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

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

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.

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

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

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.

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

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

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.

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

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

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.

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The Sharing Economy Part 2: Governments Strike Back

The Sharing Economy Part 2: Governments Strike Back

The sharing economy uses digital platforms to connect suppliers willing to provide services or use of assets with consumers.  Think of Uber and Airbnb.  These multinationals are structured to channel profits to low-tax jurisdictions.  As with Google and Microsoft, tax authorities have begun to challenge these business models.  In part two of this series, Fanny Karaman and Beate Erwin explain how these business models are being challenged.

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Brazil 2017: Tax Developments for Business Transactions

Brazil 2017: Tax Developments for Business Transactions

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.

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The Sharing Economy Part 1: New Business Models + Traditional Tax Rules Don’t Mix

The Sharing Economy Part 1: New Business Models + Traditional Tax Rules Don’t Mix

The current international tax system was established on principles dating back to the first half of the 19th century, when a nation’s retail economy consisted mostly of brick-and-mortar stores.  As the purchase of services and goods was gradually dematerialized and internet giants such as Google or Microsoft appeared, governments struggled adapt tax rules to keep up with new business models.  Now, governments around the world have shifted their focus to a relatively new part of the digital economy called the “sharing economy.”  Fanny Karaman and Beate Erwin look at recent tax developments in the world of Airbnb and Uber.

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

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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.

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

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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.

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

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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.

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

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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:

  1. 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;
  2. Reliance on data;
  3. Network effects;
  4. Use of multi-sided business models;
  5. Tendency towards monopoly or oligopoly; and
  6. Volatility