Fair Taxation of the Digital Economy: What is Fair? 2018 KPMG EMA Tax Summit Rome

Transcription

1 Fair Taxation of the Digital Economy: What is Fair? 2018 KPMG EMA Tax Summit Rome

2 Panel Chris Morgan Head of Global Tax Policy E: Robert Van der Jagt Chairman of KPMG's EU Tax Centre E: Matthew Herrington Partner International Tax E: Lachlan Wolfers Head of Indirect Tax KPMG China Asia Pacific Regional Leader, Indirect Taxes E:

3 Traditional value chain MNE Country A Collects CT Sale or transfer of goods and services via Country B Collects CT & indirect tax Subsidiary Branch Third party Sale of goods/services Both country A & B are collecting tax End consumer 3

4 Impact of digitalisation MNE Country A Collects CT Pays for services eg advertising Country B No or reduced CT collection Direct sale Operates Platform Third party Transacts Sale of goods/services How is indirect tax collected on direct sales or via platforms? End consumer Country B sees payments going out but reduced CT & indirect tax 4

5 So what is the issue? Need for horizontal equity between MNEs and domestic business Some countries see their revenue falling Just a tax grab Data not being valued Tax as tool of protectionism Doing business in a country without traditional PE Politics of envy 5

6 Polling question What do you see as being the most significant motivating factor in the debate about the impact of digitalisation? A B C D E International rules are out of date with respect to modern business models The need to create a level playing field between new and traditional businesses Some countries are seeing their tax base eroded by digitalisation A desire by some countries to tax a new source of revenue Protectionism 6

7 Overview of the Landscape No consensus Need detailed value chain analysis Short term: digital services tax Long term: tax on significant digital present Digital sub-committee Work yet to start PE thresholds WHT Turnover taxes Specific MNE regimes How does VAT/indirect tax interact? 7

8 OECD Interim Report Matthew Herrington

9 Divergent Perspectives The views of countries can be categorized into three groups Group 1 Group 2 Group 3 User participation is value creation Targeted measures needed Otherwise maintain existing international framework Digitalization challenges existing international framework Such challenges are not exclusive to DE BEPS appears to be effective Full impact yet unknown Satisfied with existing framework No significant reforms 9

10 Polling question Which of the 3 "blocks" the OECD identifies do you think will win the debate? A B C There is a need to introduce specific rules to address digitalised businesses There is a need to address the whole international system, not just digitalisation The BEPS program has addressed the issues 10

11 User-generated value Three key features of digital businesses: - Scale without mass - Heavy reliance on IP - Business model focused on data, user participation, networking effects, and usergenerated content Long-term reform - Nexus - Profit attribution Recommendations in relation to interim measures 11

12 OECD Interim Report - User participation and value creation MNE group Interim Report 2018, p.31 Reseller: E-commerce principal Multi-sided Platform: E-commerce intermediary Input Supplier: Cloud services Value Chain Value Network Value Shop Traditional value chain Value chain with network effect Value Chain for bespoke solutions 12

13 OECD Interim Report - User participation and value creation Interim Report 2018, p.58 13

14 Interim measures Countries favoring interim measures agreed on design parameters Compliance with international obligations (treaty, WTO, EU, EEA, etc.) Temporary Targeted (e.g., digital ads, platform services) Minimizing over-taxation Minimizing impact on start-ups and SMEs Minimizing cost and complexity 14

15 EU Proposals Robert van der Jagt

16 March 21 EC Proposal DE tax concerns Competition distortion between DE and traditional businesses DE intangibles are hard to value and distort concepts of jurisdiction to tax User value creation Active engagement and user data Free use of legal and commercial infrastructure No payment for user data Long-term solution Digital PE Wide scope of activities EU directive and amend treaties European Commission Interim measures Digital Services Tax (DTS) Rate: 3% on revenues Source revenues based on user location De minimis thresholds 16

17 Digital services tax: Challenges Direct or Indirect Tax? Has features of a direct tax Imposed on revenues From certain targeted activities Taxation of the Digital Economy Is It EU State Aid? Yes in principle selective Justification? end a distortion and unfair competition Approved state aid? Double Tax Treaties? Is this an income or profit tax? Mandatory Disclosure Rules? Does the DST fall under mandatory disclosure rules? Yes. It is imposed by a Member State (MS), and not mentioned under the exemptions 17

18 EU Digital permanent establishment: Challenges Mandatory disclosure rules Double tax treaties Yes, as this concerns a tax imposed on income, profits Yes, it is a normal corporate income tax, imposed by a Member State, and not mentioned under the exemptions Profit allocation Interaction with the OECD Profit attribution based on OECD work Specific guidelines to be developed at the appropriate international fora How are profits allocated to the PE? In principle profit split but Taxpayer may use functional analysis if this proofs to be more appropriate 18

19 Member states reactions A lot of countries have no clear-cut or consistent position: Preference for a coordinated action at OECD level Concerns about allocation of revenues under the long-term proposal for a digital PE Technical examination needed Positions are evolving fast: Germany former proponent UK more nuanced approach Some Member States are moving forward with unilateral initiatives: Italy Spain Slovakia 19

20 Informal ECOFIN of September 8, 2018 Broad agreement on the principle of a Digital Services Tax, if complemented by a sunset clause Discussions at the technical level already started First political debate expected at next ECOFIN on October 2, 2018 Austrian Presidency aims at agreement by the end of 2018 If implemented, possibility to indemnify Ireland? (France proposal) BUT... No discussions on technical features of the future tax Reservations of certain Member States on the timeframe: Malta, Netherlands 20

21 Polling question Do you think the EU will pass a directive on a digital services tax? A B C No Yes, before 1 January 2019 Yes, but not by 1 January

22 Polling question In the next few years, do you think the EU will pass a directive on a significant digital presence? A B Yes No 22

23 UK Position Paper Matthew Herrington

24 UK Position Paper DE tax concerns Active user participation creates value in user s jurisdiction Current international framework does not recognize this value User value creation Active engagement and user data Creation of content Network effects HM Treasury Long-term solution Digital PE Split residual profits to user s jurisdiction Amend treaties Interim measures Gross revenue tax Source revenues based on user location De minimis thresholds 24

25 Who is in, and who is out? Affected Social networks (social media platforms, file or content sharing platforms); Search engines; and Intermediation platforms (online marketplaces and appstores) Not affected Online content providers (entertainment streaming services and online content websites); E-retailers; and Digital software/hardware businesses (cloud computing, phones, tablets, software, etc.) 25

26 Long-term reform Current rules do not capture the value attributable to user participation That value is thought to be derived ultimately by principal companies in MNE groups Proposal to measure that value through a proxy, being a set percentage of the principal s residual profits Allocation keys to apportion profit between user jurisdictions (possibly based on user value) Various discussion points around how to design collection mechanics Amendments would be required to the UK s existing double tax treaties, and to the TP guidelines on profit attribution 26

27 Indirect taxes Lachlan Wolfers

28 The digital economy Direct v Indirect taxes Many tax decisions can be answered by knowing who is doing what, for whom, when, where and how much? The challenge with direct taxes in a digital economy: Where is the value added activity happening How much should be attributed to that jurisdiction The challenge with indirect taxes in a digital economy: How to collect 28

29 The digital economy indirect tax policy issues Problem 1 low value imports of goods are not subject to VAT/GST, and online shopping has grown Before After OECD Recommendations: Thresholds below which VAT/GST does not apply should be lowered Tax authorities to significantly improve efficiency of processing imports Introduce simplified registration systems to enable non-residents to register for VAT/GST 29

30 Problem 1 low value goods how to collect VAT regulatory change Examples of jurisdictions Currently applicable Legislative phase Policy discussion / consultation phase Goods Vendor liable withdrawal of import relief for low value consignments Marketplace operator primarily responsible to account for the tax (in certain circumstances) Marketplace operator jointly & severally liable Logistics provider liable under merged VAT/Customs e-commerce model Collection from debit/credit card issuers facilitating transactions Split payment method Deeming a PE through imposing VAT registration obligations 30

31 The digital economy indirect tax policy issues Problem 2 how to collect the VAT/GST on importation of digitized services supplied Business-to-Consumer (B2C) Before After OECD recommendations: Require non-resident suppliers to register for VAT/GST and account for output tax. Allow for simplified registration processes. No point in imposing VAT/GST collection obligations on end-consumers. Improve information exchanges, assistance with audits and recovery to enforce. 31

32 Problem 2 digitized services B2C - models VAT regulatory change Examples of jurisdictions Currently applicable Legislative proposals Policy discussion / consultation Services Non-resident vendor liable Marketplace operator accounts for the tax (in certain circumstances) Customer withholds or assessed Split payment method (including goods) Deeming a PE through imposing VAT registration obligations 32

33 The digital economy indirect tax policy issues Problem 3 how to collect the VAT/GST on imported intangibles and services supplied Business-to-Business (B2B) Before After Bank office Call Centre OECD recommendations: B2B: introduce reverse charge rules 33

34 Problem 3 B2B models VAT regulatory change Examples of jurisdictions Currently applicable Legislative proposals Policy discussion / consultation Services Reverse charge on all supplies Reverse charge where leakage only (Electronic services only) VAT withholding by recipient Split payment method Nothing (Transactions with public agencies only) 34

35 Direct & indirect taxes are morphing Lachlan Wolfers

36 Direct tax and indirect taxes are morphing DIRECT TAXES Tax authorities are seeking to expand PE: Concept of a PE based on physical presence is under threat Economic nexus? (i.e. no physical presence required. Merely need revenue/transaction volumes) Mail order/ Internet/ Marketplace / Cookies Divisional/ Attributional nexus (activities of affiliates) INDIRECT TAXES US Sales Taxes may provide the answer: US Supreme Court concluded that physical presence rule Is unsound and incorrect Independent contractors/agents (activities of agents may create a nexus) Employees/Actual place of business (traditional PE concepts) 36

37 The problem in a nutshell This is where your PE is located This is where your tax obligations may be Italy 37

38 The compliance costs will differ by region This is the EU This is Asia Pacific 38

39 This is why it matters to everyone Traditional Retailer Bank Payment Processor Healthcare 39

40 Unilateral developments Robert van der Jagt

41 Hungary Tax on advertising revenue Scope Legislative Evolution State aid Challenge Tax on advertising services Printed media publishers Online websites, platform owners or operators Exemption for self-advertising activities as of 2017 Introduction in August 2014 Tax on annual turnover from qualifying advertising services Progressive rates from 0% to 50% Change in 2015 Max. tax rate lowered to 5.3% Exemption if annual advertising sales revenues < HUF 100 million Update in 2017 Max. tax rate increased to 7.5% Non-resident companies generating advertising income in HU in-scope Challenge under EU State aid rules: Negative decision in November 2016 Progressive tax rates grant a selective advantage to certain companies. Tax paid in considered an overpayment 41

42 UK The Diverted Profit Tax UK Diverted Profit Tax Introduced on April 1, 2015 Objective to ensure that profits derived from economic activity carried out in the UK are fully taxed there. - For a non-resident company: circumventing the creation of a PE status in the UK; - For a resident company: using arrangements or entities which lack economic substance to take advantage of tax mismatches either through deductible expenses or by otherwise diverting income to group companies located in low-tax jurisdictions No tax relief under UK tax treaties Withholding tax on royalties Extend WHT on royalties paid, in connection with sales to UK customers, to no or low-tax jurisdictions Effect from April

43 Italy and Spain: Plans to introduce a DST Italy Included in the 2018 budget law (approved in December 2017) 3% Equalization tax levied on: - The consideration paid by Italian resident enterprises for - digital services supplied electronically, such as online advertising and embedded links, by - both resident and non-resident enterprises Exemption if < 3,000 digital transactions per year in Italy Not creditable against Italian CIT Applicable as of FY 2019 Details on scope to be clarified by a Ministerial Decree Impact of new coalition? Spain Included in Spain s 2018 Stability Programme and Budgetary Plan Update to the European Commission Plan to introduce a Digital Services Tax - Objective: ensure that large companies in the digital economy pay taxes where value is created - Following the EU Commission's proposal on DST, incl. thresholds and scope - Could be implemented as early as Estimated revenue impact of EUR 600 million in BUT no draft proposal or timeframe 43

44 Slovakia Digital Permanent Establishment Applicable as of January 1, 2018 under 21% CIT rate Extension of the definition of a fixed place of business creating a PE: regular intermediation of transport and accommodation services in Slovakia, when carried out by a non-resident solely through the use of a digital platform New definition of a digital platform : "a hardware or software platform necessary to create and manage applications" Obligation for foreign operators of digital platforms to register in Slovakia for income tax purposes No threshold in terms of number of users or revenue No approach concerning profit attribution Irrespective of tax treaties 44

45 Where do we go from here? Chris Morgan

46 What other possibilities are there? We know when we are doing business in a country Focus on location of and investment in intangibles Move to formulary apportionment 46

47 Polling question What is your preferred solution to the tax challenges arising from digitalisation: A B C D E F No change to existing rules An internationally agreed virtual PE concept An internationally agreed change of PE rules to focus on "doing business in another country A turnover tax or withholding tax Expanding or increasing indirect taxes None of the above 47

48 Observations and design challenges Whatever approach is proposed, there are some common issues International obligations Transfer pricing Design considerations Scope concerns How do you design a digital tax consistent with treaty obligations? Global agreement? Avoid double taxation Consistent with arm slength principle? Challenges with a modified authorized OECD approach (AOA) Party to tax Sourcing profits and revenue Assessment and collection How to define what s in and what s not? Flexibility for future DE business models 48

49 Polling question The next 10 years of corporate taxation for highly digitised businesses will likely see: A B C D The beginning of the 'tax wars', including double taxation, as international accords break down A new international accord being formed Corporate taxation diminishing in relevance even further None of the above 49

50 Thank you

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