On 20 June 2019 a roundtable was held in London with a group of tax directors to discuss the digitalization of the economy, the future of corporation tax and the proposals being debated by the OECD Inclusive Framework.
There is a general feeling that the tax community risks rushing towards a solution, without having properly defined the question and the concerns of all the stakeholders. Nevertheless, there seems to be a consensus that there needs to be some shift of taxing rights to market jurisdictions and one view is that efforts should focus on how to do that in as practical and simple way as possible within a short timeframe.
Concerns were expressed about the difficulties of the current transfer pricing regime and also that proposals before the Inclusive Framework to identify marketing intangibles using a modified residual profit split were too complex to work in practice. Introducing some formulary element into profit attribution could help simplify the system but full formulary apportionment was not considered to be a practical way forward.
Whatever the outcome, the agreed rules need to be as simple as possible for tax authorities and corporates and should be globally accepted. Enhanced, multilateral approaches to avoiding and resolving disputes between tax authorities are also needed. To facilitate this outcome it is important that companies engage in the debate both at the level of the OECD and relevant regulators and also in the public forum.
It is important to understand what is driving public perception and the debate on digitalization and tax to ensure that any proposals actually meet different stakeholders’ concerns; without this there is a risk of on-going unilateral measures being introduced whatever solution the OECD Inclusive Framework ultimately endorses
It was generally considered that part of the driver for reform is public perception – encouraged by the media and politicians – that large highly digitalized multinational enterprises (MNEs) are not paying their “fair share of tax”. However, will a digital services tax or more fundamental changes to the global corporation tax accord, which could impact companies of any size, really solve the problem? It was also noted that most of the successful global digital companies are not European and it appears as if - at least part of - the drive within Europe to introduce digital services type taxes is to do with anti-competition concerns and perceived quasi-monopolies. Some delegates thought some tax authorities just wanted a larger piece of the global tax cake.
There was some discussion about whether or not an MNE which sells good and services into a country in which it does not have a physical presence is benefiting from the infrastructure of that country in such a way as to justify requiring it to pay tax there. It was concluded that such an MNE is benefiting from the economic and social development of the country – such as the rule of law, education, access to infrastructure and the internet and purchasing power.
There was a concern expressed that there has been no agreement between different stakeholders on what the actual issue is and what an appropriate solution should achieve. Without this, public perception and political pressure may not change whatever solution the OECD Inclusive Framework eventually agrees and ultimately we will still end up with unilateral actions and many different digital services taxes.
One delegate suggested that companies need to do more to inform the debate. For example, a group may have tax losses and so pay no tax but still have reported profits under IFRS. Do the public and media commentators understand the different concepts or is this just seen as a profitable MNE not “paying its fair share”? Also it would be useful if the debate was focused more widely than on corporate tax alone and considered what contribution business makes to society and revenue collection more generally in various other forms of taxes paid and collected - for example social security, payroll taxes and environmental charges.
Digital Services Taxes (DSTs) are likely to be passed on to customers and so not ultimately be borne by the multinational collecting the tax
It was noted that DSTs function like an indirect tax and might well be passed on to the end consumer. Alternatively, they may be passed on to another actor in the supply chain – for example the person or entity selling goods or services through a platform. In such a case they could primarily affect SMEs or private individuals. In neither case would the result address the public perception that MNEs are not paying their fair share of tax.
The proposals before the OECD Inclusive Forum for introducing some kind of modified residual profit split could introduce too much additional complexity but there is a trade of between simplicity and a system which could create arbitrary results
There was general agreement that the way transfer pricing rules currently work was too complex and a concern that tax authorities are increasingly looking to find and assess intangible assets which exacerbates this. Trying to establish what would have happened in an independent situation when considering transactions within a controlled group requires many assumptions and can be a time consuming and difficult operation. While the proposal before the OECD Inclusive Framework to apply a modified residual profit split (MRPS) - to identify residual profits from marketing intangibles and allocate them to the market jurisdiction - could be theoretically justified it was likely to be too complex for most tax authorities or taxpayers to implement. On the other hand, it was suggested that the fractional apportionment approach - simply apportioning some of the total profits to market jurisdictions on a formulary basis - was not appropriate. One possible solution could be to try and combine the approaches by using a simplified MRPS combined with a formulary apportionment – although it was recognized that that would introduce a degree of arbitrariness.
It was also thought that whatever new approach is finally agreed, there may have to be carve-outs for certain industries, for example the extractive sector.
Business would welcome enhanced dispute resolution mechanisms
Disputes are likely to increase in the future, in particular as countries try to implement any new rules and inevitably seek to use them to increase their tax take. It was therefore agreed that there needs to be an improved dispute resolution mechanism which could include extending joint audits and introducing multilateral mutual arbitration.
Abandoning the existing arm’s length principle for global formulary apportionment is not seen as being a realistic way forward
It was thought that, despite the complexities of the current transfer pricing system, moving to global formulary apportionment was unlikely to be the solution. For example, it would be necessary to agree a single tax base or there would be either double taxation or non-taxation. But doubt was expressed that global consensus could be reached. Nevertheless some delegates indicated they would support a consolidated corporate tax base in the EU if there was political agreement.
Companies need to engage in the debate at all levels to help ensure that any solution is optimal and globally accepted
It was agreed that any solution needs to be global in nature, rather than a series of unilateral actions, and should be as simple and easy to implement as is practical – especially for tax authorities in developing countries.
In order to facilitate finding an optimal solution it is important for companies to engage in the debate, whether through industry bodies or directly with the OECD and the Inclusive Framework and with their own governments and revenue authorities.
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...