Taxing digital activities – comparing the UK, EU and OECD proposals

17 April 2018

Original content provided by BDO United Kingdom

The problem

The current international tax framework maps the taxation of profits to the location of management of key functions, assets and risks. In essence, it seeks to tax profits where value is created. A taxable presence will typically only arise in jurisdictions where an enterprise has a physical establishment.

However, digital business models often enable enterprises to generate revenues within a jurisdiction without significant physical presence. Therefore, many territories consider that value is being created within their borders in the course of provision of digital services, but the current international tax framework does not provide them with a mechanism to tax such profits. It is this perceived gap that the recent papers on the taxation of digital activities from the UK, EU and OECD seek to address.

Leading change

The UK, EU and OECD each recognise that any change should ideally emerge from a globally coordinated approach. As such a solution will change taxing rights in respect of businesses that operate across international borders, there is wide recognition of the challenges of achieving multilateral agreement on new rules: so it is regarded as a long-term project.

However, there is also recognition of the pressure that governments are under to be seen to act to safeguard their tax base as digital activities proliferate. Some territories have already introduced measures on a unilateral basis (France, Hungary, India, Israel, Italy, Slovak Republic), and others are actively considering new measures. Therefore, each of the proposals adopts a two-phased approach:

Identification of key design principles for a long-term solution
Consideration of potential interim measures to mitigate current concerns (pending multilateral agreement on the long-term solution).

Whilst there are common design features across the UK, EU and OECD for both the interim measures and the long-term solution, there are some potentially significant differences. The following comparison of the approaches set out by the UK, EU and OECD provides a flavour of where thinking is today and where it might lead.

Interim solution

The UK and EU both propose interim measures to mitigate immediate concerns. In contrast, the OECD does not recommend the introduction of interim measures. However, recognising that they are inevitable and with a desire to drive harmonisation, it has set out design principles that should be taken into account by any territories that choose to implement an interim solution.

The EU is more developed in its thoughts on design of the new measures; however, it has arguably reflected less on some of the key challenges of delivering the measures. In all cases, there is a desire to influence the direction of the global debate to drive greater uniformity in approach towards the individual agendas of these organisations.

Interim solution	UK	EU	OECD
Recommended / Intended	Yes	Yes	No - but sets out some principles for countries that do want one, eg any measure should be temporary
Design principles developed	Partially	Yes	Partially – to influence global approach
Form of tax	Indirect tax on gross revenues		Excise tax on payments
Multilateral agreement required	No (but desired)
Tax covered by existing treaties	No
Timeline	Under review	Under review	N/A
Thresholds Worldwide revenues Local digital revenues Profitability / Margin	Under review Under review Under review	EUR 750m EUR 50m (in EU) N/A	EUR 750m possible Not defined Not recommended
Activities taxed	Businesses deriving significant revenues from user activities. Options being considered: Impose the tax on channels of a business where user creation most evident Impose a tax on categories of business that derive most value from user participation Impose the tax on revenue streams derived from user participation (such as online advertising or intermediary services)	Services involving the use of user information: Online advertising Sale of data generated from user information Services involving digital intermediation [NB: Similar to the third option under consideration by the UK]	The OECD is encouraging focus on the following: Compliance with international obligations (treaties and EU or WTO membership): Defined services without reference to the economic or tax position of the supplier Not creditable or eligible for other relief against income tax on the same payment Equal application to residents and non-residents The measures should be well defined and targeted: To exclude e-tailing Be restricted to specified e-services (not any service provided over the internet) OECD members leaning towards focus on internet advertising and digital intermediation services Careful consideration needed for intermediation services
Tax rate	Under review	3%	None suggested but says the approach should minimise over-taxation (this is a function of both the rate of tax and the scope)
Double tax mitigation	Under review	Deduction as a cost	Focus on managing the cascade effects (ie multiple taxation on same payment)
Administration	One-Stop-Shop (VAT inspired)	One-Stop-Shop (VAT inspired) - one member state allocated to collect tax and distribute	Proposals take inspiration from International VAT / GST guidelines
Taxed where	Under review	Member states where users are located	Online advertising: Where content is delivered Digital intermediation: Where sale is made

Long-term solution

The UK, EU and OECD agree that the two key aspects to address are:

The definition of digital activities that give rise to a taxable digital presence in a territory
How attribution of profits to such taxable digital presence should be approached.

However, currently there is no global consensus on either point.

Long-term solution	UK	EU	OECD
Recommended / Intended	Yes	Yes	Yes
Form of proposal	New ‘digital presence’ and profit attribution guidelines
Multilateral agreement required	Yes
Timeline	Subject to multilateral agreement
Thresholds	Under review	Digital services delivered annually by member state: EUR 7m+ revenue 100,000+ users 3,000+ contracts	Not discussed
Taxable presence criteria	Focus is around identification of business models where user participation represents a significant contribution to value creation	By reference to thresholds based on the supply of digital services (yet to be precisely defined)	Not discussed, but emphasises need to consider whether to focus on highly digitalised business models, or digital activities more broadly
Profit allocation criteria	Percentage share of residual profit, where allocation is determined by: Active users Revenues attributable to users	An attribution of profit which takes into account: Profits from user data, eg placement of advertising Services connecting people, eg intermediation Other digital services, eg subscription to streaming services	Not discussed, but there is a desire to align profit attribution to value creation
Targeted business models Social networks Search engines Intermediaries Online content File sharing E-tailing Other services	Yes Yes Yes Potentially Potentially No Potentially	Yes Yes Yes Yes Yes No Potentially	Yes Yes Yes Potentially Potentially No Potentially
Approach to implementation	Domestic law and global instrument to amend treaties	EU Directive (to be reflected in local law) and global instrument to amend treaties	Global instrument to amend treaties

Conclusion

There are enough similarities in the three approaches to suggest that it will be possible to arrive at a final deal on a long-term solution. However, before that is achieved, there are clearly going to be a range of interim solutions with different features and different collection mechanisms that could make local taxes challenging for multinational digital businesses in the coming years. Higher cost of doing business digitally, as well as increased compliance burdens, look increasingly likely for some. However, not all business models will be affected equally and staying close to the direction of travel could enable more effective decision making for those looking to evolve their own service and product offerings.

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