November 29, 2021

The "Value Creation" Question has Escaped the New Pillar 1 Mousetrap

November 29, 2021/ Ruchelman P.L.L.C.

In every decade, a phrase or a term pops up that is widely used, although its meaning may vary from person to person. Examples in past decades include “groovy,” “viral,” “neat,” and “heavy.” In his article, Michael Peggs identifies “value creation” as a phrase that has gone “viral” among the O.E.C.D., the G-20, and tax authorities. The “neat” aspect is that, over the centuries, the term has meant different things to different commentators. Nonetheless, it remains the central foundational feature of controlling policy for global policy wonks. It could mean that while everyone appears to be marching in unison, they are really marching in different directions, much to the chagrin of multinational enterprises. “Heavy!”

March 20, 2020

O.E.C.D. to Use Hybrid Model to Develop Digital Economy Nexus and Profit Attribution Rules

March 20, 2020/ Ruchelman P.L.L.C.

The O.E.C.D. announced on January 31, 2020, that its policy development efforts under Pillar One, related to the taxation of the digital economy, will move forward using the non-consensus “Unified Approach” as a working model. The O.E.C.D.’s deadline for obtaining a consensus outcome is highly ambitious. Michael Peggs provides his views. Despite what people may think about when this effort should have begun, it is crucially important that it has begun at last and in an organized way.

January 24, 2020

O.E.C.D. Unified Approach Garners Less Unified Comments from Europe’s Tech Producers and Users

January 24, 2020/ Ruchelman P.L.L.C.

How does a group of experts comment on the indescribable in order to arrive at a consensus? Inconsistently is the answer. As the O.E.C.D. continues its work on the taxation of the digital economy, the O.E.C.D. Centre for Tax Policy and Administration received comments in advance of a public consultation in late November 2019. The public consultation heard input from interested parties on the policy development aspects of a "Unified Approach" to the determination of tax nexus and profit allocation rules relevant to customer-facing corporate participants in the digital economy. From the consultation, a "great divide" appears to exist on the Unified Approach. The policy interests are clearly inconsistent when looking at (i) tech haves v. have-nots and (ii) consumers v. producers. The broadly North-South partition that caused the demise of the E.U. Commission’s significant digital presence and D.S.T. directives continues to be argued in the larger forum of the O.E.C.D. Tech haves and producers appear to share a common view with U.S. tech firms. Michael Peggs explains the divide in quantitative terms and suggests that, with the exception of the U.K., the adage that looks to see "whose ox is being gored" is a useful tool in identifying those jurisdictions that support digital taxes and others that are opposed.

November 20, 2019

How Soon Is Now? The O.E.C.D. Starts Work on a Substitute for Unilateral Digital Economy Fixes

November 20, 2019/ Ruchelman P.L.L.C.

As of November 2019, the arm’s length principle continues to operate among the O.E.C.D. Member States. In a little more than a year, this may be different. The O.E.C.D.’s workplan for urgent policy development will investigate a new nexus standard that departs from the arm’s length principle applied for decades. In his article, Michael Peggs explains the current debate between tax administrations concerning the attribution of profit to digital or non-physical P.E.’s and the three popular approaches that have been proposed. The mood in the O.E.C.D. is that markets matter most under each of the suggested approaches. Brainpower and manufacturing prowess are less important.

May 30, 2019

India and the Digital Economy – The Emerging P.E. and Attribution Issues

May 30, 2019/ Ruchelman P.L.L.C.

The exponential expansion of information and communication technology has made it possible for businesses to be conducted in ways that did not exist 15 years ago. It has given rise to new business models that rely almost exclusively on digital and telecommunication networks, do not require physical presence, and derive substantial value from data collected and transmitted through digital networks. So how and where should these companies be taxed? Sunil Agarwal, an advocate and senior tax partner of AZB & Partners New Delhi, evaluates proposals already enacted in India and the U.K. and those under consideration at the level of the European Commission and E.U. member countries Italy, France, and Austria. Should the digital tax be a consumption tax passed on to the final consumer or a minimum income tax based on global profits or substantial economic presence? At this point, consensus does not exist.

February 28, 2019

O.E.C.D. on Digital Business – Seriously?!

February 28, 2019/ Ruchelman P.L.L.C.

On February 13, 2019, the O.E.C.D. issued a discussion draft addressing the tax challenges of the dig- italization of the economy and asked for feedback in a shockingly brief time- frame. Is the discussion draft – which, in many respects, mimics G.I.L.T.I.provisions and highlights the value of a market as a key determiner of profitallocation – a move away from value of functions? In a stealth way, it may be a precursor to a global B.E.A.T. Christian Shoppe of Deloitte Deutschland, Frankfurt, cautions that the ultimate destination of B.E.P.S. may be added complexity in tax laws and expanded opportunity for double taxation. Bad news for taxpayers; more work for tax advisers.

November 29, 2018

The U.K. Digital Sales Tax – It Could Be You

November 29, 2018/ Ruchelman P.L.L.C.

On November 7, 2018, the U.K. government confirmed that it will proceed with the introduction of a digital services tax ("D.S.T.") on large businesses. The tax will be charged beginning April 2020. It will apply to three key areas, which the government has concluded derive a huge value from the participation of U.K. users and are largely untaxed. Eloise Walker of Pinsent Masons, London, provides an overview of the D.S.T., cautioning that problems exist in identifying both the revenue to which the D.S.T. will apply and the hallmarks of jurisdiction that must exist in order for the tax to be imposed.

June 14, 2018

O.E.C.D. and European Commission Unveil Proposals on Taxation of the Digital Economy

June 14, 2018/ Ruchelman P.L.L.C.

Following the release of the O.E.C.D.’s B.E.P.S. Action Plan and the E.U.’s approval of the Anti-Tax Avoidance Package, the taxation of the digital economy continues to be unfinished business in the international tax arena. New O.E.C.D. and the European Commission documents mark a milestone, especially the latter, which include two different approaches. They also highlight the difficulties in achieving a consensus, which seems desirable when implementing measures that increase the tax burden of digital activities. José Luis Gaudier of Cuatrecasas, Barcelona, delves into the O.E.C.D. and the European Commission approaches to taxing the digital economy.

November 30, 2017

Brazil 2017: Tax Developments for Business Transactions

November 30, 2017/ Web Developer

In Brazil, the year 2017 saw many important developments regarding cross-border and intrastate business transactions. These developments focus on the implemention of various B.E.P.S. actions, the categorization of software transactions, and subjecting certain intrastate transactions to competing levels of state and municipal tax, all done the Brazilian way by emphasizing gross basis taxation on consumption payments. Erika Tukiama, Rogério Gaspari Coelho, and Nathália Fraga of Machado Associados, São Paulo, provide guidance on these developments.

January 15, 2015

B.E.P.S Action 10 - Part I: Profit Split Method in the Context of Global Value Chains

January 15, 2015/ Web Developer

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INTRODUCTION

There has been another release on Base Erosion and Profit Shifting (“B.E.P.S.”) deliverables. B.E.P.S. refers to the tax planning that moves profits to a low-tax jurisdiction or a jurisdiction that allows a taxpayer to exploit gaps in tax rules. These deliverables have been developed to ensure the coherence of taxation at the international level. The aim of these deliverables is to eliminate double non-taxation. The measures have been developed throughout 2014, and they will be combined with the work that will be released in 2015.

In the December 16th release on Action 10 (the “Discussion Draft” or “Draft”), Working Party No. 6 on the Taxation of Multinational Enterprises (“M.N.E.’s.”) released various factual scenarios, posed questions and invited affected persons to suggest answers. The goals of the Draft are to assure that transfer pricing outcomes are in line with value creation and to determine whether it is more appropriate to apply the profit split method in some circumstance instead of a one-sided transfer pricing method.

RELEVANT ISSUES

The Draft identifies relevant issues in the posed scenarios, asks questions, and invites commentary as follows.

Value Chains

The term “global value chain” describes a wide range of activity, from the consumption of the product to the end use and beyond. Therefore, one particular method of transfer pricing may not be appropriate.

October 15, 2014

Action Item 1: The O.E.C.D.'s Approach to the Tax Challenges of the Digital Economy

October 15, 2014/ Web Developer

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The O.E.C.D.’s Action Plan adopted in Saint Petersburg in 2013 aims at tracking where economic activities generating taxable profits are performed and where value is created. It aims at ensuring that taxation follows the economic activities and the creation of value and not the other way around. Action Item 1 of the Action Plan (the “Action 1 Deliverable”) focuses on the tax challenges of the digital economy. Along with the 2014 Deliverable on Action 15 (Developing a Multilateral Instrument to Modify Bilateral Tax Treaties), the Action 1 Deliverable is a final report.

The Action 1 Deliverable published on September 16, 2014 mainly reiterates the March 2014 Public Discussion Draft on Action 1 (click here to access our article on the 2014 Public Discussion Draft). It restates that, while B.E.P.S. is exacerbated in the digital economy space, the digital economy cannot be ring-fenced from other sectors of the economy for B.E.P.S. purposes because the digital economy is an ever growing portion of the entire economy. The Action 1 Deliverable thus refers to other Actions to address common B.E.P.S. issues that are not specific to the digital economy. Action Item 1 also refers to the O.E.C.D.’s International V.A.T./G.S.T. Guidelines with regard to V.A.T. issues raised by the digital economy. Although the Action 1 Deliverable adds relatively little to the previously published Public Discussion Draft on Action Item 1, the benefit of a set of uniformly accepted rules should not be understated. With European countries struggling to raise tax revenue in order to close budget gaps, the risk of adverse unilateral action by one or more countries is real. During a symposium held in Rome at the beginning of the month, certain European countries, and especially Italy, pushed for unilateral action with regard to the taxation of the digital economy. If that action proceeds to enactment, digital tax chaos could be encountered.

August 15, 2014

U.S.-Based Pushback on B.E.P.S.

August 15, 2014/ Web Developer

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INTRODUCTION

In addition to the aggressive actions by some foreign countries to levy more taxes on U.S. taxpayers before a consensus has been reached, the process established by the O.E.C.D. raises serious questions about the ability of the United States to fully participate in the negotiations.

Ultimately, we believe that the best way for the United States to address the potential problem of B.E.P.S. is to enact comprehensive tax reforms that lower the corporate rate to a more internationally competitive level and modernize the badly outdated and uncompetitive U.S. international tax structure.

So say Representative Dave Camp (R) and Senator Orrin Hatch (R), two leading Republican voices in Congress, on the O.E.C.D.’s B.E.P.S. project.

Does this somewhat direct expression of skepticism represent nothing more than U.S. political party politicking or a unified U.S. government position that in fact might be one supported by U.S. multinational corporations? The thought of the two political parties, the Administration and U.S. industry agreeing on a major political/economic issue presents an interesting, if unlikely, scenario. This article will explore that scenario.

OVERVIEW OF B.E.P.S./WHY B.E.P.S.?/WHY NOW?

Base erosion and profit shifting (“B.E.P.S.”) refers to tax planning strategies that exploit gaps and mismatches in tax rules in order to make profits “disappear” for tax purposes or to shift profits to locations where there is little or no real activity and the taxes are low. This results in little or no overall corporate tax being paid.

April 15, 2014

The O.E.C.D.'s Approach to B.E.P.S. Concerns Raised by the Digital Economy

April 15, 2014/ Web Developer

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On March 24, 2014, ten days after the O.E.C.D. released its public discussion draft on prevention of treaty abuse, a second public discussion draft was released, addressing the tax challenges of the digital economy (the “Discussion Draft”).

The Discussion Draft emphasizes the concept that the digital economy should not be ring-fenced and separated from the rest of the economy, given its relationship to the latter. It provides a detailed introduction to the digital economy, including its history, components, operations, and different actors. Surprisingly, it does not propose any groundbreaking approaches to addressing the base erosion and profit shifting (“B.E.P.S.”) challenges encountered in the digital economy. It simply reflects an approach that is consistent with the fight against B.E.P.S. – seeking to determine where economic activity takes place in the digital economy in order to best achieve taxation in a non-abusive fashion.

The Discussion Draft singles out six factors that characterize the digital economy in light of B.E.P.S. concerns:

Mobility of all facets of the digital economy, including the intangibles used, the users themselves, and the business functions carried on by various players in the business model;
Reliance on data;
Network effects;
Use of multi-sided business models;
Tendency towards monopoly or oligopoly; and
Volatility