What is the issue?
Some governments around the world feel that highly digitalized businesses are not paying their fair share of tax, or at least not in the right country. They feel that today’s international tax rules are out of date and need to be updated so that more tax is allocated to the jurisdiction of the customer and/or user. This jurisdiction is often called the “market jurisdiction.”
The primary focus is to change the international corporate income tax rules in double tax treaties and OECD guidelines. In addition, some lawmakers believe that there should be a special tax for digital businesses. The reasons they give are twofold: (1) even with changes to the international tax rules, digital businesses will still be able to keep their tax base low in the market jurisdiction, and (2) changing the international tax rules will be a slow process. This separate digital services tax (“DST”) is often presented as an interim measure, which would be abrogated when the international tax rules are changed.
What has been done so far?
In 2015, the OECD launched the Base Erosion and Profit Shifting (“BEPS”) project. The project was established to evaluate issues in the existing international tax system, which needed to be addressed in order to stop multinational companies from shifting profits from higher-tax jurisdictions to lower-tax jurisdictions thus eroding the tax base of the higher-tax jurisdictions (base erosion and profit shifting). Not only does the BEPS project include the 35 OECD Member States, but also many developing countries which were not OECD members but nevertheless joined the initiative. This group is called the Inclusive Framework and consists of about 130 countries. The issues and recommended solutions are divided into “Actions.” Action 1 dealt with taxing the digital economy. In the framework of Action 1, an interim report was published in 2018 setting out the issue and exploring possible solutions. Most solutions focused on so-called “user participation”. The user participation proposals limit what is considered the “digital economy” and provide taxation rights to jurisdictions only where users are engaged in digital marketplaces or providing content/data on social media or through search engines. It is worth noting that the OECD is against using interim measures to address the challenges of the digital economy and has spoken against the propagation of a DST.
The European Commission has talked about introducing a temporary DST, which mainly focuses on “user participation” but with the challenge of needing to reach consensus among EU Member States this proposal has not advanced.
Because of the slow international progress some countries have gone ahead and unilaterally introduced a DST, such as France, or are planning to do so (United Kingdom).
What is the latest development?
In May 2019, the OECD published a new work program approved by the members of the Inclusive Framework. Initially, the focus of BEPS Action 1 was to limit taxation rights only to jurisdictions where users are engaged in digital marketplaces or providing content/data on social media or through search engines. The new work program of the OECD broadened the discussion by suggesting that the entire corporate tax system should be more destination-based, thereby allocating more taxation rights to market jurisdictions. This means that many more businesses might be impacted than initially thought. The new work program divides the work into Pillar I and Pillar II. Pillar I shifts more taxation rights to the market jurisdiction. Pillar II deals with the establishment of a minimum tax on profits, in order to ensure that multinational companies pay at least a minimum amount of tax. Last month, the OECD issued a public consultation document with proposals for Pillar I. This consultation closed on November 12, 2019. Last week the OECD issued a public consultation document with proposals for Pillar II. This consultation closes December 2, 2019.
How is AmCham Belgium getting involved?
It has become clear that the work of the OECD might have an important effect on international tax rules and might impact not only highly digitalized businesses. To monitor developments, share information and advocate our position, AmCham Belgium's Legal & Taxation Committee has formed a Subcommittee specifically focusing on Digital Tax. Members who are interested in joining can contact the staff liaison, Alana Fitzpatrick (firstname.lastname@example.org), for further details.