On Monday 12 November 2018, following the KPMG client conference for the Latin America region, a roundtable was held in Mexico with a group of conference delegates. The theme was digitalisation and the future of corporation tax.
The delegates represented a variety of industries from financial services to consumer products, data management and internet sales.
The overall conclusion of the roundtable was that delegates believed that apportioning taxing rights between countries should continue to be based upon the concept of “value creation”. Nevertheless they thought that digital services/turnover taxes would be introduced across the region - as well as globally - although none thought that this was an optimal solution.
Digital services taxes are suboptimal and will create double taxation but it appears they are likely to spread across the region
Delegates raised the concern that governments were under pressure and would not allow the OECD the time to come up with a global consensus on how to “modernise” the international tax regime. As a consequence more and more unilateral digital services taxes would be introduced. Uruguay, Chile, Colombia, Costa Rica and Argentina were all mentioned as countries in the region which were looking at introducing such taxes.
It was noted that digital services taxes would create double taxation (particularly if introduced on a unilateral basis), would penalised loss-making companies and create different effective tax rates on different companies depending upon their profit margin. The UK proposals which involve safe harbours to protect loss-making and low margin companies were briefly mentioned. One delegate wondered if it would be possible to introduce a deduction or a credit for a digital services tax so as to prevent or to mitigate double taxation. However, it was noted that such mitigating rules made a digital services tax more akin to a profit tax which could therefore be contrary to double tax treaties.
Most delegates thought they would not be directly impacted by a digital services tax but some were concerned that governments expected them to collect the tax
Interestingly most delegates thought that a digital services tax would not directly impact them or would only be relevant to certain of the businesses they carried on. However a number were concerned that governments were looking to them to collect the tax and several had been in conversation with a number of jurisdictions. Discussions focused around explaining their business models to tax authorities and also trying to understand how any proposed taxes would work and the practicalities of implementing them. There was a feeling that many countries were open to discussion with business.
Moving to a system of formulary apportionment or a destination based tax was not seen as the way forward
Delegates thought that countries were unlikely to give up their sovereignty over tax rules and accept a global formulary apportionment system. Furthermore it would be very difficult to get countries to agree one formula to apportion global profits as the weighting of the factors used would inevitably shift the tax base from one country to another. It was noted that formulary apportionment was used in the US state and local tax system but there were many different formulas used by various states -rather than the basic equal split between payroll, assets and turnover. Without an agreement on one formula they would either be double taxation or, potentially, double non-taxation.
There was not much discussion about a destination tax principle but it was noted that it would result in a significant shift in the tax base. One delegate noted a lot of the company’s sales were into the US and, with the reduction in the US tax rate, a destination principle may actually benefit the company.
As regards a digital services permanent establishment (PE) there are practical difficulties in identifying the location of users although some learning may be drawn from VAT rules
Delegates thought that a key difficulty in defining a digital services PE would be identifying where users are located. A person may have an IP address registered in one country but be travelling in another when they access services through the relevant digital interface. A question was also raised as to whether the threshold would be based on the number of people accessing the site or actually interacting with it or making some kind of purchase. It was noted however that similar questions have been raised in the field of VAT where it is necessary to identify where the customer is present.
Although it is becoming more and more complex, value creation is still seen as the best way to determine taxing rights
Delegates agreed that in order to determine taxing rights it was necessary to focus on value creation. If a customer was only buying goods or a service and not contributing to the value created it was thought that the “market” where the customer resides should not have taxing rights over any of the profits. It was also thought that apportioning taxing rights by looking at marketing intangibles could create problems with identification and valuation. Nevertheless it is recognised that companies or groups generate value in very different ways in different parts of the business. Therefore, identifying where value is created is becoming a more and more complex task.
by Chris Morgan
Chris became Head of Tax Policy for KPMG UK in 2011. In this role he was a regular commentator in the press, as well as on radio and TV, led discussions on various representations with HMRC/HMT. In 2014 Chris spearheaded KPMG UK’s Responsible Tax for the Common Good initiative. In September 2016 Chris took on the role of Head of...