There continues to be ongoing political and technical debate on digital taxation, specifically focused on the development of new tax rules targeting technology companies that have little or no physical presence in a country but generate profits, usually, through large numbers of local online customers.
During 2020, the main focus of the debate was on the evolving scope of the Organisation for Economic Co-operation and Development’s (OECD) proposals to address the tax challenges arising from digitalisation via an international solution. The OECD proposals are based on two pillars; the first one considers different ways of allocating taxing rights between countries, and the second pillar looks at ways to give countries additional taxing rights where another country has either not applied its taxing rights or has done so at a low tax rate.
Whilst the OECD have made significant progress on the technical framework of their proposals, they have to date been unable to reach an agreement with all members of the OECD Inclusive Framework (IF). The IF is still committed to reaching an agreement and is targeting a deadline of mid 2021. Before then, the IF will continue its technical work following a January 2021 public consultation on the latest blueprints and will attempt to get agreement at a political level on the proposals.
In January 2021, the European Commission (EC) separately launched a ‘Digital Levy’ initiative, linked to the European Union’s (EU) strategic objectives on how to shape Europe’s digital future and to help ensure that Europe is fit for the Digital Age. The EC published an Inception Impact Assessment setting out its plans, which represent the first steps towards the potential introduction of an EU-wide digital tax. The document notes that it is important for the initiative not to undermine the OECD work on digital taxation and should be compatible with any agreement at an international level. Whilst the work will take account of international developments, the EC has identified additional policy options, such as corporate income tax top-ups for companies undertaking digital activities in the EU, possible future revenue taxes on digital activities and taxes on digital transactions conducted business-to-business in the EU. A consultation period will now run until April 2021.
In the absence of an international agreement on digital taxation, during 2020 there has been an increase in the number of unilateral measures introduced by individual countries. Whilst there are an increasing number of differences between the specific regimes, they typically comprise of taxes that are applied to gross revenues arising from digital activities (e.g. digital platforms, sale of user data and online advertising), and do not permit relief for related costs and expenses. Whilst Europe was at the forefront of introducing unilateral measures, territories in Africa and South America are now introducing their own regimes and rules. The African Tax Administration Forum (ATAF) has also released its suggested approach to drafting DST legislation that includes examples of the types of activities that may be subject to DST, and proposes a fixed rate calculated on gross turnover, which is not creditable against income taxes. In certain territories, payments of the ‘DST’ taxes are now becoming due for in-scope taxpayers.
We have positively engaged in the debate on the taxation of the digital economy and consider it appropriate for digital businesses to be taxed in a sustainable and transparent way, with profits taxed where value is created, including where material value (critical to that digital business’s success) is clearly proven to be generated by local users. We agree that multinational companies and governments should engage to achieve consensus on one single international solution as soon as possible, focused on ensuring that profits are allocated between the territories in line with the value generated, without either double taxation or non-taxation.
In respect of the current OECD Pillar One proposals, we do not consider that consumer-facing businesses, with routine margins, who have made significant physical and tangible investments in the infrastructure of a country with heavily regulated revenues generated, monetised and subject to tax within that same market jurisdiction should be the target of any new international tax rules. We are therefore supportive that the OECD are undertaking further work to consider an exclusion for the operation of certain sectors related to the operation of infrastructure (which is provided as a service to consumers), and specifically the core activities of regulated telecommunications network operators. We also support the OECD’s acknowledgement following the public consultation that there is the need for further simplification and an effective dispute resolution mechanism, especially given the potential for increased controversy and complex double taxation. In respect of the various DST regimes and proposals, our view is that a company’s tax liability should be based on the profit generated from the company’s business activities in that country, not a company’s revenues (which are not an indicator of profit). The current DST regimes do not follow this concept and we therefore do not support any unilateral digital taxes. We also have concerns about double taxation, and the detrimental effect on loss-making or low profit margin companies. In addition, there should be certainty that any introduced DST is temporary in nature and revoked immediately if international consensus is achieved by the OECD.