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Digitalization and taxation

Greater access to information and enhanced digital systems and processing capabilities open new options for policymakers. Digital information affords better enforcement of existing rules; while access to richer information can drive improvements in the rules themselves. For example, tax liabilities could be based on a taxpayer’s lifetime income and wealth, rather than current yearly income, which would arguably lead to a fairer distribution of tax burdens. Digital systems also offer potential new roles for consumers and third parties in facilitating enhanced compliance—including through the emerging peer-to-peer economy.

At the same time, some analysts have suggested that because the opportunities for tax avoidance associated with the scale of growth in online business may be putting so much pressure on current tax arrangements, fundamental changes in the international tax system are needed to ensure efficiency and fairness across countries in the allocation of taxing rights. From the perspective of international corporate tax policy, the issue of how to treat cross-border digital transactions has become highly contentious . There are several key features of archetypal “digital companies” that provide challenges for current norms of international corporate taxation: sales with little or no physical presence; heavy reliance on intangible assets; and “user-generated value”. Digital economy business models do bear significant resemblance to those in the services sector. The taxation of cross-border services provision has been grappling with many of the same issues as now face taxation of the digital economy activities. Many multinational enterprises that are involved in the production and trade of merchandise also use intra-group transactions on services and other intangibles, which has been a significant source of base erosion and profit shifting activity. See Organization for Economic Co-operation and Development Base erosion and profit shifting (OECD BEPS) Action Plan report on Transfer Pricing. The issue of permanent establishment, in particular, has sparked concerns. Under existing rules, digital companies often have no liability to pay income tax in jurisdictions where they have users and customers, because those rules require some form of physical presence for a set period of time. This has opened a broader debate on the allocation of taxing rights and attribution of income between the residence and source countries. There is also disagreement on how user-generated value should affect taxing rights. Digital economy business models make heavy use of data to realize profit, while users of online services generate information that has commercial value. Much of the data collected is extremely valuable, but there is no agreement on whether, or how, to attribute value to the creation and use of data. The lack of a universal tax standard opens the possibility for fragmentation in approaches to this issue across jurisdictions but also creates incentives towards unilateral action to counter risks to the tax base.

There are different views on how to adapt international tax rules to the digitalization of the economy. Some experts doubt the desirability or even the possibility of ring fencing digital companies for the purpose of designing special tax treatment. However, in recent policy debates, other experts have raised the prospect of tax rules that would be restricted to specific business lines. The United Nations Committee of Experts on International Cooperation in Tax Matters has established a subcommittee to consider necessary revisions in the United Nations Model Double Taxation Convention as well as to provide revised guidance. The Task Force on the Digital Economy, which is now a subsidiary body of the OECD-housed Inclusive Framework on Base Erosion and Profit Shifting (BEPS), is examining the tax challenges of digitalization; it is anticipated that the Inclusive Framework on BEPS will release an interim report on the findings by the end of April 2018, with a final report by 2020. The European Commission is waiting for that interim report and, if it does not include satisfactory proposals, may propose its own measures. Any changes to the provisions of either the United Nations or OECD model conventions as a result of this work will not automatically change the existing base of over 3,000 tax treaties or domestic practices unless Member States take action to incorporate them.