- OECD Releases Digital Economy Discussion Draft: Few Surprises-No Conclusions
- April 9, 2014
- Law Firm: Sutherland Asbill Brennan LLP - Washington Office
On March 24th, the Organisation for Economic Cooperation and Development (OECD) released its discussion draft on e-commerce, as part of its base erosion and profit shifting (BEPS) project. The draft is a result of BEPS Action 1: address the tax challenges of the digital economy.
After 58 pages describing the digital economy and the tax challenges it presents, the discussion draft presents different options on how to potentially address the issues, but confirms the view of the OECD that “ring fencing” the digital economy and applying a separate set of tax rules from the traditional economy is “neither appropriate or feasible.” It is generally believed that this is a position that the U.S. has been pushing throughout the BEPS project. The discussion draft suggests two general approaches to address BEPS issues relating to the digital economy.
The first approach would modify the OECD model tax treaty article 5 definition of permanent establishment. The discussion draft provides three different approaches to altering the PE definition:
Modification to PE exemptions: Currently, Paragraph 4 of the OECD model tax treaty exempts from the definition of PE preparatory or auxiliary activities, such as storage, display, maintenance of goods for processing, collecting information and advertising. As modified, the model treaty would provide that an enterprise could not access these exemptions if those activities were the core business of an entity, and not just preparatory or auxiliary to some other core business.
Significant digital presence: A permanent establishment could be created based on a company’s “significant digital presence” in a country. The enterprise would be engaged in “fully dematerialized digital activities,” which is essentially a business that has little or no need for a physical presence in its value chain. The approach seems to focus on digital goods and services, as opposed to online sellers of tangible goods. For companies which engage in fully dematerialized digital activities, the significant digital presence will generally be the location of the customer. The significant digital presence concept also could apply where an enterprise uses personal data of customers in a country, a proposal being pushed by France.
Virtual PE: The virtual permanent establishment is a concept previously considered by the OECD, although generally rejected by most countries. One example of a virtual PE would be if a website is hosted on a third party server in a foreign jurisdiction and the business operates through that site. Most countries today do not consider the location of a third-party server to be determinative of a PE.
The second approach would impose a new withholding tax on certain payments for digital goods or services provided by a foreign e-commerce provider. The discussion draft does not go into much detail, but the drafters note that this approach may not be feasible considering the difficulties of withholding on individuals and existing trade obligations.
The OECD noted that the 81-page draft does not reflect consensus views of the drafters, which was the Task Force on the Digital Economy, and analysts have commented that the draft reflects global inconsistencies on how to address digital economy challenges. Comments on the discussion draft must be submitted by April 14, and a public consultation will be held in Paris one week later on April 23.