Do we have the wrong tax system for the digital economy? Alf Capito, Tax Policy Leader, EY Asia Pacific July 2014

Transcription

1 Do we have the wrong tax system for the digital economy? Alf Capito, Tax Policy Leader, EY Asia Pacific July 2014

2 Key features of the digital economy as seen by the OECD taskforce Mobility Reliance on data Network effects Multisided business models Monopoly or oligopoly Volatility Page 2

3 The key layers of the digital economy Users C2C or B2C environments B2B environments User interface Evolving world of connected devices Applications Multiple software programs providing services to end users Access Multiple software programs allowing the creation, combination and connection of end-user applications Core software Core software programs allowing data collection and data storage Infrastructure software Data centers Data centers Data centers Page 3

4 Bifurcation of business processes and inputs driving globalisation Localisation of functions and processes Transfer pricing HQ Central management and central control Supplier Entrepreneur Customer Production R&D Services Distribution PEs Warehouse Local independence and local execution People functions Assets and risks Capital Form-over-substance versus substance-over-form Tension between central control and local independence CFC rules Actual involvement in business processes Page 4

5 Case Study Allocation of functions in a global accounting firm Functions transfer to other jurisdiction Topics Global Transfer of functions as qualitative business reason Global Operations Thought Leadership and Global Marketing Global Accounting and Tax Shared Service Centres Accounts Receivable Assessment of allocation of functions or assessment of transactions only Australia New Zealand Form-over-substance versus substance-over-form Page 5

6 The current state of international taxation principles specifically concerning the digital economy Article 5 (PE) Commentary 42.2: automated equipment may constitute a PE Changes introduced to model convention and its commentaries Article 5 Commentaries 42.2 and 42.3: a website cannot constitute a PE, nor can the hosting of such a website on a server Article 12 (Royalties) Commentary 17.1: principles expressed on software payments are also applicable as regards transactions concerning other types of digital products Article 12 Commentary 11.1: know-how contract involves imparting to other party special knowledge and experience which remain unrevealed to the public Page 6

7 Addressing Tax Challenges of the Digital Economy incorporates all themes 1. Address the Tax Challenges of the Digital Economy 2. Neutralise the Effects of Hybrid Mismatch Arrangements 3. Strengthen Controlled Foreign Companies Rules 4. Limit Base Erosion via Interest Deductions and Other Financial Payments 5. Counter Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance 6. Prevent Treaty Abuse 7. Prevent the Artificial Avoidance of PE Status 8. Assure that Transfer Pricing Outcomes are in Line With Value Creation / Intangibles 9. Assure that Transfer Pricing Outcomes are in Line With Value Creation / Risks and Capital 10. Assure that Transfer Pricing Outcomes are in Line With Value Creation / Other High- Risk Transactions 11. Establish Methodologies to Collect and Analyse Data on and the Actions to Address It 12. Require Taxpayers to Disclose Their Aggressive Tax Planning Arrangements 13. Re-examine Transfer Pricing Documentation 14. Make Dispute Resolution Mechanisms More Effective 15. Develop a Multilateral Instrument Coherence Substance Transparency Page 7

8 Benefits of the multilateral trading system Unilateral action (tax base land grab) creating new tariffs Fundamental WTO principle that open trade and an open economy unlock the benefits of the multilateral trading system Liberal trade policies (policies that allow the unrestricted flow of goods and services) sharpen competition, motivate innovation and breed success Temptation to ward off challenge of competitive imports always present (subsidies, complicated red tape, legitimate policy objectives) London Model (1945), OECD (from 1968) and UN (from 1980) Models Merely selling into a market without physical presence or a dependent agent within the market is not sufficient to create a permanent establishment allowing that country to claim a share of the enterprise s profit Page 8

9 According to the OECD, tax features of the digital economy exacerbate the possibility of activities Parent jurisdiction Ultimate parent Action 4 Limit interest deductions Action 3 Reinforce CFC rules Foreign HoldingCo intermediate jurisdiction Holding entity IP HoldingCo intermediate jurisdiction Principal intermediate jurisdiction Market jurisdiction Customer principal Market development support Co IP principal Direct revenues from clients Action 5 Harmful tax practices Action 7 Artificial avoidance of PE Actions 8 10 Assure that TP outcomes are in line with value creation Action 6 Prevent treaty abuse Action 9 Unusual capital funding Action 2 Eliminate hybrid mismatch arrangements Page 9

10 The broader tax challenges raised by the digital economy and potential options discussed by the OECD taskforce Country-by-country reporting Nexus and ability of significant economic impact without being liable to tax Value of marketable location data Characterization of income under new business models VAT and consumption taxes Where appropriate if actions were insufficient Country-by-country reporting Modifying exemptions under paragraph 4 of Article 5 New nexus by reason of significant digital presence Virtual PE Withholding tax on digital transactions Consumption tax option Page 10

11 Will the Ottawa Conference principles really survive the forthcoming changes? Neutrality Efficiency Certainty and simplicity Effectiveness and fairness Flexibility Page 11

12 Certainty and simplicity Currently uncertainty prevails 74% of the largest companies say they feel that tax administrators are now challenging existing structures due to changes in the law or changes in their enforcement approach. When asked to what extent they foresee more double taxation for their company in the next two years, 61% of the largest companies expressing an opinion either agreed or strongly agreed. ` 30% of large companies think the situation will be characterized by relatively limited coordinated action and more unilateral actions by countries. Page 12

13 Australia s tax system already strong CFC rules undermining ability to create global hubs without substance Transfer pricing rules very tight to the point of being dangerous by allowing hypothetical reconstruction Tight thin capitalisation rules No IP regime or patent box concession Interest withholding tax General integrity rule in new treaties and GAAR Page 13

14 Thank you