The impact of digitalization on tax regimes globally is one of the key topics in the tax world today. At the start of March the OECD published its Interim Report to the G20 – “Tax Challenges Arising from Digitalisation” – and this shows the extent of disagreement between countries, except on the need for further work to be done. On 21 March the EU Commission published proposals for a Digital Services Tax (an interim measure which taxes turnover from advertising, sale of data and operating a platform at 3%) and a new concept of a Significant Digital Presence (a longer term solution for creating a deemed permanent establishment (PE) to tax profits from digital services provided via a digital interface.)
With this as the backdrop, the latest KPMG Responsible Tax Roundtable was held at the Organisation for Economic Cooperation and Development (OECD) offices in Paris, to consider the issues through a responsible tax lens. Questions which were addressed included: is it possible to define a digital business? what is the real issue – fairness, politics, new business models making rules outdated? how do companies avoid the risk of double taxation? how can governments and global bodies react in such a fast-moving and fluid situation and how can flexibility be built into the new approach to ensure it works over the long-term?
While the stakeholders came at the issue from a different perspectives, there were numerous points of agreement. There was general agreement that the real issue was to do with globalization and changing business models, not digitalization per se. Nevertheless it was recognized some change was needed. As one delegate put it “we need a new tax system because we have a new economy”. The business representatives broadly noted it was for governments and policy makers to make necessary changes and they would comply; their ask was that any system simply comply with existing tax treaties and avoid double taxation. Together with delegates from professional bodies they focused on how corporate tax systems could be improved. Without contradicting this, representatives from academia and civil society also noted the wider picture of growing lack of trust in corporations, concerns about monopolies and privacy and questioned whether or not tax could be used to address some of these issues.
Here are some key observations from the discussion:
1. The issue is less about a need to change the tax rules for “digitalised business” and more about a systematic rethink of how we tax an increasingly global economy.
It is not possible to ring-fence or even define what constitutes the digital economy. There is a wide spectrum of the effect of digization1 or digitalization on business. At one extreme companies are providing virtual goods and services (such a social media), at the other they are using digital technology to be more efficient within a traditional business. Then there are those which have radically changed the old business models, for example by connecting passengers with hire car drivers. Many companies uses multiple business models and, any case, do not categorize themselves a digital or not. Even if a definition of a digitalized business or the digital economy could be approximated today, it would not be fit for purpose for very long because business is evolving rapidly. A good example is the car industry; not traditionally thought of as digital businesses, they are increasingly seeing themselves in this way and looking to provide digital services to their clients. “Digital,” in a way, then becomes a mere proxy for the profound changes that have taken place (and which will continue to do so).
2. Unilateral digital turnover taxes are not the answer to the impact of globalized business models on corporate tax systems.
Nearly everyone in the room was opposed to the idea of digital turnover taxes as they create double taxation and over taxation.
3. A potential solution in “Virtual PE” or an expanded concept of “doing business.”
The usual questions about where value is created and the value of data were discussed. An interesting perspective was offered that the value is not in data as such (“if I give you a CD with all my personal data that does not have intrinsic value”) but it is where the service or good in question is used. It was argued that, even using a “old world” example, the value in a car is where the driver is using it – and digitalization has just made that clearer.
It was also suggested that a binary choice between whether value is in data or algorithms and processes was too simplistic and changed over time and according to business models. One company representative noted that some years ago they had centralized their IT staff in one place to concentrate on developing software but now that that was in existence, and that there had been developments in the market, they were locating the staff closer to their customers as collection of the data was become more important: the value of the software versus the raw data to the company therefore changed over time.
There was discussion about expanding the existing concept of a PE to cover a “Virtual PE” although there was some strong criticism of the term virtual. A better formulation was put by one of the company representatives – “we know when we are ‘doing business’ in another country, even when a traditional PE is not in place”. Maybe it would be possible to use this as a new definition? It was recognized though that, even if an expanded definition of a taxable presence could be agreed, a key issue remained how to attribute value.
It was noted that, especially following the recent tax reform, there is a greater willingness in the US to discuss changing the status quo – perhaps along the lines of introducing some sort of virtual PE concept; however, countries which currently sell significant amounts of goods and services into to the US without a tradition PE may change their views when they realized the implication!
4.Some wider concerns
Another theme which came through is that tax can be a surrogate for wider concerns – about inequality, monopolies, privacy and a perceived lack of power amongst citizens, coupled with the need to share and drive innovation across economies. It was noted that it is hard to start a business or innovate without using, and maybe obtaining permission from, a small number of multinationals which dominate in the digital sphere. There was concern that digital technology also tends to favour size and promote quasi-monopolies. An idea was floated that “digital taxes” could almost be used like “sin taxes” or “green taxes” to promote or discourage certain behaviours or activities. Under such a scenario, for example, a different tax level would apply depending upon whether data collected was made publicly available or kept for private use.
An alternative view expressed was that – while the concerns may be real and even legitimate – they should be dealt with by non-tax means. Anti-competitive behaviour should be addressed by fines not dressed us a tax.
While there was no general agreement on if or how tax could be used as a lever of change, the message was clear that tax advisers and policy makers also needed to take account of the wider social and political picture influencing the tax and digital debate.
5. Blockchain and possibilities opened up by innovation
One point made was that we need to consider if any changes should only focus on the current state of the economy or should be flexible enough to be relevant in, say, 50 years’ time. It is also possible that developments in business will make new forms of taxation more appropriate in future. In that context blockchain was discussed as a technology which would allow use of individual’s data to be tracked opening up the possibility of either valuing data more easily or imposing indirect or transactions taxes on data flows.
6. There is reason to be optimistic that a globally-applicable approach that works for taxpayers, governments and the societies they serve can be achieved.
Despite vastly different interests and priorities amongst those in the room, the overriding theme was a sense of optimism, generally, about the potential to achieve a globally-applicable approach to modernizing international tax rules to apply to globalized business. There was concern that in the near future there may be more complexity, disputes and double taxation as more countries introduce unilateral “digital taxes”. However, over the medium term a consensus could well emerge, possibly about taxing where “business is carried on”.
Please click here to listen to some participant views.
Thank you to all the participants that attended the roundtable and contributed to the conversation.
Caroline Malcolm, Senior Advisor - Tax and Digitalisation, OECD; Henri Verdier, French State Chief Technology Officer; Jane McCormick, Global Head of Tax, KPMG International; Chris Morgan, Head of Global Tax Policy, KPMG International; Robert Phillips, Expert, author, CEO & Co-Founder, Jericho Chambers; Eric Anthoine, Group Tax Director, Carrefour; Clive Baxter, Head of Tax Governance and Policy, A.P. Moller - Maersk; Charles Enoch, Director of the Political Economy of Financial Markets Programme, St. Antony’s, Oxford; Catherine Fieschi, Executive Director, Counterpoint; Paul Gisby, Manager, Accountancy Europe; Mindy Hertzfeld, International Tax Professor, Florida University; Shikha Mehra, Co-Founder, MainChain; Ben Pickford, Senior Manager, International Tax, Amazon UK; Glenn Price, Head of International Tax, Vodafone Group; Stella Raventós, Chair of The Fiscal Committee, CFE; Kirsty Rockall, Partner, Corporate Tax, KPMG in the UK.
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...