The Strategist

OECD: Taxation in digital economy is a big problem

03/20/2018 - 06:52

The international community cannot agree on how taxation should look in the digital economy, the Organization for Economic Cooperation and Development (OECD) interim report states. Although more than 110 countries joined the initiative on combating the erosion of the tax base and profit shifting (BEPS), they are unlikely to reach a consensus by the appointed time (the year of 2020). Meanwhile, the European Commission is preparing to submit its own tax increase plan for techno-giants from the US, which can further heat up the brewing world trade war.

A document published last week (OECD Secretary-General José Angel Gurría should present it to the G20 finance ministers at a meeting in Argentina) outlines the main challenges that modern digital business models creates for the system of international taxation and tells about approaches of different countries to this process. Although the BEPS agenda calls for a consensus to be reached by 2020, the participants of the initiative cannot yet agree on such key issues as determining a company's digital presence in jurisdictions and extracting profits from intangible assets, the OECD states. A number of countries advocate a position of non-interference; others urge to levy taxes on technology companies, taking into account the contribution of users to the formation of profits; some believe that tax rules should be universal for all sectors of the economy.

The uncoordinated actions of countries that are already introducing temporary digital taxes without waiting for a collective decision can have a negative impact on investment and economic growth, increase the risk of double taxation and create additional problems for both taxpayers and tax authorities, the OECD stresses. Let us note that the obvious addressee of this message is the European Commission. This week, the Commission must submit its "digital tax" plan, directed primarily against the technological giants of the United States - Facebook, Alphabet (parent company Google), Amazon and others. The act will be applied to those companies, whose annual revenue exceeds € 750 million, and sales in the EU reach more than € 50 million. According to European officials, these companies must pay taxes where they generate profits through digital advertising, paid subscriptions and the use of user data, and not where their headquarters are registered. It is assumed that the rate may be 3% of turnover. If the plan is adopted, it can further complicate relations between the EU and the US, which have been on the verge of a trade war after the decision of the Donald Trump administration to raise import duties on steel and aluminum. However, the contradictions remain within the European bloc itself: France and Germany insist on tightening the policy, and the current "tax havens" for corporations - Ireland and Luxembourg - do not support the initiative (recall that a change in EU legislation of this scale requires a unanimous decision by the participating countries).

The US Treasury Secretary Steven Mnuchin has already criticized the European plan and the OECD report, saying that he "strongly opposes any country's proposals to allocate digital companies" within the framework of taxation. This will undermine economic growth and will hit workers and consumers in the US, Mr. Mnuchin noted, stating that he fully supports international cooperation in the field of creating a tax system that meets the challenges of the modern economy.