The first action of the Base Erosion and Profit Shifting (BEPS) Action Plan consists of addressing the tax challenges of the digital economy. On 24 March 2014, the OECD released a discussion draft on this subject. The discussion draft contains four main issues:
- Nexus: The continual increase in the potential of digital technologies and the reduced need in many cases for extensive physical presence in order to carry on business raises questions as to whether the current rules are appropriate.
- Data: The growth in sophistication of information technologies has permitted companies in the digital economy to gather and use information to an unprecedented degree. This raises the issues of how to attribute value created from the generation of data through digital products and services, and how to characterise (for tax purposes) a person or entity’s supply of data in a transaction, for example, as a free supply of goods, as a barter transaction, or some other way.
- Characterisation: The development of new digital products or means of delivering services creates uncertainties in relation to the proper characterisation of payments made in the context of new business models, particularly in relation to cloud computing.
- VAT Collection: Cross-border trade in both goods and services creates challenges for VAT systems, particularly where such goods and services are acquired by private consumers from suppliers abroad. This is partly due to the absence of an effective international framework that would allow economic actors, and in particular, small and medium enterprises, to register and manage payments to a large number of tax authorities. As well as the need to manage tax liabilities generated by a high volume of low value transactions, which can create a significant administrative burden but marginal revenues.
This discussion draft does not contain any concrete measures, nor does it contain a consensus view from the OECD members. It will not be finalised until the G20 meeting on 20 and 21 September 2014.