In this article, Stella Raventós-Calvo, Chair of The Fiscal Committee – shares her views on the first provocation.
Understanding the challenges of corporate taxation in a digitized, globalized economy is one of the key focus areas for the Responsible Tax project in 2019. An initial provocation was published in the Spring and a Think Piece is scheduled for the autumn. This will embrace multiple viewpoints, from across the expert spectrum. Roundtables to discuss some of the emerging issues have been held in London and Brussels, with more to follow. You can read some of reports (h)ere.
What is the nature of the problems we currently face when it comes to the global tax debate?
It is now widely recognised that the digital economy poses unique tax policy challenges for policymakers in a global context. The immediate concerns are twofold:
- The existing international tax rules are unable to fully address the increasing reliance on data and business-to-customers sales in host jurisdictions from a tax perspective, hence their corporate tax presence in host jurisdictions is not being recognised within present framework, ie. nexus issues;
- Multinational group companies with digital business models are currently subject to only a very low effective rate of tax worldwide, with a public perception that these companies are not paying ‘enough’ tax anywhere in the world.
Taking a step back, it is worthwhile reminding ourselves that we live in a different world, to the one when today’s guiding principles of the tax system were designed by the League of Nations back in 1920s.
Current tax rules were not designed for the digital business models that rely on little, if any physical presence at all. As a result, there is a perceived mismatch between where the value is created and where taxes are paid, which affects the perception of fairness in our tax systems.
Hence it is no doubt clear, as admitted by the OECD, that under the designation ‘taxation of the digital economy’ we are witnessing perhaps the most fundamental change in history of the design and modus operandi of the international tax rules.
As CFE, we have supported the proposal to focus on the economic link between the users/ market jurisdictions and the value created therewith. We believe that in arriving at a global solution, it is important that traditional concepts of international tax law are not forgotten in the process. The solution should remain consistent with the OECD’s long-standing approach to the international tax framework that corporate tax is due where the underlying economic activity takes place and where the value is created. From CFE’s perspective, the existing OECD proposals appear to address these issues conceptually but are legally and technically very complex.
What are the global tax principles that should guide any response?
Simplicity, administrability and fairness.
Simplicity, as we already operate in a global tax environment which is increasingly complex. Proverbially, tax advisers are said to be the ones who benefit from the complexity of tax rules. The truth is, tax advisers are an inherent part of administering a tax system. Be it simple of complex, tax advisers make tax systems work. We would welcome solutions which are simple to understand both conceptually and practically, which as a result will provide more breathing space to focus on what really matters – helping companies to be more innovative, productive and committed to the societies where we live in.
A related point follows i.e. the principle of administrability. If any upcoming reform results in rules that are too difficult to administer, we will have not achieved much as a result. If tax administrations in European countries are already struggling with resources, what will happen with developing countries, how much time and effort will it take to acquire the expertise and human resources needed to administer the new rules, where the existing ones are already too complex to grasp?
Fairness of our tax systems has rightly taken precedence over other principles, as seen not least in the recent EU tax avoidance initiatives. There is public perception of mistrust in the institutions and more generally in the world order that we operate in.
Restoring trust and the sense of fairness that our tax systems are delivering on the goals that matter for our citizens should be a priority for policy makers. The implications of the sense of unfairness in a tax system has a potential to undermine tax collection, tax morale in general, and in particular the voluntary compliance on which most of the tax administrations rely on.
Finally, the global trends of transparency and the tax justice campaigners urge for public country by country reporting (public CbCR) are a corollary to the above discussion on the principles. If we address the public trust in the institutions, and we restore the public perception of fairness of our tax systems, there will be less pressure for more transparency initiatives. Transparency should not be a goal to itself. More corporate or more tax-related data and MNEs information in the public domain will not solve anything, instead restoring the trust in our institutions and improving their capacity in a meaningful way should certainly be a guiding principle of this global tax policy response.
Is there now general agreement that digital companies or a digital economy cannot be separated out from the economy as a whole?
The problems are very complex and inevitably highly political.
It is widely understood, per the OECD BEPS Action 1 proposition, that the digital economy should not be ring-fenced from the rest of the economy for tax purposes due to the increasingly prevalent nature of digitalisation and the evolving nature of the digital business models.
However, it is also evident that the taxation challenges that we are facing do not arise from the business model of an airplane manufacturer (Airbus or Boeing), but from the business models of Facebook and Google.
Indeed, efforts to address the whole international tax framework, rather than the specific challenges related to the digital economy, has a significant potential to defocus our efforts from the important problems, and will make it potentially more challenging to address the fundamental underlying issues.
Is it simply a matter of strengthening anti-avoidance rules?
Indeed, the issues under scrutiny are much deeper and wider, and certainly go beyond avoidance issues and BEPS.
However, the OECD acknowledges that digitalisation of the business models does not generate unique BEPS risks, but some of the key features of digitalisation compound existing BEPS issues.
Some time should be allowed to evaluate the full effect of the BEPS-related anti-avoidance measures, before any new anti-avoidance measures are being legislated. Some of these measures are still under implementation in most countries of the Inclusive Framework.
Consequently, a longer-term perspective seems more appropriate to appreciate the entirety of the remaining BEPS issues. Within the EU a number of anti-BEPS policy and legislative measures have been introduced with the ATAD and ATAD2 directives, which significantly reduce the incentives to shift mobile tax bases to low-tax jurisdictions.
Do any of the ideas listed above adequately meet points 1, 2 and 3?**
Do we need more fundamental reform of the CT system?
The larger issue at stake is what the impact of the OECD proposals will be beyond the digital economy (transfer-pricing in general), and the related question how to allocate taxing rights among jurisdictions, hence this operation is inevitably going to result in a more comprehensive corporate tax reform.
What should follow, is a debate on a common understanding of what constitutes ‘nexus’ for taxation purposes. This must be addressed as a matter of priority, which will make it then simpler to discuss the allocation of profit rules.
As CFE, we welcome the evaluation of the merit of users’ contribution to value creation within digital business models, however, for reasons of tax certainty, CFE has called to keep as much as possible to the well-established principles of international tax law.
Whilst giving some value to users’ value participation and data for digital business models, the existing Authorised OECD Approach (AOA) that relies on assets, risks and people functions should likely be kept for all other business models. This approach has so far resulted in a globally accepted profit allocation standard in line with the operation of the arm’s length principle and the OECD Transfer-Pricing Guidelines.
In that sense, under the functional transfer-pricing analysis that underpins profit allocation between different arms of a multinational group company, the AOA approach takes into account the distinct contributors to the value creation, such as functions performed by people, which takes into account the used assets and the assumed risks.
As a reminder, Article 7 and Article 9 OECD Model embody the international tax policy consensus under which countries exercise taxing rights on the business of resident taxpayers (Article 9) and the circumstances under which business profits are attributable to a non-resident PE in a source country (Article 7).
Revision of these fundamental principles of international tax law should remain as close as possible to the existing OECD framework, ie. the OECD Model and the accompanying Commentary.
Are there other alternatives to CT – for instance can indirect, land and other taxes be applied more effectively and fairly than CT?
Some commentators have advocated to abolish Corporation Tax altogether, considering that the incidence of all taxes falls on the final consumer from an economic perspective. In that sense, sales taxes and other forms of indirect taxation remain thought-provoking as a tax policy alternative to the whole debate on reforming corporate taxation, which increasingly yields less revenue compared to indirect taxes. At present, however, such alternatives are not worth pursuing given the absence of political support, hence the viability of such ideas.
How is any of this accomplished without “tax wars”, or adding layer upon layer of complexity or double taxation?
In absence of a common agreement, we are increasingly facing a tax war indeed, an uncoordinated international tax landscape, consisting of unilateral actions being taken by individual countries. Such actions inevitably lead to misalignment of tax bases globally, resulting in double taxation and significant compliance burden for businesses. Therefore, unilateral actions will stifle economic growth and innovation.
The issue of double taxation is already difficult to address at present, considering the inadequacy of tax dispute resolution mechanisms. We therefore welcomed the developments with the EU Tax Dispute Resolution Mechanisms and have called on expediting existing MAP procedures.
We have called on the EU to give due consideration to the possibility to extend the existing mechanisms to double tax disputes arising from the unilaterally introduced digital services taxes (DST) around the EU. DST are not income taxes, but revenue or turnover taxes. It is widely accepted in the academic literature that turnover taxes do not fall within the scope of the OECD Model and tax treaties. Considering that revenue or turnover taxes are substantially similar to indirect taxes, they do not qualify for treaty relief.
Specifically, if a tax is not a ‘covered tax’ under article 2 of the OECD Model Tax Convention, it would consequently not be covered by either the ‘distributive’ articles of the OECD Model, nor would it qualify for dispute resolution under the mutual agreement procedure (MAP) of Article 25 of the OECD Model. Accordingly, such indirect taxes would not qualify for relief from double taxation under Article 23 of the OECD Model in the residence jurisdiction of the taxpayer, and will involve double or multiple taxation.
In recognition of the disputes and double taxation that any new solutions could give rise to, CFE advocates for early certainty mechanisms for taxpayers. Increasingly, taxpayers in different States are facing equal tax obligations but are not treated equally by tax administrations in terms of their rights in different states.
Consequently, the administration of the new OECD proposals should not give rise to double taxation in multiple jurisdictions or entail significant compliance burden for businesses.
Are responses meeting future developments and challenges?
We recognise the difficulties in pinpointing the features of all the digital business models as current definitions are likely to become outdated in due course. Digital business by it nature is a fast-paced environment. We should not forget still that precisely because of the fast-paced change of the digital environment, today’s solutions ought to be future-proof and consistent with the principle of aligning profit with underlying economic activities and value creation.
Are the institutions we have capable of delivering any new agenda – do they need developing or do we need new bodies?
Considering that the issues under scrutiny will inevitably involve reallocate taxing rights among jurisdictions, we support the work of all involved institutional actors, such as the UN, the OECD and the European Commission. They all seek to explore the extent to which these new forms of business activity generate value and how will such value be attributed among jurisdictions for taxation purposes.
The OECD has played a prominent role in evaluating international tax standards in the context of the BEPS process and is becoming a global forum which brings together governments, stakeholders like CFE and citizens, seeking to address issues such as the taxation challenges of the digitalising economy.
As a next step, we need to restore trust in the institutions again and to work on building capacity where this is non-existing or insufficient.
The views and opinions expressed herein are those of the authors and do not necessarily represent the views and opinions of KPMG International.
Stella Raventós-Calvo has more than 25 years of professional experience advising on projects related to taxation of companies as well as institutional and private investors, on the design of international tax strategies. Stella has been first Vice-president of the Spanish Association of Tax Advisers, serving as a member of the International Committee. Stella is currently chair of the Fiscal Committee...