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January 27, 2014
OECD BEPS Project Unlikely to Endorse Digital PE
by Lee A. Sheppard

Full Text Published by Tax Analysts®

Volvo sells cars online. Does that make a difference in the OECD's base erosion and profit-shifting action plan?

Yes. The difference between a pure digital player, like Google or Facebook, and a seller of goods that uses digital means, like Volvo and every other seller these days, is sufficiently nebulous that it is hard to define a digital economy player in a narrow or coherent way.

So when the Financial Times implied that the OECD BEPS negotiators had given up on taxing the digital economy, the paper was overstating the case. But yes, the BEPS negotiators are likely to give up on trying to define a digital permanent establishment.

"Proposals for a tax crackdown on digital companies such as Google and Amazon are to be dropped, as governments push ahead with measures affecting the global economy," the Financial Times stated (Financial Times, Jan. 20, 2014).

That's a sweeping statement. "Designing special tax rules for internet companies would not be viable, given the growing digital presence in large parts of the economy, an international task force has concluded," the paper said.

This statement is closer to the mark, but the implication is that attempts to make big U.S. digital players pay income tax somewhere might be abandoned. What's really going on is that the Europeans are likely to give up on trying to define a digital PE for specific tax jurisdiction over those companies.

Pascal Saint-Amans, head of the OECD Centre for Tax Policy and Administration, told the Financial Times that digital economy could not be defined for the purpose of creating a new, special kind of jurisdiction.

"The findings are that there is no such thing as digital companies rather than digitalization of the economy," Saint-Amans said. For example, many types of remote sellers use digital means to conduct business.

"There may not be therefore a solution for the digital economy, but we will need to draw on features of digital economy when we revise the system. Most of the tax planning by these companies will be addressed by this," Saint-Amans told the Financial Times.

Some European governments appear to be uncomfortable with the idea of a digital PE, Saint-Amans told Tax Analysts. The French government, which had been pushing for a digital PE, may have to accept that the OECD BEPS solutions may not recommend that approach.

The more significant implication of giving up on a digital PE is that it may indicate a lack of faith in a nonphysical PE among European governments. Europeans appear to believe that nonphysical PE, which also goes under the moniker service PE, is unworkable. U.S. states, meanwhile, are making it work. They are aggressively asserting economic nexus and winning cases in U.S. courts. (Prior analysis .)

In a prepared statement on January 21, Saint-Amans said: "The Task Force on the Digital Economy, which has been considering the issue since its inaugural meeting in October 2013, will further discuss options during its next meeting in February. A public consultation is planned for spring.

"Significant progress has already been made in the various areas identified under the BEPS Action Plan. The OECD will report on options for addressing the specific and systemic issues raised by the Digital Economy at the September meeting of G20 Finance ministers."


At the behest of the Americans, digital economy had already been shunted off to a task force and a study in the BEPS project. In U.S. practice, a study is a way to bury a problem.

Most big pure digital players are American, and they already are feeling the heat in Europe because of worries about the security of their cloud storage. U.S. negotiators had been lobbying against discriminatory taxation of what theFinancial Times dubbed their national champions. (Prior coverage 2013 TNT 240-8: News Stories.)

Those companies also have their own lobby, the Digital Economy Group, which is lobbying the OECD. The companies argue that their tax planning is no different from other multinationals' planning. There is a more general concern that the political will to tax multinationals is fading (The Guardian, Jan. 19, 2014).

As the Financial Times noted, throwing in the towel on digital PE would be a victory for the Americans and a defeat for the French. The French wanted a digital PE and were known to be particularly focused on Google and other pure digital players. Google has become a poster child for multinationals that don't pay tax anywhere.

The irony is that Google and its digital brethren are so big that they do have boots on the ground in market countries. Google has an affiliate in France. Google may well already have an additional PE in France under current rules. But France is unhappy about Google's low corporate income tax bill.

Saint-Amans suggested to Tax Analysts that other facets of the BEPS action plan could take care of tax issues raised by big digital players. He cited the action plan's recommendations addressing taxation of income attributable to intangibles and income minimization by means of stripped-risk distribution and commissionnaire structures.

Market countries and production countries, where intangibles are exploited, have been arguing that they should be able to tax part of the extra-normal profits attributable to those intangibles. Saint-Amans explained that the BEPS project is trying to use existing tools to address source taxation of excess returns from intangibles. He suggested that profit-split methods or cost-sharing agreements might allocate more income from intangibles to source countries.

What happens when a nonresident business is selling in the source country but no intangibles are present? It is unlikely that the sale of a Volvo online involves intangibles. Saint-Amans could not speculate on how a source country might assert tax jurisdiction in a case when no intangibles are present.

The BEPS project does not foreclose VAT on digital players. VAT is generally levied at the source of supply, but destination-based solutions have been approved in Europe to attack carousel fraud. Moreover, the French view of the essential Google transaction is that the local customer is a supplier, because that individual is uploading personal data for resale.

The French believe that there should be some way to tax value added when Google scoops up local customer information and resells it to advertisers. The argument is that digital commerce should be taxed in the country of residence of the customer because the product is transformed when the customer uses it.

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