Future of tax in a digital economy: Are you prepared? The Dbriefs International Tax series

Transcription

1 Future of tax in a digital economy: Are you prepared? The Dbriefs International Tax series Claudio Cimetta / Li Qun Gao / William Marshall 1 June 2017

2 Agenda The digital economy Tax challenges of the digital economy Case studies Questions and answers For information, contact Deloitte Touche Tohmatsu Limited. 2

3 The digital economy For information, contact Deloitte Touche Tohmatsu Limited. 3

4 The digital economy Development Increasingly becoming the economy itself Accelerated and changed the spread of global value chains Business models have changed and are changing 1 The spread of ICT across (traditional and innovative) business sectors A result of transformative process brought by information and communication technology (ICT) For information, contact Deloitte Touche Tohmatsu Limited. 4

5 The digital economy New and dynamic business models For information, contact Deloitte Touche Tohmatsu Limited. 5

6 Tax challenges of the digital economy For information, contact Deloitte Touche Tohmatsu Limited. 6

7 Digital economy: direct tax issues Taxable nexus Income characterization Profit allocation Remote supplies of goods and services PE / source Novel approaches Technological developments Royalty vs. service Withholding taxes High value intangibles R&D Transfer pricing: DEMPE* functions and risk assumption * DEMPE - development, enhancement, maintenance, protection and exploitation of intangibles For information, contact Deloitte Touche Tohmatsu Limited. 7

8 Digital economy: transfer pricing Identifying value drivers New digital business models and revenue sharing arrangements challenge traditional thinking about what creates value along a supply chain Value drivers are likely to include Enabling technologies (e.g., technology platforms that facilitate online transactions in a secure and efficient manner) Network design and effects Algorithms and proprietary data Business processes and know-how Non-routine services and global disbursing of critical DEMPE functions Advertiser / publisher relationships Active users and user demographic information Allocating these contributions across legal entities can be challenging and add uncertainty For information, contact Deloitte Touche Tohmatsu Limited. 8

9 Digital economy: VAT issues Global VAT / GST developments Final international guidelines published by OECD on 12 April 2017 VAT / GST guidelines BEPS Action plan B2B OECD Working Party 9 B2C Includes recommendations to implement principles from VAT / GST guidelines 15 Actions Action 1: digital economy Final BEPS package endorsed by OECD / G20 in October 2015 Endorsed by Global Forum on VAT on 18 April 2014 Endorsed by Global Forum on VAT on 6 November For information, contact Deloitte Touche Tohmatsu Limited. 9

10 Digital economy: VAT issues International VAT / GST guidelines Core principles of VAT Neutrality principle: VAT is a tax on final consumption that should be neutral for businesses Destination principle: transactions are subject to VAT in the jurisdiction of consumption Place of supply Different rules for goods vs. services first crucial distinction is defining what is being supplied Goods: place of supply rules for goods focus on the location of goods Services: B2B vs. B2C distinction; for B2B tax in recipient s hands; for B2C look at place of supply rules How to ensure the appropriate collection of VAT on cross-border B2C supplies For information, contact Deloitte Touche Tohmatsu Limited. 10

11 Digital economy: customs issues Software and intangible components to imported goods Pre-loaded software vs. separately downloaded after import License fees E-commerce sales of tangible goods Courier shipments vs. postal shipments Warehouse management and trade facilitation Returns and refunds Royalties relating to imported goods Trademarks and other IP For information, contact Deloitte Touche Tohmatsu Limited. 11

12 Responses to digital economy tax issues Multilateral: BEPS Action 1: digital economy Options to tax digital transactions Nexus based on significant economic presence, withholding tax on digital transactions or equalization levy Collection of VAT / GST on cross-border B2C transactions Action 5: harmful tax practices Increased substance and transparency Preferential IP regimes subject to substantial activity requirement based on a nexus approach Compulsory exchange of rulings Action 6: treaty abuse Limits on source country WHT relief Principal purpose test Limitation on benefits rule Third country PE rule For information, contact Deloitte Touche Tohmatsu Limited. 12

13 Responses to digital economy tax issues Multilateral: BEPS and other Action 7: avoidance of PE status Lower PE threshold Expansion of agency PE concept Narrowing of specific activity exceptions Anti-fragmentation rule Actions 8, 9 & 10: Transfer pricing Intangibles: emphasis on DEMPE functions not legal ownership; guidance on hard to value intangibles Risk assumption: based on ability to control and financial capacity to bear; contracts vs. conduct UN committee of experts: UN committee of experts: Taxation of technical service Taxation of technical service fees fees Proposed new fees for Technical Services Article in UN Model Tax Convention, allowing source country taxation For information, contact Deloitte Touche Tohmatsu Limited. 13

14 Responses to digital economy tax issues Avoidance of PE status OECD BEPS Action 7 recommendations Extend agency PE to habitually playing the principal role leading to the conclusion of contracts to be performed by the enterprise (if routinely concluded without material modification by the enterprise) Restrict specific activity exemptions (storage, purchasing, etc.) to activities that are preparatory or auxiliary for the enterprise and introduce anti-fragmentation rule Other specific recommendations Multilateral instrument (subject to opt out) Implementation Bilateral negotiations Potential unilateral actions (domestic law anti-abuse rules or new taxes not covered by treaties) For information, contact Deloitte Touche Tohmatsu Limited. 14

15 Responses to digital economy tax issues Examples of unilateral actions UK Australia New Zealand India Malaysia France Diverted profits tax (avoided PE charge) Multinational anti-avoidance law (schemes to limit a taxable presence) Proposed deemed PE rule Equalization levy Expanded definition of royalties and taxation of outbound service fees Attempted introduction of diverted profits tax The BEPS Action 1 report was inconclusive We should therefore not complain too much about countries taking unilateral actions, even though that's not what we at the OECD favour Pascal Saint-Amans, Head of OECD Centre for Tax Policy and Administration For information, contact Deloitte Touche Tohmatsu Limited. 15

16 Case studies For information, contact Deloitte Touche Tohmatsu Limited. 16

17 Case studies overview Online sales of goods Direct Via platform Digital downloads Downloadable digital products Downloads linked to tangible goods Customs considerations Royalties related to goods Cloud computing Cloud-based services For information, contact Deloitte Touche Tohmatsu Limited. 17

18 Online sales of goods direct Facts Business model Support services Marketing Service Co Support Co Principal Co Warehouse Sale of goods Customers Offshore Source country Customers purchase goods from Principal Co, via its website Third party logistics providers deliver the goods from a leased warehouse maintained by Principal Co in the customer country Principal Co Website IP owner and operator Datacentre / server Transaction processing Goods stored at warehouse in source country Service Co Local marketing and promotion After sales customer service For information, contact Deloitte Touche Tohmatsu Limited. 18

19 Online sales of goods direct Issues Principal Co Sale of goods PE risks for Principal Co Narrowing of specific activity exception for in-country storage of goods (must be preparatory or auxillary) Support services Marketing Service Co Support Co Warehouse Offshore Source country Even if the warehouse itself qualifies for a specific activity exception, this may be overridden by the anti-fragmentation rule (due to customer-facing activities by Service Co) Expanded agency PE definition may also be relevant (depending on interactions between Service Co personnel and customers) Customers Transfer pricing Level of remuneration for Service Co s marketing function Attribution of profit if Principal Co has a PE VAT B2B vs. B2C For information, contact Deloitte Touche Tohmatsu Limited. 19

20 Online sales of goods via platform Facts Business model Platform Co Support services Marketplace services Offshore sellers Sale of goods via Platform Co marketplace Offshore Buyers purchase goods from sellers, via an online market place operated by Platform Co Platform Co earns sales commission from sellers Third party logistics providers deliver the goods from seller countries Source country Platform Co Service Co Buyers Website IP owner and operator Datacentre / server Local sellers Sale of goods via Platform Co marketplace Transaction processing and payment collection on behalf of sellers Service Co Local marketing and promotion of online marketplace (in particular to local sellers) For information, contact Deloitte Touche Tohmatsu Limited. 20

21 Online sales of goods via platform Issues PE risks for Platform Co Platform Co Support services Marketplace services Offshore sellers Sale of goods via Platform Co marketplace Role of Service Co personnel in convincing sellers to sign up to Platform Co s marketplace Transfer pricing Level of remuneration for Service Co s marketing function Offshore Source country Attribution of profit if Principal Co has a PE VAT Service Co Buyers Identifying the relevant supplies (supply of goods and supply of services) B2B vs. B2C Local sellers Sale of goods via Platform Co marketplace For information, contact Deloitte Touche Tohmatsu Limited. 21

22 Downloadable digital products Facts Parent Principal Co R&D services Download of digital products Offshore Source country Business model Customers download digital products (e.g., apps, music, videos, e-books) from Principal Co s online store for own use Standardised online contract Principal Co IP owner for the online store technology Marketing strategy Transaction processing Service Co Support services Customers Service Co Local marketing and promotion Local content development for Principal Co s online store Parent Contract R&D for Principal Co on online store technology For information, contact Deloitte Touche Tohmatsu Limited. 22

23 Downloadable digital products Issues Parent Principal Co Service Co R&D services Support services Download of digital products Customers Offshore Source country Characterization of Principal Co s income Likely not a royalty, based on existing OECD position (subject to further work) Level of PE risk for Principal Co Nature and extent of interactions between Service Co s personnel and customers Importance of website itself in the selling process Transfer pricing DEMPE functions performed by Parent (technology) and / or Service Co (content) may result in allocation of intangibles-based return VAT Collection of VAT on cross-border B2C supplies in customer country Likely self-assessed VAT if B2B For information, contact Deloitte Touche Tohmatsu Limited. 23

24 Customs observations Importation of goods before downloading high value software into the goods Dutiability of royalties related to goods in determining the customs value, there must be added to the price actually paid or payable for the imported goods Royalties and license fees related tothe goods that the buyer must pay, directly or indirectly, as a condition of sale of the goods, to the extent that such royalties and fees are not included in the price actually paid or payable (Article 8(1)(c) of GATT Valuation Code) Royalty structuring Royalties paid by non-importing entities Precisely defining licensed rights (to facilitate analysis of whether are related to goods) Applying specific royalty rates for each type of licensed right (taking account of transfer pricing) Timing aspects decoupling condition of sale requirements Splitting agreements between dutiable and non-dutiable royalties Update agreements and ensure consistency with commercial realities For information, contact Deloitte Touche Tohmatsu Limited. 24

25 Example: royalty paid by buyer / importer Facts Branded goods purchased from a contract manufacturer in country A and imported into country B. Buyer / importer pays a royalty to related trademark owner in country C The royalty agreement provides that trademark rights owner may cancel the trademark license if buyer / importer fails to pay the royalty Contract manufacturer (Country A) Result: dutiable (1) The trademark is related to imported goods (2) The royalty agreement requires the buyer / importer to pay the royalty as a condition to purchase and import the branded goods Related trademark rights owner (Country C) Royalty Buyer / importer (Country B) For information, contact Deloitte Touche Tohmatsu Limited. 25

26 Example: royalty paid by non-importing retailer Facts Branded goods purchased from contract manufacturer in country A and imported into country B. Importer sells to retailer, who pays a royalty to a related trademark owner in country C The royalty agreement provides that trademark rights owner may cancel the trademark license if retailer fails to pay the royalty Purchase Price Contract manufacturer (Country A) Importer Goods (Country B) Result: potentially non-dutiable (1) The trademark is related to imported goods (2) The royalty agreement requires Retailer to pay the royalty as a condition to purchase and resell the branded goods in Country B (3) Importer may continue to purchase and import from contract manufacturer regardless of whether Retailer pays the royalty or loses its rights (4) As a result, the payment of the royalty may not be a condition of the sale for import Related trademark rights owner (Country C) Royalty Retailer (Country B) For information, contact Deloitte Touche Tohmatsu Limited. 26

27 Cloud-based services Facts Parent IP licence R&D services IP Co Business model Customers subscribe for cloud-based business services provided by Principal Co (e.g., Software as a Service (SaaS)) IP Co Technology IP owner and manager Parent Principal Co Marketing Service Co Support Co Support services Cloud-based service Customers Offshore Source country Technology IP development for IP Co Principal Co Website operator Datacentre / server Transaction processing Service Co Local marketing and promotion For information, contact Deloitte Touche Tohmatsu Limited. 27

28 Cloud-based services Issues Parent IP licence R&D services IP Co Characterization of Principal Co s income Likely not a royalty Level of PE risk for Principal Co Nature and extent of interactions between Service Co s personnel and customers (compare B2B vs. B2C) Consider unilateral measures (e.g., DPT, MAAL) Principal Co Marketing Service Co Support Co Support services Cloud-based service Customers Offshore Source country Transfer pricing DEMPE functions performed by Parent (technology) and / or Service Co (customer relationships) may result in allocation of intangibles-based return Profit attribution if Principal Co is considered to have a PE VAT Likely self-assessed VAT on B2B For information, contact Deloitte Touche Tohmatsu Limited. 28

29 Questions and answers For information, contact Deloitte Touche Tohmatsu Limited.

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31 Join us 8 June at 12PM HKT (GMT +8) as our International Tax series presents: Future of government incentives in Asia Pacific: What does the future hold? For more information, visit For information, contact Deloitte Touche Tohmatsu Limited.

32 Dbriefs Bytes This video brings you a weekly summary of the significant international tax developments. It is broadcast every Friday afternoon. Dbriefs Bytes is also available in Chinese and is broadcast every Tuesday. For more information, visit To view archives, visit For information, contact Deloitte Touche Tohmatsu Limited.

33 Contact information Claudio Cimetta Tax Partner Deloitte Melbourne, Australia Li Qun Gao Tax Partner Deloitte Shanghai, China William Marshall Asia Pacific Leader Customs & Global Trade Deloitte Hong Kong, China For information, contact Deloitte Touche Tohmatsu Limited.

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