions the OECD will undertake to address a series of issues
that contribute to the perception that individual countries’ tax bases arebeing eroded or profits shifted improperly. Pursuant to the Plan, theOECD issued a public discussion draft on 24 March 2014 on BEPS Action
1: Address the Tax Challenges of the Digital Economy (hereinafter the
Discussion Draft or Draft). The Discussion Draft discusses the OECD’sviews of the digital economy and sets forth several options that theOECD may adopt to address the tax challenges that digital activities may
present.
The OECD requested comments on the Discussion Draft no later
than 14 April 2014. On behalf of Tax Executives Institute, Inc. (TEI), I am
pleased to respond to the OECD’s request for comments.
TEI BackgroundW ALTER B. D OGGETT, III
Vice President-Region VII
E*TRADE Financial Corporation
Arlington, Virginia

D ONALD J. RATH
Vice President-Region VIII
Symantec Corporation
Mountain View, California

CHRISTER T. BELL

Discussion Draft on BEPS Action 1: Address the Tax
Challenges of the Digital Economy

TEI was founded in 1944 to serve the needs of business tax
professionals. Today, the organisation has 55 chapters in Europe, North
America, and Asia. As the preeminent association of in-house tax
professionals worldwide, TEI has a significant interest in promoting tax
policy, as well as the fair and efficient administration of the tax laws, at
all levels of government. Our nearly 7,000 members represent over 3,000of the largest companies in Europe, the United States, Canada, and Asia.

Vice President-Region IX
LEGO System A/S
Billund, Denmark

ELI J. D ICKER
Executive Director

W. PATRICK EVANS
Chief Tax Counsel

1200 G Street, N.W., Suite 300 | Washington, D.C. 20005-3814 | P: 202.638.5601 | F: 202.638.5607 | www.tei.org
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13 April 2014
BEPS Action 1: Digital Economy
Page 2TEI Comments
TEI commends the OECD for the Discussion Draft’s detailed and broad overview of thedigital economy, some of the tax challenges it may present, and potential options to address
those challenges. TEI agrees that the framework for analysing options to address the possible
tax challenges of the digital economy should include the principles of neutrality, efficiency,
certainty and simplicity, effectiveness and fairness, and flexibility. 1
More important, TEI agrees with the Discussion Draft’s statement that “[a]ttempting toisolate the digital economy as a separate sector would inevitably require arbitrary lines to be
drawn between what is digital and what is not” 2 and “that ring-fencing the digital economy as aseparate sector and applying tax rules on that basis would be neither appropriate nor feasible.” 3
It is simply not practical to sort modern business into “digital” and “non-digital” categories.
The potential tax issues presented by the digital economy, especially in the direct tax area, are
not new and can be addressed by applying the existing international tax framework in thedigital context with little or no modification.
The Digital Economy Generally
Overall, the Discussion Draft seemingly proceeds from the view that businesses with aheavy information and communication technology (ICT) component can more easily relocate
business assets and resources (e.g., tangible and intangible assets, and workforce), have much
lower costs, and benefit from utilising fewer employees as compared with traditional
businesses. Businesses with a heavier reliance on ICT, however, generally have different costs,
not lower costs, and often must make significant investments in infrastructure and other assets
necessary to their operations. This is true even for “pure play” digital businesses, i.e., those thatappear to operate only digitally.
With respect to mobility, the Draft overlooks is that ICT-heavy businesses face the samechallenges in moving assets and people between jurisdictions as other businesses. Digitalbusiness asset movement, whether of intellectual property or other assets, is subject to the samelegal, regulatory, and tax costs as traditional businesses that choose to relocate assets orfunctions. Further, employees are no more mobile in a business that happens to be heavily
digital or dependent on intellectual property than a traditional brick-and-mortar business. The
same hurdles must be overcome if employees move across, and conduct business in, different
jurisdictions. ICT does give businesses greater flexibility to place operations where it makes theSee, e.g., Discussion Draft, page 6, referencing the principles of the Ottawa Taxation Framework
Conditions regarding electronic commerce, issued in 1998.
2
Id. at 24.
3
Id. at 63.
1

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BEPS Action 1: Digital Economy
Page 3most sense for the business model (e.g., next to research universities, or in close proximity toother needed resources), among other things.
The business models of companies that heavily utilise ICT have the same operational
focus as companies in existence prior to ICT advances – to manufacture, produce, or create theirproducts and services and deliver them to customers. What has changed is how the consumer –whether an individual or a business – accesses and receives delivery of the product or service.
Changes to how a product or service makes its way into the hands of the consumer is not cause
for re-writing the rules of international taxation or writing specific rules for new delivery
mechanisms. The OECD’s mission is to promote economic and social well-being, not to erect
additional barriers to trade and capital or people mobility through the introduction ofcomplicated and sector-specific rules.
Specific Measures to Address Digital Economy Issues
TEI opposes the potential options set forth in Section VII of the Discussion Draft toaddress the direct tax issues presented by the digital economy. These are: (i) modifications to
the exemptions from permanent establishment (PE) status; (ii) a new nexus standard based on
significant digital presence; (iii) a virtual PE; and (iv) creation of a withholding tax regime on
digital transactions. These options are all generally unworkable. They would impose highadministrative costs on businesses conducting digital operations as they would have to registerfor tax purposes in every country where they sell their goods and services, which would require
hiring local advisors to ensure compliance. In addition, determining the country of the relevant
activity or of a “virtual PE” or applying and remitting the correct withholding tax may bedifficult or impossible. For example, a sale may involve a customer that resides in one country,
uses a credit card from a second country, and effects the purchase through an IP address from
yet a third country. More important, these options are inconsistent with the Discussion Draft’s
conclusion that “ring-fencing” the digital economy is not viable.
In addition, the Discussion Draft begins by quoting from the statement by the leaders of
the G20 on the BEPS Action Plan at their meeting in September 2013. The statement reads inpart that “[p]rofits should be taxed where economic activities deriving the profits are performed
and where value is created . . . .” 4 The options and measures suggested by the Draft, however,would have the opposite effect. For example, the Discussion Draft suggests a potential new
nexus standard based on significant digital presence and also creating a virtual PE. 5 These
options would impose a tax in the jurisdiction of consumption rather than where the activities
of a business take place or where value is created (e.g., the jurisdictions where a product isdesigned and manufactured). A similar result would flow from the imposition of a withholding

45

Id. at 4.
Id. at 64-65.

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BEPS Action 1: Digital Economy
Page 4tax on digital transactions as suggested by the Draft. These options do not comport with thestatement of the G20 that profits should be taxed where they are located.
Further, it appears that these options are included in the Discussion Draft for Member
States to choose selectively when implementing domestic anti-base erosion and profit shifting
measures. TEI urges the OECD to address digital economy issues through its work on the other
BEPS actions, rather than encouraging Members States to pick and choose from a menu of
options. Giving countries the option to select their measure will only result in a greater
patchwork of inconsistent international tax rules. Indeed, the best action to curb BEPS is topromote greater uniformity of international rules so that rules of one country cannot be played
against the rules of another.
Section V of the Draft addresses digital economy issues through the OECD’s work on
the other BEPS actions. This approach properly focuses on targeted legal issues of generalapplicability (e.g., treaty abuse, transfer pricing), rather than cordoning off or “ring fencing” asection of the economy for unique treatment. Notwithstanding our preference for a single set of
uniform rules, TEI does not necessarily agree with all of the specific options discussed in
Section V.
For example, one suggestion made with respect to BEPS Action 7 “Prevent the artificial
avoidance of PE status” is to “ensure that where essential business activities of an enterprise arecarried on at a given location in a country, the enterprise cannot benefit from the list of
exceptions usually found in the definition of permanent establishment (see, e.g., Art. 5(4) of theOECD Model Tax Convention).” 6 The Draft’s concern is that, through the fragmentation ofbusiness activities and changing business models, previously “auxiliary” activities may now
constitute the core activities of an enterprise. To address changes in business activities, theDiscussion Draft suggests modifications to Art. 5(4) may be necessary. It is important torecognise, however, that fragmentation (or business restructuring) concerns are not new andany modifications to Art. 5(4) will have broader implications beyond companies using digital
resources to conduct their business.
One example of such implications is the Discussion Draft’s focus on the maintenance ofa local warehouse. The maintenance of a local warehouse is not the core activity of a seller –sales to the seller’s customers is the core activity. Today, as in the past, sellers based in one
jurisdiction use warehousing and delivery facilities in other jurisdictions to deliver goods tocustomers (e.g., companies selling over the telephone or through mail-order catalogs). Thisbusiness model has not changed merely because these businesses have moved to digital means
for interacting with and advertising to customers. The core activities of these businesses havealways been, and continue to be, selling products to consumers, not warehousing or
advertising. Minimising or right sizing the breadth of a company’s operational footprint and6

Id. at 49.

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BEPS Action 1: Digital Economy
Page 5costs, including administrative costs associated with creating a taxable presence in ajurisdiction, is just one of the many factors a company evaluates when determining where toplace functions and processes. Such realignments are not “artificial” in the vast majority ofcircumstances.
The Discussion Draft also sets forth other measures that would restore taxation in themarket (source) jurisdiction where it may be lacking due to the features of the digital economy. 7
These measures fall under BEPS Actions 6 (Prevent Treaty Abuse) and 7 (Prevent the Artificial
Avoidance of PE Status). Such measures would address multi-national enterprise (MNE)
operating structures that centralise risks in a low-tax jurisdiction and may be viewed by tax
authorities as inappropriately tax motivated. However, the OECD should recognise that thesestructures have legitimate business purposes, including: (i) the centralisation of functions to
extract efficiencies; (ii) the hedging of the risk of losses in a single location; and (iii) a constantand regular (albeit lower) income flow in most countries to the satisfaction of tax authorities
worldwide.
Other measures noted in the Discussion Draft would aim to restore taxation in both themarket country and the country of the ultimate MNE parent. These measures fall under BEPS
Actions 2 (regarding hybrid mismatch arrangements), 4 (regarding limiting base erosion), 5(regarding harmful tax practices) and 8-10 (regarding transfer pricing). TEI notes that many of
the issues that these measures are designed to address are the result of deliberate tax policy
choices of the OECD’s Member States. MNEs take into account these policy choices whenstructuring their operations to legally minimise their tax burden, in many cases in full accord
with the underlying policy to encourage business activity of one form or another in thepolicymaker’s jurisdiction. It is these policies, and not the MNEs, that create the low effective
tax rates.
Paragraph 166 of the Discussion Draft notes the increasingly integrated nature of MNEs,
which is facilitated in part through the utilisation of ICT. For transfer pricing purposes, thisparagraph of the Draft foreshadows the need for greater reliance on “value chain analysis andprofit split methods.” TEI looks forward to the OECD’s work in this area. We note, however,that profit splits may appear simple in concept, but are fraught with difficulties in application.
TEI urges the OECD to tread carefully when reviewing these aspects of its BEPS project andavoid implicitly endorsing a global formulary apportionment approach.
In paragraphs 189-201 (and the immediately following commentary on pages 61-62) andin paragraphs 219-224, the Discussion Draft seems to suggest eliminating or reducing VAT
exemptions on low value imports and addressing issues with the supply of digital goods andservices. Such exemptions, however, are in many cases highly utilised by small enterprises like
software developers and marketers and not large MNEs. Removing the exemptions for low
7

Id. at 48-49.

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13 April 2014
BEPS Action 1: Digital Economy
Page 6value imports must be accomplished in a measured fashion to avoid hindering innovation or
imposing unreasonable administrative costs on small and medium sized enterprises, which area driver of future growth.
On the other side of the spectrum, the OECD should recognise that the additional
personal mobility created by ICT puts MNEs at risk of having taxable jurisdictions all across theworld for de minimis activities. TEI recommends that PE rules be adjusted to reduce thesubstantial administrative burden this is likely to create for both tax authorities and taxpayers
alike by introducing a de minimis safe harbor.
With respect to indirect tax issues, TEI emphasises that the approach to such issues
should be guided by the Ottawa Taxation Framework Conditions, including taking into accountthe administrative and compliance burdens imposed on non-resident suppliers and ensuring
the neutrality of VAT. Any new approach to the administration of indirect taxes should ensure
a level playing field for all businesses, no matter their jurisdiction of residence.
Section V of the Discussion Draft sets forth several other options to address potential tax
issues presented by the digital economy. TEI will comment on these options when addressedby the OECD in its work product under the other BEPS actions.
Conclusion
TEI appreciates the opportunity to comment on the OECD’s Discussion Draft on BEPS
Action 1: Address the Tax Challenges of the Digital Economy. These comments were prepared
under the aegis of TEI’s European Direct Tax Committee, whose Chair is Nick Hasenoehrl. If
you have any questions about the submission, please contact Mr. Hasenoehrl at +352 26 20 77
46, nickha@herbalife.com, or Benjamin R. Shreck of the Institute’s legal staff, at +1 202 638
5601, bshreck@tei.org.

Sincerely yours,
TAX EXECUTIVES INSTITUTE, INC.

Terilea J. Wielenga
International President

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THE ASSOCIATION OF COMPANIES DRIVING INNOVATION WORLDWIDE

OECD: Tax on the Digital Economy

mailto:CTP.BEPS@oecd.org

CTP.BEPS@oecd.orgmailto:CTP.BEPS@oecd.org
mailto:CTP.BEPS@oecd.org

RE: TechAmerica Europe response to the Public Discussion Draft on BEPS Action 1: Addresses the Tax
Challenges of the Digital Economy
Brussels, 14 April 2014
(Sent by e-mail)

TechAmerica Europe represents leading European high-tech operations with US parentage. Collectively
we invest Euro 100 bn in Europe and employ approximately 500,000 Europeans. TechAmerica Europe
Member companies are active throughout the technology spectrum, from software, semiconductors
and computers to Internet technology, advanced electronics and telecommunications systems andservices. Our parent company, TechAmerica is the leading tech association in the US.
Dear Sir/Madam,
We refer to the Public Discussion Draft in relation to the tax challenges of the digital economy, publishedon 24 March 2014. We welcome the opportunity to comment on the draft report on behalf of ourmembers. Given the relatively short comment period, we have confined our comments to high level
observations on key points raised in the draft report.
At the outset, we wish to lend our full support to the conclusion that there is no requirement to ring fence
the digital economy from the rest of the economy; the digital world touches practically all sectors of the
global economy. Thus any recommendations by the OECD in respect of the digital economy will havewidespread implications.
We note that some of the comments and proposals in the draft report challenge the fundamental
principles of taxing companies that operate across borders in a digital manner. There appears to be anunderlying assumption that the business model of a “digital company” is unique and hence existing tax
rules are not fit for purpose in terms of establishing an appropriate profit attribution.
Advances in technology mean that many new products and services have been developed in recent years.
Businesses are also using new technology to operate existing business models, often more efficiently thanpreviously. In our view, neither of these developments has led to a change in the business model itself.
Even companies operating exclusively in the digital space still require investment in labour, capital andinnovation. There has been no change to the basic business model involving the production/provision of
goods/services to customers in return for payment. This is a fundamental point.
We note that an underlying theme of the wider BEPS project is a focus on substance. We noted aninconsistency between the wider BEPS focus on substance and one of the conclusions in the digital

411 Page 1 of 2

economy draft report that companies operating across borders should be taxed in a jurisdiction where
they have no assets, functions or employees. We do not believe that it is appropriate to alter fundamental
and long standing principles of direct tax in this manner. In our view, the line between direct tax andindirect tax principles has been blurred. The taxation of the customer, both in the digital economy andbeyond, is an indirect tax matter.
On this latter point, we would specifically point out that customer data on its own generally has little value
to a business; it is the analysis completed on this data that creates the value. The work involved inanalysing the data involves real substance, with that substance often remote from where the customer
resides. An attribution of profits to the customer jurisdiction thus raises the risk of a misalignment of
taxable profits and the real value added activities. As well as adding unnecessary cost to businesses, anattempt to arbitrarily apply direct taxation on a business on the basis of where its customers reside is also
likely to be bad for the customer and bad for the global economy.
Similarly, the use of data to determine a taxable nexus doesn't make sense. There is no clear connection
between the value of data and its location. An attempt to force such a connection is likely to beparticularly onerous for small businesses.
The conclusions in the draft report raise the possibility of linking a permanent establishment to a digital tax
presence. We believe that such a link is contradictory to what we understood to be the OECD’s wider
objective of aligning taxable profits to substance. Digital economy businesses have substance. The
conclusion also violates the neutrality principle in terms of penalising digital activities, thus discouraging
businesses from expanding digitally. This could affect more remote countries in particular and impact
adversely on their economic growth.
We would also note that the proposed virtual permanent establishment is likely to raise potential conflicts
with the existing definition of a permanent establishment and could create additional double taxation
issues for digitalised companies.
We welcome and strongly support the view expressed in the draft report that other actions of the BEPS
Action Plan will address Digital Economy challenges. We believe that work on these Actions will
successfully address the tax challenges of the Digital Economy without seeking to artificially attributetaxable profits to jurisdictions where, in our view, little or no value may reside. As noted above, we believethat taxation based on the market for goods or services is best addressed through VAT measures.
In conclusion, we agree with the conclusion in the draft report that no separate taxation regime is required
for the digital economy. We believe that while technology advances have clearly changed the nature of
how companies do business, the fundamental business model has not changed.
We agree with the comments in the draft report that the tax challenges of the digital economy will be
addressed by other Actions in the BEPS Action Plan. We look forward to commenting further in the future
on publication of these Action Plans.
Kind regards
Jarita Christie
Head of TechAmerica Europe
Rue de Namur 16
B-1000 Brussels
Jarita.Christie@TechAmerica.org

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tax challenges of the digital economy
OECD/CTPA

By email: CTP.BEPS@oecd.org
April 11 2014

RE: NOB commentary to the Public Discussion draft BEPS Action Plan 1: Address thetax challenges of the digital economy (hereinafter: the “Discussion draft”):

The Dutch Association of Tax Advisers (NOB) is pleased to submit its comments to the
Public Discussion draft BEPS Action Plan 1: Address the tax challenges of the digital
economy (hereinafter: the “Discussion draft”).
1.

The digital economy cannot be ring-fenced

1.1

The Discussion draft gives a comprehensive overview of the digital economy, its
evolution and its impact on the rest of the economy. In doing so, it raises the question
whether the digital economy can be ring-fenced from the rest of the economy, also froma taxation perspective.

1.2

Unfortunately, the Discussion draft does not answer this question clearly but wewelcome the fact that it raises serious doubt as to whether the digital economy can bering-fenced. We welcome comments made in, for example, paragraphs 59 and 205 thatring-fencing the digital economy from the rest of the economy is difficult, if not
impossible (par. 59) and neither appropriate, nor feasible (par. 205). In our view there isno possible way to ring-fence the digital economy from the rest of the economy, since
the digital developments have been pervasive in all sectors and all sorts of businessmodels. In other words it can be said that the digital economy is increasingly becoming
the economy itself.

1.3

Based on the above, it would make no sense to treat the digital economy differently
from the rest of the economy from a taxation perspective or to create a separate set ofrules for the digital economy. This will only create uncertainty and disproportionate
burden for the business and may create an adverse precedent for the rest of theeconomy. We will elaborate on both points below.

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2.

BEPS is not inherent to the digital economy

2.1

The Discussion draft points out (e.g. in par. 120) that BEPS concerns are not inherent to
the digital economy. The BEPS strategies utilized in the digital economy are identical to
the BEPS strategies utilized in the rest of the economy. Also, the Discussion draft
concludes that provided these BEPS concerns are dealt with in other actions of the
BEPS Action Plan, there may be no need for additional measures specifically for thedigital economy (par. 208). In our view this raises the fundamental question whether
Action 1 really belongs in the BEPS Action Plan.

2.2

We find it striking that the Discussion draft insinuates (for example, par.125-128 but inessence the entire Chapter IV) that digital businesses in particular do not follow thearm’s length principle and typically use BEPS strategies to create “stateless” income. In
our view the report unduly sets apart companies active in the digital economy
negatively while similar concerns exist in the rest of the economy. Moreover, if there isindeed merit to the insinuations it does not seem to stem from a shortcoming of the(arm’s length) rules, but rather in the enforcement of these rules. This would mean thatgovernments in fact have the tools to achieve an arm’s length result in all sectors(including digital businesses), but do not or are not able to apply these correctly andeffectively. Therefore the wording of the Discussion draft should in our view have been
more objective in line with reality and should avoid a subjective tone which seems to be
aimed at a few companies that are engaged in the digital economy. In addition, in reality
a majority of digital start-ups are not successful and not all digital businesses are
profitable and cash-rich on an overall basis while paying tax in source countries. Thisbegs the question whether a perceived problem with a limited number of larger
companies would warrant measures that would affect a much larger number (andultimately potentially) all businesses and may have precedents outside the digital
economy..

2.3

The Discussion draft (par. 146) mentions that its main aim, in combination with theother action points mentioned in the BEPS Action Plan, is to restore taxing rights at thelevel of both the source / market jurisdiction and the jurisdiction of the ultimate parent.
According to the Discussion draft, elements that are inherent to the digital economy,such as its mobility, its dependency on (mobile) intangibles (data) and the ability tooperate far away from its customers without considerable physical presence, raise
considerable opportunities for the digital economy to implement BEPS strategies. The
Discussion draft goes even further and insinuates that the digital economy broadly uses
these strategies to shift profits to low taxed jurisdictions. Digital businesses are subject
to the same profit allocation rules, more specifically the arm’s length principle, as anyother business. Shifting more effective taxing rights to the source/market jurisdictions in
the context of the digital economy would require, however, different nexus rights andprobably a fundamental change to the TP framework (deviating from the current trend
towards attaching much value to “People functions”). . Under the current TP
framework, the value drivers and their related functions of the digital economy
companies are typically located outside the source / market jurisdictions, for an
important part in the parent jurisdiction, and this is recognized by the Discussion draft(see par. 161). If the parent jurisdiction does not take sufficient action to levy2414

sufficient/immediate tax on the “stateless” profits (e.g. inadequate CFC rules), this does
not justify in our view granting more effective taxing rights (in terms of nexus andmaterially different profit allocation principles) to the source / market jurisdictions.
2.4

The aforementioned shows that in our view that there is not so much a need for aseparate set of rules for the digital economy (widening the taxing rights of the source /market jurisdiction) but a need for a uniform and consequent application of the arm’s
length principle in combination with actions to be taken by the parent jurisdiction. With
respect to the latter in our view any country should be able to continue to develop its
own (competitive) tax policy. The other BEPS actions in combination with the current
international framework for allocation of taxing rights and profits should be capable todeal with the peculiarities of the digital economy supplemented by potential
clarifications and/or amendments to the commentary to article 5 and 7 of the OECDmodel tax treaty. This should be acceptable to business as long as the risk of double
taxation, which will only increase in the post-BEPS era, is similarly eliminated.

2.5

Furthermore, although the Discussion draft focused on direct taxation it acknowledges
that a more serious BEPS concern lies in the area of indirect taxation (see par. 120). In
view of the above, and the fact that the Discussion draft believes indirect tax strategies
pose a greater challenge, it may be best to focus on a solution in the area of indirect tax,
as done by European Union in the form of new EU VAT rules regarding electronicallysupplied services that will enter into force in 2015 and will be further developed tosimplify collection and compliance within the EU and in relation to third-countries. We
will discuss this point below in more detail.

3.

No need for new concepts/rules

3.1

As concluded above, we believe that the current international framework should becapable to deal with the peculiarities of the digital economy. Of course there may be aneed to clarify certain points and concepts that are specifically relevant for the digital
economy. The OECD model commentary on article 5 and 7 is a suitable platform to
make recommendations to countries as to how to deal with the digital economy in termsof taxable nexus and profit attribution, provided there is broad consensus among themember states so that the rules are clear and predictable for the business.

3.2

Introducing new rules and vague concepts, such as the concept of a “virtual PE”,
limiting the PE exceptions and the introduction of new withholding taxes, will havenegative consequences to the digital business community, which in our view will not
outweigh the aim of the Discussion draft. More specifically:• Considering that the Discussion draft concludes that the digital economy cannot bering-fenced, introducing some form of virtual nexus or modifying the PE thresholdwould create a significant risk that the same concepts will spread out to the nondigital economy, at least source countries (e.g. BRICS countries which already takeaggressive positions in unilaterally assuming taxing rights outside the current OECD
permanent establishment concepts) will have a justification to widen their taxing
rights and this would create a precedent potentially fundamentally changing the rules
3415

for taxing cross-border business in general. In many cases, the current PE threshold
is not the issue. The Discussion draft acknowledges (see par. 182) that even in theabsence of a PE threshold imposed by an applicable tax treaty, many jurisdictions do
not tax income derived by non-residents from sales to consumers located in thosejurisdictions.
• Such developments may also open discussions relating to fundamental changes incurrent transfer pricing and profit allocation principles. In this respect, it isemblematic that the Discussion draft does not mention the fact that if a digital nexus
would be created how profit then should be attributed to this nexus. It is very
unlikely that there is a way to attribute profits to a digital nexus that is simple,
effective and fair in the sense of the Ottawa Taxation Framework Principles. By
definition a merely virtual presence would mean that no “significant people
functions” would be present in the country where e-sales are made. Substantial profit
allocation would be incompatible with the current OECD’s principles on profit
allocation to permanent establishments. As this is a much more fundamental
discussion than the BEPS discussion, careful thoughts and extensive discussion
should take place before the OECD even considers embarking on this route. In
addition, moving to fundamentally different profit allocation rules, such as formularyapportionment, is not feasible as it would lead to an unbalanced outcome if one
consider the overall value chain• Uncertainty about - or different methods of - profit allocation would potentiallyseriously hamper digital enterprises doing business abroad and would open the door
to potential double taxation, which does not seem compatible with the aims of the
BEPS Action Plan.
• Moreover, introduction of some form of virtual nexus would increase compliancecosts significantly, which will be a barrier for companies to conduct cross borderactivities, especially for SME companies. Companies will likely feel compelled torefuse to make sales in jurisdictions where the compliance costs would exceed thepotential profits of doing business there. This would go against the key principle of
the OECD of encouraging international trade.
3.3

Given these concerns, it may be considered to specifically clarify in the commentary toarticle 5 of the OECD model tax treaty in which cases within the context of the digital
economy a company does not have a permanent establishment in the source / market
jurisdiction.

4.

Indirect taxation may be the best solution

4.1

Rather than introducing new digital nexus rules in the profit tax domain, which could
have far reaching consequences, it should be considered adopting the principles
introduced as per January 1, 2015 in the European Union regarding the new place of
supply rules for electronically supplied services together with the mini One Stop Shop,
including proposals to expand the One Stop Shop concept to third countries (reference
4416

is made to the Working Paper on VAT issues of the EU’s Expert Group on Taxation of
the Digital Economy dated 31 January 2014). This would ensure that jurisdictions inwhich foreign traders realize substantial e-sales would pay VAT/sales taxes, taking
away competitive advantages they currently have over locally operating enterprises,
while minimizing compliance burdens for such out-of-country entrepreneurs.
4.2

Compliance controls should be organized through co-operation between tax authorities
in the jurisdictions concerned, rather than exposing enterprises (particularly SMEs) todiffering positions taken by tax authorities in potentially many jurisdictions where adigital enterprise does business.

4.3

The cross border compliance area (particularly with respect to non-EU member states)
appears to be typically an area where the OECD can have an important role, compatible
with the principles of the BEPS Action Plan.

With kind regards,
The Dutch Association of Tax Advisers

mr. B.R. Zoetmulder
Chairman of Commission International Tax Affairs

5417

April 11, 2014
VIA EMAIL
Mr. Pascal Saint-Amans
Director, Center for Tax Policy and Administration (CTPA)
OECD, 2, rue Andre Pascal
75775 Oarus /Cedex 16
France(Pascal.SAINT-AMANS@oecd.org / CTP.BEPS@oecd.org)
Re: USCIB Response to the OECD’s Discussion Draft on the Tax Challenges of the Digital
Economy (the Discussion Draft)
Dear Mr. Saint-Amans,
USCIB appreciates the opportunity to have input at this stage of the process. We understandthat this is a report on the digital economy that identifies options for further discussion rather
than makes recommendations. Keeping this in mind, we have the following general comments.
General Comments
First, we endorse wholeheartedly the conclusion that there should not be a separate taxation
regime for the "digital economy", however defined.
Second, parts of the Discussion Draft range far beyond the Digital Economy, with some aspects
affecting other BEPS Actions and others touching on issues explicitly excluded from the BEPS
project. We believe that fundamental issues such as the division of income between the place
where functions, assets and risks generating income are located and the market jurisdiction,
should be addressed, if at all, directly and separately, rather than tangentially in this Discussion
Draft. We believe that it is only by squarely facing the issues and doing the difficult analyticaland political work that these issues can be properly resolved.
In particular, the Discussion Draft raises the issue of whether a market jurisdiction should havethe jurisdictional basis to impose an income tax based solely on the demand created by themarket place, regardless of the fact that an enterprise may have no physical presence in themarket place. We believe that a combination of an origin-based income tax and a destination
based VAT appropriately divides the jurisdiction to tax between the countries where income
producing activities occur and the countries where consumption of goods and services occur.
USCIB believes that the further work on this Action would be clarified by expressing the analysis
as whether current business models or practices (digital or otherwise) warrant a deviation from1418

the principle that the right to impose an income tax should be based on the presence of actual
business operations in a state. This work should include an analysis of the purpose andeconomic burden of the corporate income tax versus the VAT.
We note an important inconsistency between certain of the proposals in this Discussion Draft
and other recent OECD/G20 work on the role of business substance to determine the right totax and the measure of taxable income. The draft revisions to Chapter VI of the Transfer Pricing
Guidelines (“TPG”) specify that the returns to intangibles should be allocated by reference tothe location of personnel who perform or control the development, enhancement,
maintenance, and protection of the intangible, and not by reference solely to ownership,
funding and bearing risk. In contrast, this digital economy Discussion Draft expresses concernthat taxpayers control the location of functions and assets, and thereby suggests that thelocation of the actual business activities giving rise to the development, delivery and support ofdigital products and services may not be the determinants of the jurisdiction to tax income
arising from those activities. This inconsistency needs to be resolved, either the place ofperformance of profit producing activities is important or it is not. It cannot be important todetermine the entitlement to intangible related returns, but not important to determine tax
nexus for enterprises delivering digital goods or services.
We note with approval the many recent statements by OECD representatives that the OECD
continues to endorse the arm’s length principles (“ALP”). We also strongly support theconclusion in this Discussion Draft that the proposals to be developed under the other Actionsof the BEPS Action Plan will address the challenges posed by the digital economy. Chapter V of
the Discussion Draft notes how some of the ideas now being developed under those otherActions would address the tax challenges of the digital economy. We are concerned, however,that a number of proposals described in Chapter V (discussed in more detail below) if adopted
would move the OECD's application of the ALP substantially in the direction of formularyapportionment. USCIB believes that the OECD should assess all capital allocation, interest
expense allowance, and similar proposals by the criterion of whether the proposal is consistent
with the purpose of the ALP. A hybrid tax system would allow countries to assert the ALP
selectively (and almost certainly, inconsistently with the practices of other countries) or to
adopt elements of formulary when it gives the better tax result. Businesses would be caught inthe middle and subjected to a high risk of double taxation. This would have a negative impact
on trade and investment. Further, a hybrid system will substantially increase the administrative
burden associated with an either/or approach. Taxpayers will still be producing transfer pricing
studies, but will also be required to produce information that will support apportionment insome cases. The current proposals for Transfer Pricing Documentation and the Country-byCountry Reporting template illustrate this tension.

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USCIB sympathizes with OECD executives and staff for the extreme time pressure under which
the OECD has been required to develop these proposals. We appreciate the opportunity tocomment, and hope that our comments will be useful to allow the OECD to complete the next
steps of this project with efficiency. We also understand the political imperatives under which
the OECD believes it is operating. Nevertheless, the proposals raised in this and otherdiscussion drafts are complex issues which require time and care to work through the analysis
and study the expected repercussions. We believe that decisions on significant changes to theinternational tax law should not be made in haste. The OECD/G20 should not use the politicalexigencies of the moment as an excuse for not endeavouring to develop proposals which enjoy
consensus support. Otherwise, proposals prepared and delivered in haste could undermine theOECD’s reputation for careful, analytical work that supports the foundation of sound tax policy.
We look forward to contributing to a productive dialogue with the OECD as it continues thisimportant work.
Specific Comments
INTRODUCTION AND BACKGROUNDUSCIB strongly supports the Discussion Draft's reference to the Ottawa Taxation Framework(from 1998) principles – neutrality, efficiency, certainty and simplicity, effectiveness andfairness, and flexibility. We endorse the view that these principles are still relevant and,supplemented as necessary, can constitute the basis to evaluate both direct and indirect tax
options to address the tax challenges of the digital economy. (Para. 7) 1 We apply thoseprinciples in our comments on section VII to analyze the proposed options.
INFORMATION AND COMMUNICATION TECHNOLOGY AND ITS IMPACT ON THE ECONOMYUSCIB commends the Task Force for compiling a thorough and thoughtful analysis of the digital
economy in Chapters II and III of the Discussion Draft. USCIB agrees with the Task Force thatthe digital economy is characterized by rapid technological progress and shares the Task Force’s
view that the digital economy of tomorrow may look nothing like the digital economy of today.
THE DIGITAL ECONOMY, ITS KEY FEATURES AND THE EMERGENCE OF NEW BUSINESSMODELS 2
USCIB strongly agrees with the Task Force that, “because the digital economy is increasingly
becoming the economy itself, it would be difficult, if not impossible, to ring-fence the digital
1

These fundamental principles were further elaborated on and supplemented by the post Ottawa VAT work on ecommerce – the E-commerce Guidelines and the Consumption Tax Guidance papers in 2003 – and also the current
work on the development of the International VAT guidelines,2

As the OECD proceeds with this topic, it might want to include a definitional section. One of the issues with the
Discussion Draft is that the definition of important terms is frequently unclear.

3
420

economy from the rest of the economy.” (Para. 59) As a corollary to this statement, USCIB
notes that it is equally difficult to distinguish the digital economy from the larger economy.
Moreover, with the ever increasing digitalization of commercial activity, USCIB notes that it isdifficult to distinguish “pure play” digital / internet companies - i.e., companies that use theinternet as their principal method to deliver goods and services, including communicating withusers and suppliers through hosted web pages - from other companies. The Discussion Draft
implicitly acknowledges this point in its treatment in Chapter II of the Discussion Draft of theinternet of things, virtual currencies, and 3D printing, all of which create a businessconvergence between digital / internet service providers and providers of manufacturing,
design, development, and financial services.
USCIB nevertheless acknowledges that digital / internet companies distinguish themselves from
low-technology enterprises through the positive contributions that digital / internet companies
make to the economies in which they are based. USCIB reaches this conclusion because
academic studies demonstrate that an economy in which a high-technology enterprise, such asa digital / internet company, is based enjoys positive externalities in the form of increased
employment in the local service sector that exceed those associated with the presence of a
low-technology enterprise.
The Digital Economy Is Indistinguishable from the Economy
As noted above, USCIB agrees with the Task Force that the digitalization of the economy has
made the digital economy and the larger economy generally indistinguishable from one
another. To this end, USCIB wishes to refine certain points in Chapter III of the Discussion Draft
to reflect this conclusion.
The Digital Economy Is Not Characterized by the Presence of New Business Models
The Discussion Draft states that “[t]he digital economy has given rise to a number of new
business models” (Para. 60) and notes that examples of such “new "business models include
auction solutions, logistics services, online sales, the development and sale of applications,
online advertising, cloud computing, and payment services.” USCIB respectfully submits thatthe activities that the Discussion Draft identifies are not examples of “new” business models.
Rather, these activities are examples of the use of ICT to operate existing business models more
efficiently and to extend these business models through opportunities for new products andservices. This conclusion follows because, as the Discussion Draft acknowledges, these “new”
business models have offline analogues, through which marketplace, payment, logistics,
auction, and other services have been provided since the 19th century. For example, in more
traditional companies digital activity generally flows from existing sale and supply chains andthe digital component is used to enhance capabilities within those flows.
The Discussion Draft observes correctly that ICT enables enterprises to conduct “many types ofbusiness at substantially greater scale and over longer distances than was previously possible.”(Para. 60) USCIB considers this feature of ICT to be one of its key virtues. With ICT, small- to
medium-size enterprises are able to reach discrete and specialized markets at earlier stages intheir development than was previously possible. This creates considerable economic
4421

efficiencies, and goods and services can reach even these specialized markets with muchgreater efficiency than before. As a result, businesses and consumers around the world haveaccess to a greater variety of goods and services, and more opportunities for economic
advancement, than ever before. We would also note that the ability to monitor and apply
standards remotely has actually led to the localization of production in some cases.
Communications enhancements have reduced the need to keep development and production
in close proximity.
ICT does not change the fundamentals of business models, however. A retailer of LPs once
shipped LPs to consumers using the postal service. An online provider of song downloads now
uses ICT to deliver songs to consumers over the internet. The fundamental business model offinding and developing artistic talent, marketing, and delivering musical content to consumers
remains the same. Similarly, a software developer and manufacturer once shipped software on
disk or CD directly to consumers or retailers. This same developer and manufacturer may now
provide access to this software online. The fundamental business model of developing,delivering and supporting software for use by consumers remains the same.
Digital / Internet Companies Do Not Enjoy Lower Costs than Their Offline Counterparts
The Discussion Draft suggests that e-commerce companies enjoy a competitive advantage overtheir offline counterparts because e-commerce companies are able to “eliminat[e] the need formany of the wholesalers, distributors, retailers, and other intermediaries that were traditionallyused in businesses involving tangible goods.” (Para. 64) USCIB notes that the digitalization ofcertain forms of commerce has not resulted in a net reduction of costs. Instead, digitalization
has shifted these costs to new operational areas. In place of costs associated with renting andoperating retail space and transacting with intermediaries, e-commerce companies bearsignificant costs associated with developing, hosting, and operating websites that are accessible
to consumers around the world every day of the year. These websites require ongoing R&D toensure that they retain the right level of functionality to provide consumers with the interactive
experience that consumers expect from a virtual marketplace. In some cases functions are
shifted to third parties. For example, a digital economy enterprise which sells tangible goods
still needs to develop logistics systems to deliver the goods to its customers, just as adepartment store needs to handle its inventory. In many cases for enterprises operating in thedigital economy, these non-core functions are outsourced to third parties. The statement in
the Discussion Draft also fails to sufficiently acknowledge how more traditional companies
operate. Digital distribution functions may be an adjunct to rather than a replacement fortraditional distribution networks.
Moreover, costs associated with activities such as product development, marketing, andcustomer support persist in the businesses of digital / internet companies, just as they do inother businesses. In many cases, these costs may be higher for digital / internet companies
that must contend with short product cycles, the rapid obsolescence of technology, and low
barriers to entry into markets. As the Discussion Draft acknowledges, this competitive pressure
drives some digital / internet companies to give away hardware, and to treat this hardware asan operational cost, in an effort to expand the market of customers for their goods and5422

services. (Para. 15) In addition, the use of technology and data in business brings with it
specific legal costs, such as costs of complying with local country export controls and data
privacy rules. More traditional companies that are expanding their capabilities in the digital
sphere are expending significant amounts of capital in the development of new products andhave applied an impressive amount of resources in educating their customers as to the benefitsof these capabilities. The Discussion Draft underestimates the financial commitment thatcompanies must make and the significant risks they incur in order to become successful within
the digital economy.
The Discussion Draft states that technological advances make it possible for businesses to carryon economic activity with minimal need for personnel to be present. The Discussion Draft
notes that businesses can increase in size and reach with minimal increases in the number of
personnel required, so-called scale-without-mass. (Para. 98) While some start up companies
certainly have succeeded in developing valuable businesses at an early stage in theirdevelopment, we believe this point is greatly exaggerated as a description of the industry as awhole. Well-known “digital economy” companies have tens of thousands of employees.
Business cannot effectively scale without human and asset resources. 3 This misimpression of
the amount of business substance actually required to operate a significant “digital economy”
enterprise distorts discussions on the appropriate nexus rule for such companies through thefalse implication that such enterprises lack substance outside the market jurisdiction.
Key Features of the Digital Economy Are Key Features of the Economy
The Discussion Draft identifies what the Task Force considers to be six “[k]ey features” of thedigital economy. (Para. 91) USCIB agrees that certain of these features are present in thedigital economy but observes that these same features are present in the larger economy. For
example, the Discussion Draft characterizes “[r]eliance on data” as a key feature of the digital
economy. USCIB notes that all enterprises, including digital / internet companies, “collect data
about their customers, suppliers, and operations.” (Para. 103) Moreover, this practice is notnew. By way of illustration, customer-facing enterprises used mailers, loyalty cards, andcontests to collect and analyze data about customer behaviour long before the internet cameinto being. What digital has provided is the ability to collect such data in a faster and moreaccurate manner. For example, data regarding engine performance was historically collectedby airline mechanics, pilots and flight reports. Much more accurate data is now collected fromthe engines themselves. The collection of data is not a new development and does not require
sweeping changes to the rules regarding nexus and tax base.
USCIB respectfully questions whether the digital economy can properly be characterized ashaving a tendency toward monopoly / oligopoly if volatility is also a key feature of the digital
economy. (Paras 117 – 118) With low barriers to entry, the digital economy is consistently
witness to rapid ascents and declines. The now-defunct Friendster was considered “the hottest

3

One major digital economy company, for example, has 99,000 employees worldwide with 41,000 outside the U.S.
Many of its foreign marketing subsidiaries have over 1000 employees. Another digital economy company has
around 30,000 people of which around half are in the US. There is “mass” behind this scale.

6423

thing in social networking” 4 in 2003, one year before the founding of Facebook. Although
Facebook arguably dominates the English-language social networking space today, its successor
could be founded tomorrow. The trajectory of digital / internet companies thus stands incontrast to historic monopolies, like that enjoyed by the United Fruit Company, which
dominated the banana trade virtually unchallenged for much of the 20th century.
USCIB respectfully submits that the Discussion Draft overstates concerns about the mobility ofintangible assets, users, and business functions in the digital economy. Enterprises in all areasof the economy, including pharmaceutical, biotechnology, semiconductor, and natural
resources enterprises, develop, acquire, and exploit intangible assets. These enterprises
transfer intangible assets just as they transfer other, tangible assets, such as equipment.
Transfers of both tangible and intangible assets may constitute gain recognition events andresult in direct tax at the level of the transferor. In addition, in many cases, the physical easewith which an enterprise may transfer an intangible asset as opposed to a tangible asset isoffset by IP protection and other compliance burdens associated with intangible asset transfers.
Most OECD/G20 countries have developed rules that create significant tax costs upon the crossborder transfer of intangibles. These rules should generally provide a proper framework foraddressing the issue of intangible transfers.
USCIB also observes that users are generally not mobile because users live and work in one
place. Situations in which users reside in one country and purchase and/or access applications
while located in a second country are less common. Similarly, business functions are generally
not mobile. Personnel who perform R&D, IT, logistics, marketing, management, and otherfunctions remain situated in a particular location. These personnel have always been able tomove among different locations and are no less rooted to a single location now than before.
USCIB nevertheless acknowledges that ICT enables enterprises to centralize certain functions,such as finance, legal, management, and customer support functions, in a single location to
reduce costs and improve efficiency. This location might (or might not) be remote from market
jurisdictions. By definition, centralizing such functions means that the centralized activity will
be remote from the majority of market jurisdictions. Centralizing functions does not entail themobility of functions, however. Instead, centralizing functions requires that these functions
remain fixed at a single location. Current transfer pricing rules can be used to address the issueof mobility with respect to services that are used internally.
In its treatment of the mobility of business functions, the Discussion Draft suggests that digital /internet companies are able to “carry on economic activity with minimal need for personnel tobe present.” (Para. 98) USCIB respectfully disagrees with this contention. USCIB observes that
all enterprises, including digital / internet companies, require human resources to scale, as
evidenced by the tens of thousands of employees of the leading digital / internet companies.
Although digital / internet companies may retain fewer salespeople as compared to their offline
counterparts, these same companies employ significant numbers of development, marketing,operations, IT, and other personnel. Put differently, digital / internet companies havereallocated the responsibilities of their employees but have not eliminated the need for4

Robert McMillan, “The Friendster Autopsy: How a Social Network Dies,” WIRED.COM (Feb. 27, 2013).

7424

employees. This statement also reflects a potential misunderstanding by the OECD of how
companies operate in the digital sphere. Technology is developed by engineers, scientists andother sophisticated professionals that have the ability to innovate. The technology
development may be both labour and capital intensive. Most of these people are located incountries which are hardly thought of as tax havens and there is not a tremendous amount ofmobility within this population.
USCIB also respectfully questions the utility of Figure 8, which appears below paragraph 98 of
the Discussion Draft and which depicts the “[a]verage revenue per employee of the top 250 ICT
Firms.” As a threshold matter, USCIB notes that revenue generally does not translate into
profits for digital / internet companies and thus represents a false metric for the productive
capacity of employees of these companies. In addition, neither Figure 8 nor the source in which
Figure 8 originally appears - i.e., the OECD Internet Economy Outlook 2012 - sets forth thenames of the “top 250 ICT Firms.” As a result, USCIB is unable to assess the relationshipbetween the average revenue per employee in Figure 8 and the profitability of the firms inquestion. Moreover, USCIB respectfully submits that an objective assessment of the relative
profitability of ICT employees must take place in the context of other high margin industries,
such as financial services, consulting services, and oil and gas.
Significance of Investment Decisions
Paragraph 101 notes that businesses are increasingly able to choose the optimal location for
productive activities and assets, even if that location may be distant from the location ofcustomers or the location of other stages of production. The ability of businesses to choose theoptimal location for assets and activities is not limited to the “digital economy” and thus cannot
be used to justify separate rules for digital enterprises. USCIB believes that this statement
reflects concern on the part of some delegates that this ability to choose the optimal location
for productive activities and assets will permit taxpayers to locate productive activities andassets where they are subject to little or no tax. USCIB believes that there are four true
statements about tax and investment decisions, unrelated to the digital economy:
1. Taxpayers take into account the level of tax they will incur on their productive
investment when they make decisions about where to locate these activities.
2. Low taxes or tax incentives will not make up for an unfavourable investment climate.
3. Tax incentives can tip the scales towards a location that has an otherwise favourable
investment climate.
4. A difficult tax environment including high rates, lack of clarity and the difficulty ofresolving disputes can discourage investment in an otherwise favourable environment.
In an open global market place, if countries seek to encourage business to make productive
investments in their jurisdictions, then consequences of these factors are clear. Countries need
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to focus on making the investment climate favourable. Tax regimes are a part of this, including
tax regimes that are clear, predictable, and generally impose lower rates of tax on a broader
base.
This paragraph also raises concerns that countries wish to have it both ways. The BEPS projectgenerally has a theme of requiring more substance in order to support taxpayers’ allocating
income to a particular jurisdiction. 5 This focus on increased substance is inconsistent with thesuggestion that income of a MNE can be taxable in a jurisdiction where that MNE has no assets,functions, or employees. 6 That is, if a country wishes to focus on the “people functions”
leading to the development of intangible property and assert that the people functions are theprincipal source of profit creation (in distinction to the contributions of risk and capital), thenthat country should not at the same time assert that another country where the “people
functions” are carried on, which lead to the creation of products that are marketed in the first
country, must yield to the first country insofar as the right to tax the full return from thosefunctions is concerned. This point will be discussed in more detail in comments on section VII,
but USCIB believes that the Task Force underestimates the need for people and assets in the
production of digital economy products.
The Discussion Draft does recognize the volatility of the market and notes that the few
companies that have managed long-term success typically have done so by investing substantial
resources in research and development and in acquiring start-ups with innovative ideas,
launching new features and new products and continually evaluating and modifying businessmodels. (Para. 118) USCIB is concerned that although volatility and the resulting need tocontinuously innovate is acknowledged, it is not taken properly into account for purposes of
profit attribution. Particularly in the context of the Discussion Drafts on intangibles, USCIB has
been making the point that the OECD is undervaluing the contributions attributable tomanaging business risk. These fundamental business decisions are generally centralized in one
or a few designated MNE group members, and are not decentralized into the market
jurisdictions. For example, risk management policies are generally determined at headquarters,
but their daily implementation and control are generally decentralized into a few regional
management companies.
IV IDENTIFYING OPPORTUNITIES FOR BEPS IN THE DIGITAL ECONOMY

5The OECD has identified actions 6 through 10 as directed at ensuring a taxpayer’s transactions have substance. In
addition, action 5, relating to harmful tax practices, is directed at ensuring that countries require substantial activity
for any preferential regime.

6

That is, if two men and a dog cannot support the attribution of income to a low-tax jurisdiction, then no men andno dog cannot support the attribution of income to the market jurisdiction.

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The draft acknowledges that the nature of the strategies used to achieve BEPS in digitalbusinesses is similar to the nature of strategies used to achieve BEPS in more traditional
businesses. (Para. 120) Some of the characteristics of the digital economy may exacerbate therisk of BEPS, particularly in the context of indirect taxation. USCIB would like to point out that
MNEs are much more likely to be VAT compliant with respect to digital economy transactions
than smaller enterprises. Obviously, all businesses should comply with their tax obligations, but
in the case of VAT, MNEs function as an uncompensated tax collector. The trade distortive
effects that the OECD has pointed out in other contexts therefore operate in the opposite
direction. That is, consumers may be discouraged from acquiring digital goods and services
from MNEs because they do comply with their VAT obligations while smaller companies may
not. Tax authorities may find that digital economy-based technology solutions may improveoverall compliance with VAT by SMEs.
BEPS in the Context of Direct Taxation
The draft identifies four elements of BEPS planning: avoiding a taxable presence; avoiding
withholding tax; low or no tax at the level of the recipient; and no current tax at the level of theparent. (Para. 122)
Eliminating or reducing tax in the market country
Avoiding a taxable presence
The domestic laws of most countries require some degree of physical presence before businessprofits are subject to tax. Articles 5 and 7 require a permanent establishment before a nonresident may be subject to tax. Accordingly, a non-resident company may not be subject to tax
in the country solely by reference to the fact that it has customers there. (Para. 123)
The Discussion Draft also states that the ability of companies to maintain some level of businessconnection "within a country" without being subject to tax on business profits from sources
within that country is the result of particular policy choices reflected in domestic law and tax
treaties, and is not in and of itself a BEPS issue. (Para. 124) However, digital companies may beable to take greater advantage of these opportunities. This combined with the elimination of
taxation in the residence state, creates double non-taxation, and does raise BEPS concerns.
(Para. 124)First, USCIB believes a distinction needs to be drawn between actual presence “within acountry” and sales “to a country”. Activities “within a country” include sales affiliates,
customer support operations, and other personnel and assets that actually are established inmarket jurisdictions by many digital economy companies. This is distinct from making sales to10427

customers located in a country, which should not be considered a business connection “withina country”.
USCIB believes that these choices relate to the fundamental jurisdictional issue 7 concerningwhen it is appropriate to impose income tax on participants in the economic life of a country. A
legitimate substantive basis for imposing a tax may arise from different contacts between the
country and the person or thing taxed. The location of a person, the situs of property, theperformance of an activity, the entry of a person or property into a jurisdiction all can support
the jurisdiction to impose a tax. Different contacts support different types of assertions oftaxing authority. For example, importation of non-income producing property into ajurisdiction would support the imposition of a customs duty, but not an income tax on the
person importing the property. Although all taxes are designed to raise revenue, they
legitimately reach different aspects of the economic life of a country. Thus countries use avariety of tax instruments to reach each of these aspects and a country may have a legitimate
jurisdictional basis for imposing one tax but not a different tax based on the type of connection
between the country and the thing that they wish to tax.
The notion of an income tax -- particularly a net income tax -- requires identification of theperson receiving the income as a first step in determining the items of income and expensearound which the income tax net is drawn. Since that must be the first step in identifying theincome tax base, the characteristics of that person seem more relevant than they might forother taxes, for example, excise taxes. Even in the case of a gross basis income tax, the identityof the person receiving the income is relevant to the determination of the amount of tax
imposed; bilateral income tax treaties grant benefits on fixed or determinable type income on
the basis of the residence of the recipient. So, the status of the recipient of income is a key
concept in determining the amount of an income tax. Because of the intrusiveness of theincome tax, this status is relevant in a way that is not for other taxes. 8 Thus the basic
jurisdictional nexus is between the person earning the income and country with which that
person has substantial contacts justifying the imposition of a tax that requires detailed
information concerning the person subject to the tax. USCIB believes that this is thefundamental reason that countries have historically adopted an origin based income tax modeland refrained from imposing an income tax, particularly a net income tax, in the absence of
substantial contacts of the enterprise located in the country. Because of these sound reasons
the OECD/G20 should not lightly reject these historical standards.
7

Countries should only impose tax if they have a substantive basis for their taxing authority. They may attempt todo so in other cases and may succeed if they have enforcement power, but an exercise of taxing authority in such asituation where there is no substantive basis is illegitimate and the OECD/G20 should not condone such an
exercise of taxing jurisdiction.

8

See the FATCA rules.

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The single fact that may differ in the case of the digital economy is that the scale of remotesales has increased. The policy choice, therefore, is whether this fact justifies a modification to
the traditional nexus standards. USCIB believes that this increase in scale does not justify ageneral change, or a special rule for the digital economy, since over time trade in these goods
and services will become more reciprocal among jurisdictions.
Traditionally, gross basis withholding taxes may be imposed on certain types of income even in
the absence of an actual business presence. For a gross basis withholding tax to be consideredappropriate, the income should be of a type the production of which does not requiresignificant expenses. As previously discussed, the Discussion Draft asserts that internet
businesses have significantly more revenues per employee. USCIB would like a further
explanation of how those figures were derived. We believe that in most cases internet
businesses are like any other. That is, it is difficult to move from a good idea to a businessprofit. Most businesses fail. Even successful businesses may have long periods of start-up
losses before becoming profitable such that a model that imposes tax on a gross basis is likely
to impose tax in many cases on amounts that do not reflect net profits. Gross revenue per
employee, even if high, does not mean that those businesses do not incur significant costs.
People may be replaced by technology, but technology costs may be expensive. For example,
search revenue per employee may be high but traffic acquisition costs (TAC) may significantly
reduce the profit opportunity on that revenue.
Historically, there have been two primary bases for imposing income tax: source andresidence.9 Tax treaties generally recognize that a jurisdiction where the source of income islocated (the jurisdiction in which the income “arises”) has the primary right to impose an
income tax on that income, and the jurisdiction of residence has a secondary right to impose
tax. A person’s income is generated by that person’s activity and/or property. Source rules
generally are intended to reflect the location of the person’s activity, or the location of theperson’s property, that generates the income or the origin of that income. Neither concept
focuses on the location of the customer.
Source rules are not universal or immutable, but there are some basic principles that are
generally used to determine source. Some of those principles are: place of activity(performance of services, profits attributable to a PE), place of use (rents and royalties10 from
9

The BEPS Action Plan provides: “While actions to address BEPS will restore both source and residence taxation
in a number of cases where cross-border income would otherwise go untaxed or would be taxed at very low rates,
these actions are not directly aimed at changing the existing international standards on the allocation of taxing rights
on cross-border income.” (Action Plan p. 11.) So, while jurisdictions may debate these issues, the BEPS project is
not intended to changing the current standards.

10

The market jurisdictions may believe that returns attributable to accessing a market are royalties. The OECD’s
Discussion Draft on intangibles rejects that view because the market cannot be owned or controlled by any person.

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property), residence of the payor (interest and dividends), and residence of the recipient(capital gains, and business profits, not otherwise dealt with, and not attributable to a PE
outside the residence country).
The income tax, at its most basic level, is an origin based tax on income created by activities
conducted in a particular place. That is, jurisdictional nexus is created by the location ofactivities11 and assets of the person earning the income. The country or countries that have asubstantial nexus to those activities and assets should have the jurisdiction to tax that income.
Minimizing functions, assets, and risks in market to jurisdictions
The Discussion Draft asserts “[i]n the context of the digital economy, an enterprise may
typically establish a local subsidiary or a PE, with the local activities structured in a way thatgenerates little taxable profit.” (Para. 125) The Discussion Draft acknowledges that this is not a
BEPS issue in and of itself, even if the enterprise takes taxes into account in deciding where tolocate personnel and functions. (Para. 125) The Discussion Draft asserts, however, that thiscreates "incentives to purport an allocation of functions for tax purposes in ways that may notcorrespond to actual business functions performed, and that would not be chosen in theabsence of tax considerations.” (Para. 125) How much profit a local entity generates depends
on the functions, assets and risks of that entity. There has been a lot of public comment on thisissue, but the public comment does not necessarily reflect the actual operations taking place inparticular countries. In many cases, “digital economy” companies only locate a small portion of
their worldwide labour force in a jurisdiction and those personnel are not responsible forintellectual property. Thus, minimal presence and low value functions are what leads to thelow profit attribution.
The Discussion Draft states that authority to conclude contracts is one of the functions that may"purportedly" be in a nonresident entity, while the "effective authority" to conclude contracts is
in fact in the local entity. 12 (Para. 127) The draft continues as follows: “assets, in particularintangibles, and risks related to the activities carried out at the local level may be allocated via
contractual arrangements to other group members operating in a low tax environment in a waythat does not correspond to actual risks assumed or to functions performed, assets used, orrisks assumed related to the intangibles.” (Para. 125) The draft also identifies "undervaluing"intangibles at the time of transfer as a risk. (Para. 126)
Assuming that this view is retained in the final version then the royalty analogy is not the appropriate method for
determining the source of income derived from the delivery of digital goods or services.
11

The word “activities” is used broadly here. Activities would include investing, bearing risk, holding title andmanaging property.
12
Contract approval parameters are generally set at the headquarters company or regional managementcompany, not at the local market level. Difficult contract negotiations are generally escalated to the headquartersor regional management company.

13
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The Discussion Draft also states “[o]perations in higher tax jurisdictions often are “allegedly”
stripped of risk, do not “claim” ownership of intangibles or other valuable assets, and do nothold the capital that funds the core profit making activities of the group.” (Para. 126 internal
quotations added.) USCIB has addressed some of these concerns in our comments in our
responses to the Discussion Drafts on intangibles. USCIB is very concerned with the tone of thisDiscussion Draft, that it reflects an assumption that MNCs systematically misrepresent to tax
authorities the actual functions, assets and risks located in a jurisdiction.
The emphasis on “alleged” and “purported” is misplaced. Within the limits of the law,
taxpayers are allowed to decide on the structure of their transactions. Taxpayers and tax
authorities may disagree with the consequences of transactions, but the pejorative language isunhelpful to the resolution of these difficult issues. The discussion of these issues needs to takeplace at the level of the appropriate policy without comments that imply taxpayers are
generally not following the current rules. Under current law, in cases where function does notfollow form and taxpayers only “purport” to do things rather than actually doing them, tax
authorities have the appropriate tools to challenge those allocations of income and assert
taxing jurisdiction.
Maximizing deductions in market jurisdictions
This section asserts that companies artificially inflate expenses including interest, royalties, andservice fees. (Para. 128) We reiterate here the comments above. If the payments are notarm’s length, tax authorities may challenge these allocations. The discussion on appropriate
rules should be based on the appropriate policy.
Avoiding withholding tax
The Discussion Draft provides that companies may use treaty shopping structures to avoid
withholding tax that would otherwise be due and this raises BEPS concerns. (Para. 129) USCIB
will be providing comments on the recently proposed Discussion Draft on Treaty Anti-Abuse
rules.
Opportunities for BEPS with respect to VATThis topic is discussed at the end of this letter.
V. TACKLING BEPS IN THE DIGITAL ECONOMYUSCIB strongly agrees with the view expressed in this section of the Discussion Draft that otherAction Plan items that will have an impact on BEPS in the digital economy. We also strongly
agree with the statement that is necessary to evaluate the impact of those other changes
before considering unique rules for the taxation of the digital economy that may turn out to be14431

unnecessary. 13 The Discussion Draft provides insight into where some of the future action
items may be headed. It is worth noting that with all the proposed changes, there is noevidence in the Discussion Draft that the countries see improved dispute resolution as part ofthe package of items necessary to tackle BEPS in the digital economy. As business hasrepeatedly made clear, improved dispute resolution is critical to implementing any fundamental
restructuring of the international tax principles. The interpretation of these new rules will
generate disputes and improving dispute resolution must be addressed.
Restoring Taxation on Stateless Income“Structures aimed at artificially shifting profits to locations where they are taxed at morefavourable rates, or not taxed at all, will be rendered ineffective by ongoing work in the context
of the BEPS Project.” (Para. 146) Presumably this includes all the transfer pricing action items(Actions 8, 9, and 10). The Discussion Draft also recognizes greater transparency andmandatory disclosure of aggressive tax planning arrangements, uniform transfer pricing
documentation requirements, and country-by-country reporting as contributing to this. USCIB
has previously submitted comments on these issues. We would like to highlight that the OECDneeds to be mindful of the burden created by additional reporting requirements and ensurethat burden is appropriate and proportionate.
Measures that will restore taxation in the market jurisdiction
These measures include the prevention of treaty abuse (Action 6). A Discussion Draft on thiswas published recently. USCIB has submitted separate comments on this topic.
On preventing the artificial avoidance of PE status (Action 7 – which is due by September 2015),
the Discussion Draft mentions possible changes to the rules concerning the conclusion ofcontracts and dependent agents (Para. 150) and possible changes to the Article 5(4)preparatory and auxiliary activities. (Para. 151)
Measures that will restore taxation in both market and ultimate parent jurisdictions
The Discussion Draft identifies three action items in this context. These are the work on hybrid
mismatch arrangements, the work on base erosion via interest deductions and other financial
payments, and the actions to assure that transfer pricing outcomes are in line with value
creation.
Neutralize the effects of hybrid mismatch arrangements
13

The timing on this Action Item may be premature. Action Item 1 should probably have been Action Item 15.
That is the impact of all the other changes should have been considered before taking action of the “digital
economy.”15
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The OECD recently published two Discussion Drafts on these topics. USCIB will be developing
comments on these Discussion Drafts.
Limit base erosion via interest deductions and other financial payments
The Discussion Draft points out that “many large and well-established digital economy players
are cash rich and they often finance new ventures, the acquisition of start-ups, or other assets
with intra-group debt.” (Para. 155) Intra-group financing entities are often established in low
tax jurisdictions. The existing rules permit companies to fund profit-generating activities of thegroup with intercompany debt even though the group as a whole may be much less heavily
leveraged. (Para. 156) This issue is not unique to digital economy companies and may be lessprevalent in the “digital economy” than in other sectors of the economy.
The Discussion Draft identifies this as an area where mechanisms within or beyond the arm’s
length principle may be necessary and suggests a formulary approach which ties deductible
interest payments to external debt payments which may lead to results that better reflect thebusiness reality of MNE groups. (Para. 157) This would obviously be a significant change fromcurrent law and a significant move towards formulary apportionment. USCIB has serious
doubts concerning the feasibility of such an approach. In order for this to work, countries
would not only deny deductions for intra-party debt, they would also have to permit a
deduction for a portion of the external interest expense incurred by an entity located outside of
their jurisdiction. Since, these countries are now allowing that deduction presumably theywould also want the option to impose a withholding tax on the portion of external interest
paid. Instead of actual intra-company debt would there now be deemed intra-company debt
that would be subject to withholding tax? That does not seem appropriate since there would
be no income in that jurisdiction since the only income is held by unrelated parties who are notnecessarily located in the jurisdiction of the entity that incurs the third party debt. Would eachcompany have a share of the external debt? If so, how would each company determine a shareof that in a timely manner such that withholding tax could be imposed without burdening
capital markets? Perhaps withholding agents have to determine which treaty applied to some
portion of each payment. Perhaps withholding agents would withhold at the highest possible
applicable rate and investors would be required to apply for refunds in every jurisdiction towhich interest was allocated.
Counter harmful tax practices more effectively
The Discussion Draft notes that a number of OECD and non-OECD countries have introduced
preferential tax regimes for IP. (Para. 158) The OECD will be examining whether those regimes
constitute harmful tax preferences, specifically whether they require substantial activity. If theregimes are found to be harmful, then the relevant country will be given an opportunity to16433

abolish the regime or remove the features that create the harmful effect. This may have moreof an impact within the EU because of the limitations on State Aid. If certain regimes are foundto be harmful, they may violate the EU’s prohibitions against State Aid; countries may, in fact,
be obliged to get rid of them (or face penalties). If countries establish tax incentives, thentaxpayers should be free to take advantage of them. It is not a BEPS concern if a consequenceof taking advantage of a legal tax incentive is low or no tax on the income covered by thatincentive.
Assure that transfer pricing outcomes are in line with value creation
This is the work being done under action items 8 through 10 and should have the effect ofaligning income with the location in which the income arises.
Intangibles, including hard-to-value intangibles, and cost contribution arrangements
The BEPS work on intangibles will address the below value transfer of intangibles by taking
several steps. (Para. 160) These include:
1.

A broad definition of intangibles -- this is intended to ensure that any intangible
for which unrelated parties would pay compensation must be compensated in a
related party transfer;2.
Entities that contribute value by performing or managing development functions
or by bearing or controlling risks are appropriately rewarded;3.
Valuation techniques may be used when appropriate comparables cannot befound;
4.
In the case of partly developed or hard to value intangibles, post-transfer
profitability (commensurate with income) should be taken into account.
USCIB has submitted comprehensive comments on the topic of intangibles and stands by thosecomments.
Business risks
The Discussion Draft states that the BEPS work will require the control of risk, the financial
capacity to bear the risk, and the management of risk to be more closely aligned. (Para. 163)
Even more importantly, the Discussion Draft states “the guidance will also identify risks that, by
their nature, are borne by the MNE group as a whole and therefore which cannot readily be
assigned to a single group entity.” (Para. 163) The Discussion Draft does not say what would
be done with these risks. Ignoring commercial risk is one of the principal tenets of formularyapportionment (those advocating for formulary approaches basically consider the return from
intangibles and risk to be spread over all the activities of the group). So, ignoring risk would be17434

a significant move in the direction of formulary apportionment. As mentioned earlier in thiscomment letter, the managing of global risk is one of the principal functions of senior
management. Management is responsible for identifying the direction of the business, deciding
which ventures to pursue and which to abandon, and developing or acquiring new products orbusinesses which they believe will be successful. These basic decisions determine whether acompany will become and remain successful. Even successful businesses must continuously
evaluate and manage these risks. These risks are not managed in the contract manufacturing
entity or the contract research and development facility, but they are key to the continuing
vitality of any business 14 and an approach that either ignored these risks or allocated them on
the basis of a formula would fundamentally misallocate business risk. This approach would
divorce taxation from business and economic realities; a result that appears contrary to thegoals of the OECD. Additionally, formulaic apportionments carry significant risks of creating
their own base erosion problems.
Base eroding payments
The Discussion Draft describes, in brief, certain targeted measures that could be helpful inaddressing base eroding payments. These could include measures that preserve some relianceon the ALP but depart from it in certain respects. These approaches could include caps on
certain payments or formula based allocations. (Para. 165) Our earlier comments on allocatinginterest using formulas could be relevant here depending on what is allocated and whether
withholding taxes potentially apply. This would be another significant step in the direction of
formulary apportionment.
Global value chains and profit methods
The Discussion Draft provides that:“Attention should therefore be devoted to the implications of this increased integration in
MNEs and evaluate the need for greater reliance on value chain analyses and profit split
methods. This work should also address situations where comparables are not available
because of the structures designed by taxpayers and could also include simpler and clearer
guidance on the use of profit splits along the lines that have been successfully applied inconnection with global trading and other integrated financial services businesses.” (Para. 166)
The output is to be delivered by September 2015.
USCIB is very concerned that all of these elements taken together represent a significant
erosion of the ALP. As we stated at the beginning of this letter, this hybrid approach will
14

Even companies that have been successful over a long period can fail because they fail to manage business risk
and change. Kodak is a prime example of the sort of failure.

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potentially lead to a high risk of double taxation and will potentially create a significant drag on
trade and investment.
Measures that will restore taxation in the jurisdiction of ultimate parent
The Discussion Draft provides that to address BEPS in the digital economy, CFC rules must
effectively address the taxation of mobile income created by the digital economy. (Para. 168)
To address this situation, consideration should be given to CFC rules that target income
typically earned in the digital economy, such as income earned from the remote sale of digital
goods and services. (Para. 169) 15 Remote selling is neither new nor unique to the digital
economy. Internet/cloud technology has made remote selling pervasive in the economy. So it
would be difficult and unfair to limit rules on remote selling to digital economy transactions.
The draft also says that the work will need to take into account the need for anti-inversion
rules. (Para. 169)
USCIB believes that the purpose of the corporate income tax and the economic burden of thattax are relevant to whether a CFC approach or another approach is appropriate to reducing theincidence of low or non-taxation. That is, if other BEPS concerns are addressed and yet there is
still low-taxed income: does any country have jurisdiction to tax that income? If so what is thebasis of that jurisdiction? The corporate income tax ensures a comprehensive income tax;
without a corporate income tax, corporate earnings would not be taxed until paid out toindividual shareholders. 16 It is also widely acknowledged that corporations do not bear the
economic burden of the corporate tax, although it is less clear where that burden falls.
Traditionally, the impact of corporate taxation has been believed to borne by the shareholdersof the corporation since it reduces the value of their shares. More recently some have argued
that the burden of the corporate tax falls on labour or the consumer. The U.S. Congressional
Research Service believes the traditional analysis is generally correct.17 This is relevant to thepolicy analysis because if the corporate tax functions as a pre-payment of the personal income
tax and the economic burden of the tax in fact usually falls on the shareholders of thecorporation, then the jurisdiction which ought to be determining whether residual tax shouldbe imposed on a corporation that is earning income subject to a low rate of tax ought to be thejurisdiction in which the shareholders reside. Taxing the ultimate individual shareholders is
probably impractical. However, taxing the ultimate parent in the jurisdiction in which it resides
is probably a reasonable proxy for taxing the individual shareholders. If that conclusion iscorrect, is the jurisdiction of the ultimate parent obliged to tax low taxed income or can it makea sovereign choice to tax that income only on repatriation to the ultimate parent or not at all?
15

See the recent US Treasury proposal on CFC rules for the digital economy.
The Corporate Income Tax System: Options for Reform, the Congressional Research Service, p. 15.
17
Ibid at 16.
16

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USCIB believes that countries do have the sovereign right to make these choices and that after
appropriate returns are paid based on a FAR analysis, the right to impose an additional tax on
corporate profits ought to be reserved to the jurisdiction of the ultimate parent.
This issue goes to the origin theory of income taxation vs. the supply/demand theory. Under
the supply/origin theory: "profits originate where the factors that produce the profits operate
and the source of the “normal” return of equity capital should therefore be identified “to thelocation in which the actual operation of the capital occurs”; 18 ... the mere consumer market
does not represent a factor contributing to the added value of the company. 19 “[A]ctivity
somewhere, as reflected by the entrepreneur's risk assumption, labour deployment, andproperty investments, remains a necessary component to an enterprise's creation of products
and services. Nothing in the "new" economy changes the proper justification for a state toimpose an income tax on an enterprise." 20
The Final Report also says: "No member of the TAG argued that tax rules should be modified toshield countries from the effect of technological developments on their tax base. Countries do
not have a right to a particular level of tax revenues regardless of where business profits
originate." 21 So, if activities have shifted to outside the jurisdiction, countries will lose tax
revenue and that is appropriate. BEPS is intended to address artificial profit shifting. If theincome is attributable to actual activities that have moved out of the jurisdiction, then the
profit shifting is not artificial. We are concerned that the digital economy proposals areinconsistent with the other BEPS action items that strive to attribute more profit to the location
where activities take place. We believe that countries cannot have it both ways. If they want
to look to the location of people functions in the context of the attribution of income todevelopment of intangibles, they should also look to the location of people functions in thecontext of the digital economy.
USCIB also believes that this does not deny a market jurisdiction an appropriate share of taxing
jurisdiction because proper application of a destination based VAT will permit the market
jurisdiction to collect an appropriate amount of tax. 22
18

Anne Schafer and Christoph Spengel, ICT and International Taxation: Tax Attributes and Scope of Taxation,
Business Profits TAG, final report, paragraph 40.
20
Business Profits TAG final report paragraph 50.
21
Ibid para. 118.
22
There are political reasons that some jurisdictions do not want to rely on a VAT to tax the value attributable tothe market. These vary but include the fact that, as discussed, the economic burden of a VAT is supposed to fall on
the final consumer. That is, jurisdictions may wish to tax corporate income precisely because the economic burden
does not fall on their residents. In some jurisdictions VAT rates are already very high and there is not a lot of scope
to raise rates further. Sub-national governments may impose VATs, so revenue from a VAT would have to beshared between national and sub-national governments. Some jurisdictions may have constitutional or otherrestrictions that limit their ability to impose a VAT. These political concerns of course need to be properly taken
19

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In contrast to an income tax, a VAT is intended to impose a broad-based tax on final
consumption by households. The central design feature of a VAT is that the tax is collected
through a staged process. Each business in the supply chain takes part in the process ofcontrolling and collecting the tax, remitting the portion of the tax corresponding to its margin.
That is the VAT of a business is the difference between the VAT on its taxed inputs and the VAT
on its taxed outputs. The tax is collected in principle on the “value added” at each stage of thecollection process.
The economic burden of a VAT is supposed to be borne by the ultimate consumer (in contrast
to the corporate income tax). We believe that the OECD should take a careful look at theeconomic burden of both of these taxes in the context of the digital economy. If companies arecompeting on price then VAT compliant MNEs may be bearing the burden of the VAT because
SME competitors may be less likely to be VAT compliant and will undercut more compliant
companies on price. Thus, VAT compliant businesses may be bearing at least a portion of the
VAT. Also, companies may want to use a uniform pricing model across jurisdictions and inorder to avoid pricing differentials caused by different VAT rates, some VAT may be borne by
MNEs (which may mean that it is ultimately borne by shareholders). Business also believes thatin determining the economic burden of the VAT compliance costs should be taken into account.
These costs are higher than they need to be because governments have not coordinated theirrules; compliance is more burdensome than it needs to be; penalties are significant; and there
is no process for resolving double taxation disputes. Precisely because the economic burden is
supposed to be borne be the customer, the compliance costs business incurs are an economic
burden on the company. 23
The fundamental policy issue in relation to the international application of the VAT is whether a
VAT should be imposed by the jurisdiction of origin or the jurisdiction of destination. Under thedestination principle, tax is ultimately levied only on the final consumption that occurs within
the taxing jurisdiction. If countries adopt a destination based VAT, in the case of a cross-bordertransaction, the country of origin is ceding its taxing jurisdiction to the country of destination.
This may be the right policy, but the economic result is that the country of destination is taxing
value added in other jurisdictions.
Under the destination principle, exports are not subject to tax (and are entitled to a refund of
input tax) and imports are taxed on the same basis as domestic supplies. Thus, the value that
into account, but that should be done after the tax policy analysis of the proper scope of the income tax and theVAT, so countries understand that they are making political concessions to achieve a consensus solution.
23
Some have argued that making use of the infrastructure of a country ought to be a sufficient basis for finding a
PE and imposing an income tax. We disagree with that view, but note that MNEs not only make use of theinfrastructure of a country, but also contribute to it. Serving as the government’s VAT collector is a prime example
of such a contribution.

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was added outside of the jurisdiction of consumption is subject to full VAT in the jurisdictionof final consumption. In other words, the jurisdiction of consumption is able to impose a tax
on the value created by activities taking place outside the jurisdiction and assets whose use andvalue is outside the jurisdiction.
Under the origin principle, each jurisdiction would levy VAT on the value created within its own
borders. Thus, jurisdictions would tax exports on the same basis and at the same rate as
domestic supplies and would tax imports as domestic supplies with a credit for the hypotheticalvalue of its VAT (not the actual VAT paid in the country of export). By imposing tax at thevarious rates applicable in the jurisdictions where value is added, the origin principle could
influence the economic or geographical structure of the value chain and undermine neutrality
in international trade.
Obviously this is true and could also be true for origin-based income taxes. That is, imposing
income tax on the place where value is created can and does influence the economic andgeographical structure of the value chain, as discussed above companies take taxes into
account in deciding where to locate productive activities. The OECD has recognized that
consumption taxes are preferable to income taxes, precisely because consumption is lessmobile and does not create distortions. This does not mean that all taxes – income taxes in thiscase -- should be imposed on the basis of place of consumption. A distinction between origin
based income taxes and destination based consumption taxes allows both the jurisdiction oforigin and the jurisdiction of destination to tax value creation in an appropriate way.
Although VAT is a tax on final consumption, VAT is not imposed on actual consumption but on
proxies that are intended to predict the likely place of consumption. In the context ofdeveloping VAT guidelines, the OECD is identifying which proxies work best in certain
circumstances. Once proxies are identified, actual consumption is irrelevant to determining
the place of taxation. That is, the proxy trumps the place of consumption if they differ. In thecontext of digital transactions there are four possible proxies being considered. Those proxies
are: consumer residence; actual location of the consumer; residence or location of the supplier;and place of performance. It is likely that the only really feasible proxy in the majority of cases
will be consumer residence. The residence of the consumer is the proxy (and therefore thedeemed place of consumption) for digital transactions. In other words, the place of actual
consumption would be irrelevant and the place of consumer residence would generally be theplace of consumption.
USCIB believes that this division of taxing jurisdiction between VAT and income tax allows bothjurisdictions (e.g. origin and destination) to tax a “fair share” of the value attributable to eacheconomic transaction. That is, the country where the functions that generate income havejurisdiction to tax income and the country of consumption (probably deemed to be the country
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of the consumer’s residence) has jurisdiction to impose a VAT. Each country gets one “bite of
the apple”, with the VAT share on final consumption actually being the far larger amount as it is
imposed on gross revenue without regard to profitability.
VI. BROADER TAX CHALLENGES RAISED BY THE DIGITAL ECONOMY
The Discussion Draft states that the evolution of business models in general and the growth ofthe digital economy in particular have resulted in nonresident companies operating in market
jurisdictions in a fundamentally different manner today than at the time that international tax
rules were designed. (Para. 174) The draft also asserts that the traditional model of doing
business in market economies is obsolete. (Para. 174) USCIB believes that these assertions
grossly overstate the impact of digital methods of doing business on market economies.
Companies still require people, assets and functions which will create a tax presence insignificant jurisdictions. The main challenges of the digital economy are identified in paragraph
177 as:1.

Nexus – the reduced need for physical presence in order to carry on businessraises questions as to whether the current rules are appropriate;
2.
Data – the use of data raises questions concerning how to attribute value createdfrom the generation of data through digital products and services, and how tocharacterize a person’s supply of data;
3.
Characterization – how should payments attributable to new digital products andservices be characterized;
4.
VAT collection – particularly with respect to goods and services acquired by private
consumers.
Nexus and the ability to have a significant presence without being liable to tax
The Discussion Draft recognizes that advances in digital technology have not changed thefundamental nature of the core activities that businesses undertake to generate profits.
Businesses still need to source and acquire inputs, create or add value, and sell to customers.
(Para. 178) The digital economy has had an impact on how these activities are carried out.
There is a need, therefore, to consider whether the current rules are fit for purpose. (Para.
180) The ability to provide digital products and services to a market at lower costs means thathigh quality products and services can be provided to small and remote markets that would
normally not benefit from current technological advances. This has a positive impact on thesemarkets and tax rules should encourage this development. Imposing expensive and complex
tax burdens which are unrelated to local profit or activity would have the opposite effect.
Data and the attribution of value created from the generation of marketable locationrelevant data through the use of digital products and services
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The Discussion Draft provides that data gathered from various sources is a primary input into
the process of value creation in the digital economy. (Para. 183) A key challenge is theattribution of value to this data and the extent of value relative to other sources of value –systems, software and people. It may be challenging to assign an objective value to raw data
(Para. 183) and determine the ownership of that data. Personal data is generally considered to
be owned by the individual to whom it relates, rather than by a company. (Para. 183)
USCIB believes that raw data has little or no intrinsic value, especially generally available raw
materials such as usage data. Value is created by the aggregation of data and the application ofanalytics, which is achieved through investment in people and technological resources.
Characterization of income derived from new business models
This section of the Discussion Draft raises the question of whether monetization models
utilizing new delivery methods of goods and services challenges the rationale behind existing
categorisations of income and consistency of treatment of similar types of transactions. Theseissues are raised, in particular, with respect to "cloud computing" transactions, including
infrastructure as a service, software as service, or platform as a service. (Para. 187)
The Discussion Draft includes a lengthy factual description of the nature of cloud computing
transactions. (Paras 79 - 84). USCIB generally agrees with that description and the broader
factual statements contained in Chapters II and III of the Discussion Draft relating to cloudcomputing models. To consider the appropriate characterisation for such transactions, theDiscussion Draft notes that it: “will, therefore, be necessary to examine the rationale behind
existing rules in order to determine whether those rules produce appropriate results in thedigital economy and whether differences in treatment of substantially similar transactions are
justified in policy terms.” (Para. 188)
With respect to the characterisation of cloud computing transactions, we note the prior OECD
work in this area, which produced guidance that remains useful today. In 2001, the OECDpublished the final report of the Technical Advisory Group on Treaty Characterisation ofElectronic Commerce Payments. 24 That TAG addressed the characterisation analysis for avariety of e-commerce transactions for purposes of the OECD Model Convention. The TAG
discussed general principles which should be applied to the characterisation analysis, thenapplied those principles to 24 specified transactions. Those 24 transactions included several
remote access transactions, including “application hosting”, “web site hosting”, “datawarehousing”, and “streamed (real time) web based broadcasting”, which would be describedas "cloud computing" transactions today.
24

Taxation and Electronic Commerce - Implementing the Ottawa Taxation Framework Conditions (2001),
hereinafter the “Business Profits TAG Final Report” or “Final Report”.

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The TAG evaluated the available precedents for characterising such payments as businessprofits or royalties, and concluded that the most useful guidance existed under U.S. tax law.
Accordingly, the TAG adopted the principles of U.S. Internal Revenue Code section 7701(e) to
guide its characterisation analysis. The TAG report states as follows:
27. The Group also examined a few transactions where it could be argued thattangible computer equipment (hardware) was being used by a customer so as to allow
the relevant payment to be characterised as “payments for the use of, or the right touse, industrial, commercial or scientific equipment” [the report here referred toapplication hosting, web site hosting and data warehousing examples].
28. The Group examined various factors used to distinguish rental from service
contracts for purposes of section 7701(e) of the U.S. Internal Revenue Code and foundthese factors to be useful for purposes of determining whether payments are for “theuse of, or the right to use, industrial, commercial or scientific equipment”. Once
adapted to the transactions examined by the Group, these factors, which indicate alease rather than the provision of services, can be formulated as follows:(a)the customer is in physical possession of the property,(b)the customer controls the property,(c)the customer has a significant economic or possessory interest in theproperty,(d)the provider does not bear any risk of substantially diminished receipts or
substantially increased expenditures if there is nonperformance under
the contract,(e)

the provider does not use the property concurrently to provide
significant services to entries unrelated to the service recipient, and(f)the total payment does not substantially exceed the rental value of thecomputer equipment for the contract period.

29. This is a non-exclusive list of factors, and some of these factors may not be
relevant in particular cases. All relevant facts bearing on the substance of thetransaction should be taken into account when determining whether the agreement is aservice contract or a lease.

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The TAG then applied these principles to application service provider and data warehousing
examples, concluding in both cases that the payment would be for the provision of services,and not for the lease of industrial, commercial or scientific equipment, as follows:
30. Applying these factors to application service provider transactions, the Group
concluded that these should generally give rise to services income as opposed to rental
payments. In a typical transaction, the service provider uses the software to provide
services to customers, maintains the software as needed, owns the equipment on which
the software is loaded, provides access to many customers to the same equipment, andhas the right to update and replace the software at will. The customer may not havepossession or control over the software or the equipment, will access the software
concurrently with other customers, and may pay a fee based on the volume oftransactions processed by the software.
31. Likewise, data warehousing transactions should be treated as services
transactions. The vendor uses computer equipment to provide data warehousing
services to customers, owns and maintains the equipment on which the data is stored,
provides access to many customers to the same equipment, and has the right to remove
and replace equipment at will. The customer will not have possession or control overthe equipment and will utilise the equipment concurrently with other customers.
The guidance provided in the TAG continues to be useful today in characterising payments forcloud computing transactions. While the TAG language discussed above has not been formallyincorporated into the OECD Commentary, guidance on certain analogous transactions recently
has been incorporated in the Commentary. 25 In particular, the Commentary discusses how
satellite operators and their customers frequently enter into "transponder leasing" agreements
under which the satellite operator allows the customer to utilize the capacity of a satellite
transponder to transmit over large geographical areas. The Commentary concludes that inmost cases, payments for these transactions should be characterised as business profits rather
than royalties. This is true even in the context of treaties that include the leasing of industrial,commercial or scientific (ICS) equipment. In reaching its conclusion, the Commentary points tothe fact that customers typically obtain access to the transponder's transmission capacity,rather than physical possession of the transponder itself. We believe this analytical approachshould apply to cloud computing transactions, and that the current Commentary guidance isconsistent with the TAG report and the principles of section 7701(e).
In most cases, an application of the factors accepted by the TAG to XaaS transactions would
characterize payments for cloud computing transactions as business profits (based on the25

See e.g., OECD Commentary on Article 12, para. 9.1.

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provision of a service), rather than royalties. As with transponder leasing agreements, we
believe this is true even in treaties that include the leasing of ICS equipment in the definition ofroyalties because the user generally does not acquire physical possession of the server in mostcloud computing transactions.
We would be pleased to work with the OECD to develop language for the Commentary thatprovides guidance for payments from cloud computing transactions.
Collection of VAT in the digital economy
Detailed comments on VAT are provided at the end of this document.
POTENTIAL OPTIONS TO ADDRESS THE BROADER TAX CHALLENGES RAISED BY THE DIGITALECONOMY
Framework for evaluating options
The Discussion Draft states that the Ottawa framework of neutrality, efficiency, certainty andsimplicity, effectiveness and fairness, and flexibility continues to be a good starting point.
(Para. 204) USCIB strongly endorses the use of the Ottawa framework. The framework will alsoneed to take into account the key features of the digital economy as outlined in section III.
The principle of neutrality means that “ring fencing” the digital economy and applying separate
tax rules is neither appropriate nor feasible. (Para. 205) USCIB agrees completely with thisconclusion.
Another key point is that the OECD expects that action on the other action items will raise theeffective tax rates of digital economy companies. If that is not the case and effective rates inthe digital economy remain extremely low, then “addressing the broader tax challenge of thedigital economy becomes a more pressing concern.” (Para. 208) While not surprising, thisstatement seems somewhat inconsistent with the notion that countries are free to choose toimpose low (or no) tax on income properly attributable to that jurisdiction because it implies
that a certain level of income tax ought to be paid at the corporate level in all cases. If income
is subject to tax in the appropriate jurisdiction, then whether that jurisdiction chooses toimpose a low tax or any tax at all, is a sovereign choice for that jurisdiction. If that jurisdiction
does not choose to impose tax, then (apart from appropriate CFC rules) other countries should
not be able to assert a claim to tax that income.
Options proposed to the Task Force
Modifications to the exemptions from permanent establishment status27
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The Discussion Draft raises the question whether the activities described in Article 5 (4) of theOECD Model Convention could constitute core functions of a business. (Para. 210) At least in
the case of maintaining a warehouse, that activity normally could be considered a "core"
activity only of an enterprise whose principal business function is to provide warehousing
services. Warehousing is an activity within almost every industrial supply chain. But it is seldom
if ever a core function – indeed it is an area that many companies outsource in full or part and it
is a function that is generally acknowledged as being easy to benchmark, given the multitudeof third party comparables. It would also be unfair and distortive if companies that outsource
their warehousing function are potentially treated differently from those companies who
primarily insource. USCIB believes that if Article 5(4) is to be changed, then any such changes
should modify the preparatory or auxiliary exception only for those enterprises whose primarysource of revenue is an Article 5(4) activity. USCIB supports a policy that all businesses are
subject to tax in the jurisdictions in which revenue-generating functions relating to their corecompetencies take place.
Changes to the definition of PE are part of Action Item 7 which is due by September 2015.
USCIB will provide comments at the appropriate time on OECD/G20 proposals modifying theserules. Business prefers bright line rules that provide certainty, so to the extent the changes the
OECD/G20 is considering move in that direction, that would be a plus. However, as we discussat length in other parts of this comment letter, PE rules that minimize exposure to local country
tax have a sound basis in policy. The OECD/G20 should not make broad changes without
careful consideration of the consequences.
A new nexus based on significant digital presence
The Discussion Draft includes an option of an alternative nexus test when a business is “fully
dematerialized.” (Para. 212) This seems to directly contradict the statement in paragraph 205
that ring-fencing the digital economy is neither appropriate nor feasible. Paragraph 213
provides a potential test for determining whether "fully dematerialized digital activities" areconducted, including the following elements:••

The core business relies completely or in considerable part on digital goods orservices;
No physical elements or activities are involved in the value chain other than theexistence use, or maintenance of servers and websites or other IT tools and thecollection, processing, and commercialization of location-relevant data; 26

26This condition is the most difficult to understand how it could apply to any significant enterprise. Assuming thatthe object of this option is to define a category of digital enterprises that provide valuable services cross-border, it
is hard to conceive of such a business that does not include as part of its value chain development, operations,

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•
•
•

•
•
•

Contracts are concluded exclusively remotely via the Internet or by telephone;
Payments are made solely through credit cards or other electronic means;
Websites are the only means used to enter into a relationship with the enterprise;no physical stores exist for the performance of core activities other than offices
located in the parent company or operating company countries (emphasis added –USCIB questions why these operations seem to be ignored);
All or the vast majority of profits are attributable to the provision of digital goods
or services;
The legal or tax residence and physical location of the vendor are disregarded by
the customer;
The actual use of the digital good or the performance of the digital service does
not require physical presence.

If a fully dematerialized business is considered to exist, then a significant digital presence could
be considered to exist in a country, under the following circumstances:
•

•
•
•

A significant number of contracts for the provision of fully dematerialized digital
goods or services are remotely signed between the enterprise and a customer that is
resident for tax purposes in the country;
Digital goods or services of the enterprise are widely used or consumed in the
country;
Substantial payments are made from clients in the country to the enterprise; orAn existing branch of the enterprise in the country offers secondary functions.

As a general comment before analyzing this under the Ottawa principles, it is interesting tonote that the tests do not look to whether the payment by the recipient of the good or service
is deductible. USCIB believes that this is because many of the transactions intended to becovered by this option are B2C so a deduction would not be available. It would seem that inorder for this to be a base erosion problem, a deductible payment would be necessary. To
reiterate, as to profit shifting, the BEPS project should be targeting artificial profit shifting, if
profit producing activities shift, profits should move. Countries do not have a right to aparticular level of tax revenues regardless of where business profits originate. It seems
fundamentally inconsistent for market jurisdictions to argue that income from intangibles
should be allocable to people functions (e.g., where the research and development takes place)and ignore the people functions when the transaction is digital (where the digital content iscreated). The digital content ultimately is created by people, so if people functions should
trump then there is no basis for a nexus that looks solely at consumption activity. Otherwise,
customer support, marketing, management and similar functions which allow the enterprise to identify newservices, develop the technologies to perform the services, and deliver the service to the market.

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this option is inconsistent with the emphasis on people functions in the draft Chapter VI TPG
revisions.
Ottawa Principles:
Neutrality: As the Discussion Draft notes in paragraph 205, ring-fencing the “digital economy”
would violate the neutrality principle. That is, tax rules and therefore conditions would differ
between traditional and electronic commerce. The option of special nexus rules clearly ringfences some portion of the “digital economy” and therefore violates this principle. Paragraph
216 also raises neutrality issues because it raises the possibility of separate income attribution
rules for “fully dematerialized digital businesses.”
Efficiency: USCIB believes that the efficiency criterion is also violated. USCIB believes that thenexus based on significant digital presence must be based on taxation of net, not gross,income. 27 Net basis taxation will require some sort of return and depending on how the many
subjective terms – significant number, substantial payments, widely used – are defined this
could result in tax returns in many additional countries where the company has no physicalpresence at all. Establishing the intercompany transaction infrastructure and accounting
systems necessary to file returns in many additional countries is a significant burden and one ofthe principal reasons for the historical PE standard.
Certainty and Simplicity: The nexus test contains many subjective criteria such that thecriterion of certainty will be violated. The test uses terms such as “considerable part”,“significant number”, “widely used or consumed”, “substantial payments”, which are all
subjective and probably intended to be subjective. The determination of a "significant number"will vary widely between jurisdictions depending upon factors such as market size.
At the same time, however, one of the core elements of the definition would seem to apply
only in exceedingly rare cases. One element of the proposed definition of a fully dematerialized
digital business is that “no physical elements or activities are involved” in the value chain otherthan servers, websites and the collection of location-relevant data. Any enterprise of sufficient
size to have its goods or services "widely used" in a country will have many employees who
perform critical business activities other than “the collection, processing, andcommercialization of location-relevant data.” As written, it is hard to conceive of anenterprise to which this element of the definition could apply. This would lead companies to beconcerned that the test does not really mean what it says.
Effectiveness and Fairness: This criterion is more difficult to judge given that the standard is“that taxes imposed are designed to produce the right amount of tax at the right time, and27

In part, because one of the other alternatives is a gross basis tax.

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avoid creating new opportunities to artificially avoid taxation.” The Discussion Draft does notprovide details of how profits would be attributed to a taxable presence imposed under thisnew nexus standard. Accordingly, it is difficult to judge whether the right amount of tax would
be imposed at the right time. The nexus rules fail the fairness test depending on whether what
appear to be absolute tests are in fact absolute tests.
Flexibility: This criterion is difficult to apply; since it is difficult to anticipate which direction
technology will take. However, the number of absolute tests proposed likely will make the test
less flexible. For example, new technology may make the criterion of “contracts are concluded
exclusively remotely via the internet or by telephone" irrelevant.
USCIB believes that the proposed option of a new nexus based on a significant digital presence
clearly fails the Ottawa principles.
Looking at the new nexus test more generally, we believe that the only argument in favour ofadoption would be a political one. That is, it would permit market jurisdictions to impose an
income tax on “fully dematerialized digital activities” in certain limited cases. This option
would result in significant controversy and double taxation. This option also would discourage
the expansion of digital goods and services into remote economies, which will adversely affecteconomic growth.
Accordingly, USCIB recommends that countries reject this approach. The Discussion Draft also
proposes the option that a fully dematerialized business could be considered to have asignificant digital presence if it uses personal data obtained by the regular and systemic
monitoring of Internet users in that country through the use of multi-sided business models.
(Para. 215) USCIB believes that this is narrower than the above proposals, but it is not clear
who is doing the regular and systemic monitoring of the Internet users: the enterprise itself? If
the data is obtained and analyzed by another entity, then it would seem the profits from those
activities should be attributable to the other entity and therefore should not give rise to a nexus
for the business purchasing the data.
The Discussion Draft acknowledges that development of these options would “requireevaluation of the above elements to determine which combination of factors would result in an
appropriate nexus to address the tax challenges of the digital economy effectively, whileproviding enough clarity to minimize dispute. It would also require consideration of how profits
would appropriately be attributed, and whether doing so would require modification of thecurrent rules for the attribution of profits to PEs. The work would also need to consider
whether such a change would require a change in the attribution rules for all enterprises orwhether the changes could be limited to “fully dematerialized digital business.” (Para. 215)

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This seems inconsistent with the statement in the Discussion Draft that ring-fencing the digital
economy and applying separate rules is neither appropriate nor feasible.
Virtual permanent establishment
The Discussion Draft includes "for the sake of completeness" virtual permanent establishment
options considered by the Business Profits TAG. (Para 217) It does not seem that these options
are being actively considered by the Task Force since the options are merely stated with noassessment of pros and cons as were expressed by the Business Profits TAG. USCIB opposes the
adoption of any of these virtual PE options because adoption would violate the Ottawa
Principles.
Neutrality: A virtual PE establishment is not real; there is, in fact, no place of business in thecases in which the virtual PE options seek to deem a PE to exist. The neutrality principle would
be violated to the extent that the options would result in different tax outcomes forconventional and digital forms of commerce. 28
Efficiency: Extending the PE concept to cover situations where websites are being hosted in acountry would create serious compliance difficulties. A business may not even know where a
website is hosted. Tax administrations would have to attempt to enforce their tax rules in theabsence of physical assets and employees. 29
Certainty and Simplicity: The virtual PE proposals would add uncertainty to the determinationof whether a PE exists. For example, businesses may not know where the servers hosting its
operations are located. Businesses may have difficulty identifying where contracts areconcluded and to the extent there are thresholds, it may be difficult to have reliable
information on whether the thresholds are exceeded and it will be difficult to know at theoutset whether the thresholds will be exceeded. 30
Effectiveness and Fairness: The virtual PE options attempt to tax business activities that are notcarried on within a country. Thus, creating a PE is “unfair”. It is also likely to be ineffective bothbecause it will be difficult to administer and unless profit attribution rules are fundamentallychanged, little or no profit will be attributable to the virtual PE.
Flexibility: It is unclear whether these models would be flexible enough to deal with emerging
technologies.
Creation of a withholding tax on digital transactions
28

Final Report of the Business Profits TAG, para. 332.
Ibid at para. 333.
30
Ibid at para. 338.
29

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A further proposed option is a final withholding tax on certain payments made by residents of acountry for digital goods or services provided by a foreign e-commerce provider. (Para. 218)
Presumably, the justification for such a tax is that the provider delivers a substantial amount ofgoods or services into a jurisdiction but does not maintain a taxable nexus in that jurisdiction.
Consistency with trade obligations would need to be considered, as would the difficulties of
imposing a withholding tax in the context of B2C transactions. The burden of complying with awithholding tax may be imposed on financial institutions. (Para. 218)
A withholding tax would allow the market jurisdiction to collect some revenue without theburden of imposing net income filing requirements and determining the profits attributable tothe market jurisdiction. It would likely therefore be simpler in some respects. However, thisoption raises difficult characterization issues and those issues have caused significant
controversy and double taxation in the software and service industries. Revenue is a poor
proxy for net income. As discussed above, developing digital products and services may
require significant investment in time and money. Many products and services never make any
money on a net basis. Because of these concerns any withholding tax should be at a very low
rate. India’s High Powered Commission recommended a 3% rate for these reasons.
Neutrality: “It would be difficult to justify applying withholding tax only on cross-border ecommerce and not on traditional cross-border trade. Such a tax would violate the neutrality
principle as presented in the Ottawa framework principles. The alternative of applying the tax
to all forms of cross-border trade would mean, however, the introduction of tariff-like taxation,
which might well be against WTO rules and principles.” 31
Efficiency: There are also administrative concerns. Many of these transactions will be B2C 32
and very low value. It is unlikely that individual consumers will collect and pay over a
withholding tax. Imposing a withholding tax on these transactions will create significant
burdens for the financial system.
Certainty and Simplicity: A withholding tax applicable only to digital transactions would requirea definition of the transactions to which it applied. This would likely be a difficult task. 33
Effectiveness and Fairness: Given the difficulty of imposing a withholding tax on B2Ctransactions, this option may not be effective. It also appears to fail the fairness test since thewithholding tax would be levied regardless of profitability. A tax on gross revenues is a very
poor proxy for a tax on net income.

31

Ibid at para. 260.
We reiterate that in the case of B2C transactions there should not be a base erosion concern.
33
Final Report of the Business Profits Tag, para. 265.
32

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It seems to us that the administrative issues will be essentially the same as those which would
be created by imposing VAT on cross-border digital transactions. Since the VAT is theconceptually more appropriate tax in this context, the consideration argues for preferring a VAT
over a withholding tax.
Consumption Tax Issues
Business believes that a combination of an origin-based income tax and a destination-based
VAT appropriately divides the jurisdiction to tax between the countries where income
producing activities occur and the countries where consumption of goods and services occur.
The VAT issues can and should be addressed by the ongoing work of the OECD and WP9 andthe TAG. They have clearly demonstrated that they are able to produce an international
consensus in the area of VAT. The OECD’s Committee on Fiscal Affairs (CFA) approved thebusiness-to-business (B2B) aspects of the VAT Guidelines in January 2014. The indirect tax
issues, including remote digital supplies to consumers, highlighted in the Discussion Draft are
already due to be further examined by the OECD – “how to ensure the effective collection of
VAT with respect to the cross-border supply of digital goods and services” – is covered by the
WP 9 work related to B2C and is currently discussed in the well-established OECD VAT TAG
process. USCIB is actively contributing to this work. This work also plays a critical role inresolving the VAT aspects addressed in the BEPS discussion draft on the digital economy. The
OECD can assess whether the existing process is likely to continue to produce consensus.
Business participants in the technical advisory group are optimistic that an international
consensus will be reached on additional guidelines concerning the taxation of digital goods andservices in the area of B2C transactions.
Exempt Sector and Multi-Location Entities
The Discussion Draft identifies remote digital supplies to exempt business (Para. 137) and to a
multi-location enterprise (MLE) (Para. 140) as aspects which, under certain conditions, create
opportunities for tax planning by businesses and corresponding BEPS concerns for governments
in relation to VAT. Concerns particularly relate to the extent that Guidelines 2 and 4 of theOECD’s “Guidelines on place of taxation for B2B supplies of services and intangibles” are not
implemented.
Before commenting on this aspect in further detail, we would like to first highlight some moreconceptual aspects that are not specific to the digital economy.
All stakeholders, including governments, business or academia, agree that conceptually, abroad based VAT system, with ideally no or very few exemptions, and one standard VAT rate,would represent the most efficient and effective structure for all relevant parties. It would take34451

substantial complexity out of the VAT system, would ensure neutrality for business, and wouldease both compliance for business and administration for governments.
The issues relating to the exempt sector and MLEs in the exempt sector are not specific to thedigital economy. Instead, they are conceptual issues related to the design and the applicationof the VAT system. As the Discussion Draft points out these issues arise to the extent that
Guidelines are not implemented. (Para. 136) Thus, implementation of the Guidelines would
alleviate these BEPS concerns. (Para. 171) Business supports the implementation of the
Guidelines and urges governments to implement the principles of the Guidelines in a consistentfashion.
USCIB would also like to point out that the imposition of VAT on exempt purchasers of digitalproducts is a significant issue. Universities, hospitals, governments, local government bodies
and many others buy vast quantities of digital services and do not have the budget to pay VAT.
As the OECD examines the application of VAT to the exempt sector, these issues should betaken into account.
Finally, we would like to clarify two editorial aspects of the Discussion Draft to ensure acommon understanding:In paragraph 140, an MLE is referred to as a multinational business that has establishments indifferent jurisdictions. This could be misunderstood as including subsidiaries of multinationals.
However, putting this statement into the context of the relevant example described in the
Discussion Draft, and considering the work already done on the VAT Guidelines, it should beclear that it can only mean a multinational business established as a single legal entity with
branches of that same entity in different jurisdictions.
Paragraph 171 states that “Guideline 2 recommends that the taxing rights on cross-border
supplies of services and intangibles between businesses be allocated to the jurisdiction where
the customer has located its main business establishment and that business customers be
required to self-assess VAT on remotely delivered services acquired from offshore suppliers
according to the rules of the jurisdiction in which they are located”. We agree with theallocation of the taxing rights to the jurisdiction where the customer is located, and with therequired self-assessment of VAT by the business customer, but we would like to point out thatin context of Guideline 2 of the International VAT Guidelines, which deals with legal entities
that are established in one location (Single Location Entity, SLE), the taxing rights will always beallocated to the jurisdiction where this legal entity is located. Therefore, there is no “main”
business establishment in this context, as the business is only established in one location.
Consumption tax options
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The Discussion Draft states that the main VAT challenges created by the digital economy relate
to exemptions for importation of low value parcels (Para. 219) and the increase in direct salesof services to consumers (Para. 222) (not the tax treatment of the exempt sector). Paragraph
189 states that the challenge posed by the digital economy may result “in no VAT being leviedat all on these flows, with adverse effects on countries VAT revenues and on the level playing
field between resident and non-resident vendors. (Para. 189)
With respect to low value imports, there is a need to find a balance between the need forappropriate revenue protection, avoidance of the distortion of competition and the need tokeep the cost of collection proportionate to the small level of VAT collected. (Para. 193)
With respect to remote digital supplies to consumers, the Discussion Draft notes thatcompliance by non-resident suppliers is essentially voluntary. (Para. 195) Experience suggeststhat MNEs do comply, in part because of reputational reasons. (Para. 195) We expect that thisissue will be returned to Working Party 9 to be dealt with be the VAT/TAG.
USCIB agrees that the most effective and efficient option to ensure appropriate VAT collection
on cross-border B2C services is to require the non-resident supplier to register and account forthese supplies in the jurisdiction of the consumer. (Para. 221) Countries should consider
simplified registration regimes to minimize the compliance burden. (Para. 222)
To safeguard VAT revenues and to be able to accurately, timely, and efficiently comply with the
VAT obligations, clear, consistent and easy to apply rules are of utmost importance forbusiness. This is even more important in the B2C context, both for imports of low-valued goods
and for remote digital supplies to consumers, where businesses have to deal with high volume
and low value cross-border transactions.
Striking the right balance between the VAT at stake and the administrative costs for businessand governments related to that collection is crucial. The wrong balance discourages
compliance and can lead to a distortion of competition for business. This is a significant concern
for the international business community related to cross-border B2C supplies, particularly inthe context of e-commerce related supplies. It is important to recognize that VAT revenues are
best safeguarded and collected when the administrative costs of collection and compliance are
reduced. Nevertheless, thresholds and exemptions will still be necessary. Business should not
be forced to deal with compliance burdens in relation to a de minimis level of transactions,especially where the business may have no control over whether the obligation is incurredbecause customer’s ability to purchase goods and services without regard to borders.
The question that therefore arises is how can collection be made as easy and as efficient as
possible for business while ensuring enforceability for governments?
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Two aspects play a vital role here:a) Internationally consistent ‘place of taxation’ rules are required that allow business todetermine, in an easy and efficient manner, where a transaction should be taxed for
VAT purposes.
b) Internationally consistent simplified procedures/mechanisms are required, particularly
for foreign businesses selling digital supplies cross-border, to allow business to collectand pay the VAT in an easy and efficient manner, while at the same time, improving
enforceability for governments.
In a B2B scenario, the two aspects identified above are covered by the International VAT
Guidelines based on the destination principle and the recommendation to apply the reverse
charge regime as the collection mechanism. Adoption of the Guidelines by governments wouldease the burden of the collection of the VAT for business while ensuring full enforceability forgovernments.
Consistent application of the destination principle by governments around the world, together
with the application of a reverse charge regime is vital. It was suggested in the ‘E-commerce
Guidelines and the Consumption Tax Guidance’ papers issued in 2003 and has been further
explored and reconfirmed again by the VAT Guidelines. In a B2C scenario, it will be moredifficult but not impossible to implement consistent place of taxation rules and simplified
procedures. Flexibility on the use and evidence of place of taxation proxies, easy access to
information, easily accessible, simplified, and standardized and technology friendly
administrative procedures and an effective administrative cooperation between governments
are crucial to make this happen.
A tax is not worth anything if it cannot be collected. Particularly when it comes to high volume
low value transactions, the OECD should aim for place of taxation rules that allow VAT to becollected in an easy and efficient manner.
Business needs flexibility both on appropriate proxies for place of consumption and appropriate
indicia to determine the application of those proxies. It may, in some cases, be impossible notjust burdensome, for business to identify the residence of their customers and they therefore
may need to rely on appropriate indicia of residence such as the address associated with acredit card. Only if flexibility is ensured will business be able to effectively collect the VAT at
stake. Substantial work has already been done on this aspect in some jurisdictions, for example
in the EU, which should be considered, learned from and further explored.
Procedures/mechanisms need to be as simple as possible. This will enable foreign businesses
to collect and pay the VAT in efficient manner, while improving enforcement for governments.
Business agrees that vendor collection is the most viable option. (Para. 222) Business also37454

agrees that simplified registration systems and registration thresholds are necessary tominimise the compliance burden on business. (Para. 223) The simplified registrations systemshould allow business the choice and maximum flexibility (i.e. direct registration, simplified
registration, collection by a 3rd party intermediaries on behalf of the supplier, etc.).
Such a system will only work if business has easy access to information in order to know how tocomply and if governments provide easily accessible, simplified, standardized and technology
friendly administrative procedures. Technological solutions should be web-based, secure, andshould cover remote selling of goods and remote supplies of services. In addition, governments
must establish effective administrative cooperation. Without such cooperation, it will be
impossible to simplify and standardize the compliance requirements, leading to inefficiencies
for business and less compliance with VAT overall. Thus, business supports the notion
expressed in paragraph 224 that improved international cooperation between jurisdictions islikely to be required. We would note, however, that this paragraph focuses on cooperation in
enforcement actions. While such cooperation is both necessary and appropriate, cooperationneeds to begin with designing simple, consistent VAT systems and extend through the cycle todispute resolution. The issue of double VAT taxation is difficult for two reasons. First, unlike anincome tax dispute, it is essentially impossible to split the tax because the issue is always inwhich jurisdiction did consumption occur? Therefore to reach resolution one jurisdiction has toconcede that its VAT will not apply. Second, although VAT is covered by the Mutual Agreement
Procedures of income treaties and the MLAT, we believe it is unlikely the Competent
Authorities would be willing to deal with VAT issues. If the Competent Authorities were toaccept a VAT case, it is unlikely they would have a basis to reach agreement because of thejurisdictional nature of these disputes.
Remote B2C digital supplies may involve multiple parties in the supply chain which can make it
difficult to determine who the supplier of the service is to the final consumer. Knowing the
supplier is key, particularly when aiming at supplier registration as the mechanism to collect the
VAT at stake. The OECD must develop clear rules on this. These rules should be informed by EU
rules in this area.
In some cases business may wish to use third party intermediaries in the collection process. Thisshould be an option for foreign business, not a requirement. Financial intermediaries may nothave the relevant information to determine VAT properly. So financial intermediaries can only
be a part of the solution if both the supplier and the intermediary agree.
All of these aspects need to be further explored and the OECD VAT TAG process is the rightplatform for governments and business to work together to develop an efficient solution. Thissolution can only work through effective administrative cooperation between governments.
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Finally, there is one very important point to highlight when it comes to supplier registration as
collection mechanism for VAT purposes. As mentioned in footnote 25 of the VAT Guidelines, aregistration for VAT purposes by itself does not constitute a permanent establishment.
Business experiences more and more that, by acting as VAT collectors for governments, foreign
VAT registrations are misused by governments and are re-qualified as a permanentestablishment for corporate tax purposes, forcing business to pay corporate tax in a jurisdiction
where, based on international direct tax principles, no corporate tax should be due. In the longterm, and if this continues to happen on a larger scale, such developments might undermine anefficient collection of VAT by dissuading businesses from registering for VAT purposes. This
would result in VAT revenue losses for governments and distortion of competition for business.
Coordination with other Digital Economy Options
In section VII, various options unrelated to VAT are proposed to address the broader tax
challenges raised by the digital economy. Some of these options could have an impact on VAT.
For example, any changes to the current permanent establishment concept may have an effecton the application of the simplified VAT registration procedure. Such changes might also
influence the application of the reverse charge mechanism.
Therefore when considering these options from a direct tax perspective, adequate time must
be dedicated to fully understanding the potential VAT consequences.
Sincerely,

William J. Sample
Chair, Taxation Committee
United States Council for International Business (USCIB)

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Submitted by e-mail:CTP.BEPS@oecd.org.

Subject

The Hague

April 14, 2014
VNO-NCW comments on the
Discussion Draft regarding BEPS Action T e l e p h o n e n u m b e r
Point 1: Address the Tax Challenges of 070 070-3490423
E-ma ilthe Digital Economy
lammers@vnoncw-mkb.nl
Reference nu mber
14/10.616/Jla

Dear Mr. Saint-Amans,
The Confederation of Netherlands Industry and Employers VNO-NCW is happy toprovide comments on the Discussion Draft regarding BEPS Action Point 1: Address the
Tax Challenges of the Digital Economy.
The comments are included in the annex. The main points we would like to make, are:1. It is essential that underlying principles are set out to which a taxation framework
should be held. It should be promoted that both domestic and international rules
hold to these principles.
2. VNO-NCW is of the opinion that ring-fencing the digital economy from the rest of
the economy is not possible, feasible or appropriate.
3. It seems unlikely that there are (digital) enterprises that have no physical presence
worldwide whatsoever and consequently the corporate income tax base is not
attributable to any jurisdiction. VNO-NCW questions if the Discussion Draft does
not overstate this occurrence.
4. Since ring-fencing the digital economy is not possible, introducing some form of
virtual nexus would risk spreading out taxation of enterprises not physically present
to non-digital businesses. This would entail a very serious risk of creating double
taxation on the shorter term and potentially changing the rules for taxing crossVNO-NCW Postbus 93002 2509 AA Den Haag
T: 070 3490 349 F: 070 3490 300
www.vno-ncw.nl

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border business fundamentally.
5. Creating a digital nexus as suggested in the Discussion Draft would not meet withthe taxation principles as set out in the start of the Discussion Draft. Creating a
digital nexus might even result in discouraging businesses – and especially small
and medium sized businesses – from engaging in international trade andinvestments.
6. Uncertainty about – or different methods of – profit allocation to a digital nexus
would potentially seriously hamper digital enterprises doing business abroad andwould open the door to potential double (non) taxation.
7. VNO-NCW opposes introducing a withholding tax on digital transactions thatwould essentially discourage instead of promote cross border trade andinvestments.
8. Regarding indirect tax and the growth of cross-border B2C electronic services
VNO-NCW advocates a broad adoption of the principles of taxation on the place of
supply for electronically supplied services which will be introduced in the EU on 1
January 2015.
We hope you will take our comments into consideration in further developing thisaction point. Of course, we are available to elaborate on these comments should this behelpful and we look forward to the public consultation on this important issue.
Yours sincerely,

Jeroen Lammers
manager Fiscal Affairs

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VNO-NCW comments on the Discussion Draft regarding BEPS Action Point 1:
Address the Tax Challenges of the Digital Economy published on 24 March 2014
VNO-NCW welcomes the opportunity to provide comments on the Discussion Draft
regarding BEPS Action Point 1 on addressing the tax challenges of the digital economy(hereinafter: Discussion Draft).
Underlying principles for taxation are crucial
VNO-NCW feels it is essential that in this Discussion Draft underlying principles are
set out to which a taxation framework should be held. In fact, such a principle-based
approach has been lacking in the previous Discussion Drafts on other Action Points. In
our view the Ottawa Taxation Framework Conditions, as they are described in the
Discussion Draft, are appropriate principles to not only apply to electronic commerce ordigital economy, but to taxation of all sectors.
It should therefore be globally promoted that both domestic and international rules on
taxation should;• seek to be (technologically) neutral, as to allow for economic and technologicaladvancement;• be efficient so compliance costs are kept at a minimum;• ensure certainty be simple to understand, as to provide sufficient comfort fordomestic and cross border trade and investments to occur;• be effective and fair so that taxation can be effected by authorities and there areno ‘ blind spots’ and also no double taxation;• be flexible enough to be able to keep up with commercial and technologicaldevelopments.
There is no separate digital economy
The Discussion Draft very comprehensively describes recent digital developments. In
doing so, the Discussion Drafts shows conclusively that there is no possible way to ringfence the digital economy from the rest of the economy, since the digital developments
have been pervasive in all sectors and all sorts of business models. This also proves that
separate rules for the digital economy are not necessary. VNO-NCW therefore supports
the comments made in paragraphs 59 and 205 that ring-fencing the digital economy
from the rest of the economy is difficult, if not impossible (paragraph 59) and neither
appropriate, nor feasible (paragraph 205).
The Discussion Draft convincingly shows, in our opinion, that digital economy businessmodels do not lead to different BEPS questions than exist in other areas of the economy.
Insofar as there are BEPS concerns raised by situations that taxable income can be
artificially segregated from the activities that generate it, or in the case of VAT,
situations in which no or an inappropriately low amount of VAT is collected, theseconcerns should therefore be addressed through the other Action Points. VNO-NCW
determines that in section V of the Discussion Draft the OECD reaches the sameconclusion. We would, however, like to point out that the timing of Action Point 1 does

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not align with the timing of the action points. As we recommend relying on the otheraction points to address any BEPS concerns related to the so-called digital economy, we
would strong urge the OECD to ensure there is coordination with the action points andnot pursue individual proposals under Action Point 1. In fact, pursuing individual
proposals under this Action Point would contradict the conclusion that no separate rules
are needed for the digital economy and that ring-fencing is not possible.
Although VNO-NCW does agree with some of the general conclusion reached in the
Discussion Draft, as mentioned above, there are particular areas and wording in the
Discussion Draft that we do object to. For instance in, but not limited to, paragraphs
125, 126, and 128 of the Discussion Draft the wording seems to insinuate that digitalbusinesses in particular do not follow the arm’s length principle. It strikes VNO-NCW
that this unduly sets digital businesses apart negatively. Moreover, if there is indeed
merit to these intimations, it does not seem to stem from a shortcoming of the (arm’s
length) rules, but rather from the enforcement of these rules. This would mean thatgovernments in fact have the tools to achieve an arm’s length result in all sectors,
including digital businesses, but do not or are not able to apply these correctly andeffectively. Therefore, the wording of the Discussion Draft should be more objective.
Dealing with non-resident income
The Discussion Draft suggests that the evolution of business models in general, and thegrowth of the digital economy in particular, have resulted in non-resident companies
operation in a market jurisdiction in a fundamentally different manner today than at thetime international tax rules were designed.
The fact is that less physical presence is required in market economies in typicalbusiness structures. This means that companies can sell more easily than before into ajurisdiction without any physical presence there. It therefore is possible to be heavily
involved in the economic life of another country without having a fixed place ofbusiness or a dependent agent therein. Under the current international tax rules no direct
tax base can be attributed to that jurisdiction. Of course, indirect taxes can be levied onthese activities.
This is congruent with the actual domestic and international tax rules in place at thistime. Most jurisdictions are under their domestic tax rules not able – and under income
tax principles should not be able – to tax the profits of non-resident enterprises derivingfrom sales to customers in that jurisdiction.
The fact, however, that no tax base for the purposes of corporate income tax can be
attributed without a physical presence in the jurisdiction that sales take place, should inand of itself not lead to any BEPS concern. In fact, it seems more than unlikely that
there are enterprises that have no physical presence worldwide whatsoever. VNO-NCW
questions if the Discussion Draft does not overstate this possibility. Therefore, insofar
as the corporate income tax base is not attributable to the jurisdiction in which there isno physical presence, it should be attributable to the jurisdiction where it has physical

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presence. This means that there should be no question of a ‘blind spot’, outside unlikely
situations where there are businesses that have no physical presence anywhere in theworld.
The Discussion Draft does not explicitly go into the jurisdiction where there is aphysical presence that would be able to tax the profits. Only in paragraph 180 it is statedthat there often are compelling reasons that core [physical] resources are placed close topossible markets. This would therefore mean that there should not be any real BEPS
concerns. By mainly focusing on the jurisdiction where there is no physical presence,
this Discussion Draft seems to address not so much a question of BEPS activities by(digital) businesses, but rather a debate between states about splitting the tax cake in adifferent way.
Given the Task Force’s position that ring-fencing of the digital economy is not possible,
introducing some form of virtual nexus , therefore, would risk spreading out taxation ofenterprises not physically present to non-digital businesses and this would create aprecedent potentially fundamentally changing the rules for taxing cross-border business.
This is a discussion that is, and should be, far outside the scope of the BEPS project.
Proposed actions by the Task ForceThe Task Force propose to further investigate three options to deal with the question on
how the tax cake should be split in paragraphs 211 through 217. Notwithstanding theforegoing, we would like to make a few observations regarding these options.
First, all three of the options regarding direct taxation have in common that digitalnexus will provide states with a way to tax profits derived in their jurisdiction. The
options, however, also share a significant risk that they will result in double taxation.
VNO-NCW strongly counsels that this be avoided.
Furthermore, VNO-NCW feels that also the rest of the underlying principles of taxation
as mentioned above will not be met by following these options. This would suggest thatthese options are not viable.
For instance, introducing any of the options in the Discussion Draft could mean that asmall or medium sized enterprise (SME) running a webshop that sells in any new
jurisdiction would be compelled to register and file a corporate income tax return insuch new jurisdiction. If, consequently, the sold item is returned, the SME will be facedwith a loss in that jurisdiction. However, under Dutch legislation the loss of a permanentestablishment (PE) cannot be offset in the Netherlands until it is clear there will be nofurther activities in the other jurisdiction. Since any webshop can be approached fromanywhere in the world, it is impossible to say whether a new sale might occur in thatsame jurisdiction. The end result therefore is that the digital business that sells through awebshop might never be able to deduct the loss incurred and thus is placed at a
disadvantage in relation to a business that sells through a physical location. This issue,
and more generally compliance costs, would potentially be prohibitive and SMEs

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operating in the digital domain would likely feel compelled to refuse to make sales injurisdictions where the compliance costs would exceed the potential profits of doing
business there.
Putting the options in the light of the Ottawa Taxation Framework Conditions:• The creation of a digital nexus will not necessarily lead to a situation where thetaxation is technological neutral.
• Also it is not efficient, since it cannot be said that compliance costs will be kept
at a minimum if all digital business have to file for corporate income tax
purposes in all jurisdictions they might make or have ever made a sale.
• This situation also does not lead to more certainty and simplicity. In fact, thepresented options might scare off businesses from engaging in international
trade. It seems to VNO-NCW this cannot be the desired effect of the Discussion
Draft.
• In that sense, it might also not be flexible since these options might even stand in
the way of commercial and technological developments.
• As stated above, the options present a significant risk of double taxation because
the proposed approaches to create a digital nexus will spill over to businesses
that do have physical presence. In doing so the options are not effective and fair,since the options might give two jurisdictions the right to tax the same profit andthus cause double taxation.
Attributing profits to a digital nexus
It is emblematic that in the Discussion Draft no mention is made as to the fact that if adigital nexus would be created how profit then should be attributed to this nexus. It isvery unlikely that there is a way to attribute profits to a digital nexus that is simple,
effective and fair in the sense of the Ottawa Taxation Framework Principles. By
definition a merely virtual presence would mean that no “significant people functions”
would be present in the country where e-sales are made. Substantial profit allocation
would be incompatible with the OECD’s principles on profit allocation to permanentestablishments. Furthermore, uncertainty about – or different methods of – profit
allocation would potentially seriously hamper digital enterprises doing business abroad
and would open the door to potential double (non) taxation, which does not seemcompatible with the aims of the BEPS project.
Creation of a withholding tax on digital transactions
VNO-NCW feels that the Discussion Draft already puts forward enough problems withthis option so that it is not really an option that should seriously be considered. Morefundamentally, VNO-NCW would deem it out of place for the OECD to consider
introducing a withholding tax that would essentially discourage instead of promote
cross border trade and investments.
Indirect tax comments
With regard to the paragraph “Opportunities for BEPS with respect to VAT” (paragraph
3 on page 46) VNO-NCW would like to emphasize that the mentioned collection of “an

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inappropriately low amount of VAT” is mostly caused by a lack of either adequate VAT
legislation or cross-border cooperation between tax authorities. The wording ofparagraph 3 may inadvertently give the impression that businesses always structure theiraffairs in such a way that the result is the lowest possible VAT. To avoid this incorrect
impression VNO-NCW advocates to refine the wording “an inappropriately low amountof VAT” by adding a distinction between unintended effects of inadequate legislationand the effect of structures aiming at the misuse/abuse of legislation.
VNO-NCW underlines that cross-border cooperation between tax authorities in the fieldof compliance controls is also of major importance to prevent enterprises (particularlySMEs) from differing positions taken by tax authorities in the many countries where ane-business could be active.
With regard to digital supplies to a multi-location enterprise the report mentions theexample of processing of data relating to banking transactions (paragraph 3.2.). In theview of VNO-NCW the example is not solely related to the digital economy. It would
be more useful to focus on the strong growth in cross-border digital supplies to
consumers (B2C) as described in paragraph 6.2., a growth directly related to the digital
economy.
Regarding the growth of cross-border B2C electronic services VNO-NCW advocates abroad adoption of the principles of taxation on the place of supply for electronicallysupplied services which will be introduced in the EU on 1 January 2015. From that date
VAT on electronic services supplied by a supplier established within the Community to
non-taxable persons also established within the Community will be charged in theMember State where the customer belongs. This major change includes the mini One
Stop Shop. A broad adoption would ensure that in case foreign traders render electronic
services they would pay VAT/sales taxes in the country of consumption, taking away
possible competitive advantages over locally operating enterprises, while minimizing
compliance burdens by offering the mini One Stop Shop scheme.

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