A train can hide another: what is coming down the tracks in digital taxation?

While the OECD’s original BEPS plans set the digital tax train in motion recent laws, and the pandemic's effects, led jurisdictions down a new track.

Mar 11, 2021

When the Organisation for Economic Cooperation and Development (OECD) ramped up its plans in 2019 to bring simplicity, clarity and certainty to revamped international tax rules it was anxious to avoid tax chaos which would necessarily result from a lack of consensus among its member-nations.

Frustratingly for the OECD — due in large part to the effects of the pandemic — there is an ever-increasing concern among multinational taxpayers that even if it is able to reach consensus among its members on a broad methodology to tax the digital economy, the OECD will not be successful in avoiding continuing complexity, confusion, uncertainty and conflict. An increasing number of unilateral tax moves by several jurisdictions that were originally intended as interim levies on the activities of large digital businesses potentially run the risk of being repurposed for a longer duty as “temporary” pandemic revenue-raising measures.

The unilateral moves seem to be increasingly interlinked with the key aim of raising additional sources of revenue to finance the pandemic, rather than reaching consensus to bring fairness and equity to global tax structures. As a result, what we may face are two parallel, but vastly differing and potentially conflicting approaches: 1. The OECD’s quest for consensus-based rules to bring fairness and equity to the international tax system and 2. A series of unilateral pieces of legislation aimed at boosting revenues in a time of dire need for jurisdictions worldwide.

It is important to review each of the legislative efforts to understand if they are a DST that will, by definition, be swiftly revoked once the OECD achieves consensus, or if they could potentially be characterized as special levies that could remain in place. 

A conceptual shift in approach: levies alongside taxes 

An example of one such unilateral move is the U.K.’s recent preliminary assessment of a potential new online sales tax to level the playing field between online and high street retailers. The U.K. Government tipped its hand to introduce this new ‘levy’ in its March budget but postponed its introduction, according to FT.com, until the autumn.

While the U.K. is the first European country to consider introducing such a levy, similar moves have already been introduced in India, with its equalisation levy in effect since April 2020, and in Kenya as of January 1, 2020.

The definite need for a broad tax, or levy, to help replenish the pandemic-emptied or much-reduced treasury coffers of many jurisdictions has now been discussed at the European Union level as an addition to the expected OECD initiative. This option was one of the points of focus for a recent EU consultation assessing the impacts of such a ‘digital levy’. An Inception Impact Assessment clearly stated that the EU sees its “top-up tax” approach working in tandem with the OECD’s. The document states that “the initiative [a digital levy] should be designed in a way that is compatible with the international agreement to be reached in the OECD as well as broader international obligations." So clearly a suggested new concept than the previous view which always contemplated that the various one-off (so-called DST) initiatives were in lieu of the OECD reaching successful consensus of its global initiative and these would be revoked by the successful passage of the OECD initiative.    

These background moves portend the beginning of a shift in the intention of the taxing establishment from a single global taxation regime as embodied in the proposed DST solution at OECD level — and for which a consensus is targeted to be reached by mid-2021 — to a continuation of these special levies' on providers of digital services existing alongside the OECD regime. The justification appears to be a perception of ‘fairness and equity’ in such approaches as these digital companies are widely perceived as unduly benefiting from the pandemic’s consequences, e.g. eCommerce boom, and increases in remote working and online communication, etc. 

However, there is a significant knock-on effect on the operations of digital services companies that will be within the scope of such new taxes. These companies will now have to scrutinise the introduction of such pieces of legislation to understand the impact on their sales and to their customers. A key commercial question will be whether to pass on the economic cost of these additional levies to its customers or whether a digital enterprise will instead absorb the additional cost to reduce its margin.

Impact of the pandemic 

The economic effects of the global pandemic have impacted the world and will likely continue to do so for several years into the future. The pandemic is predicted to result in a sharp decline in global GDP (the OECD recently projected a 4.5% fall in global GDP in 2020) and jurisdictions will need to find additional sources of tax revenue. 

Restrictions on movements, such as widespread lockdowns, have forced a large swathe of the world’s population to migrate online for work, communication, and social interaction. In effect, the pandemic has accelerated the digitalisation of the economy. 

This surge in online economic activity has not gone unnoticed, especially as previous sources from high street retailers have dried up. As the digital tools used to work, communicate, and purchase online become increasingly popular, tax authorities —- impoverished by the pandemic’s ramifications — are seeking to recoup much-needed revenue by turning their attention to the perceived “deep pockets” of companies with this increasing online activity.

Politically, the situation is also fraught. In certain regions like Africa, for example, the overriding response to the OECD’s initiative has been one of concern at both the taxpayer and the tax administration level. At a January 2021 OECD/G20 Inclusive Framework meeting, a representative from the African Tax Administration Forum (ATAF) stated that Pillars One and Two simply would not address the primary concerns of African nations. Again a likely outcome of such concern will potentially be additional one-off taxation initiatives and the resulting complexities and confusion of multiple taxation regimes applying to the same revenue.   

Digital levies: what is in place today?

Definitions of DSTs, or digital levies, are very broad and differ among the tax jurisdictions that have introduced or proposed such regimes. The broad scope of these levies creates conflict typically resulting in tax leakage and/or double taxation of the same revenue stream. 

Sample rules in force today:

Tax jurisdiction

Rate

Threshold (on gross group revenues)

Spain

3%

$840m (global) | $3m (domestic)

Kenya

1.5%

None

Poland 

1.5%

None

United Kingdom 

2%

$638m (global) | $32m (domestic)

India

2%

$260,000 (domestic)

Turkey 

7.5%

$840m (global) | $4m (domestic)

Austria

5%

$840m (global) | $28m (domestic)

Italy

3%

$840m (global) | $6m (domestic)

Hungary

0%1

$344,000 (global)

France

3%

$840m (global) | $28m (domestic)


1 Originally 7.5% but reduced to 0% through to December 31, 2022.

Proposed rules (in order of proposed introduction first):

Tax jurisdiction

Introduction date

Rate

Threshold (on gross group revenues)

Canada

July 1, 2022

3%

 

Belgium

No confirmed date

3% 

$840m (global) | $5m (domestic)

Brazil

No confirmed date

1 | 3 | 5%

$550m (global) | $18.4m (domestic)

Czech Republic

No confirmed date

5%

 

Indonesia

No confirmed date

--

 

Latvia

No confirmed date

3%

 

Norway

No confirmed date

--

 

Slovakia

No confirmed date

--

 

Slovenia

No confirmed date

--

 

Russia 

No confirmed date

--

 

South Africa

No confirmed date

--

 

Maryland changes approach of U.S. States

The quest for revenue and the targeting of digital businesses in this time of pandemic-induced financial crisis is also finding favour in the U.S. One such tax proposal was recently approved in Maryland with its new tax on digital advertising revenue. The move by Maryland’s lawmakers is the first tax in the U.S. “on the revenue from digital advertisements sold by companies like Facebook, Google and Amazon”, but it surely won’t be the only state as several others are following Maryland’s experience with interest. This illustrates that the need for revenue knows no bounds, the pandemic has hit state and government coffers across the globe. 

While the OECD’s original BEPS plans set the digital tax train in motion there is no doubt that recent legislative initiatives and the effects of the pandemic have caused intentions to veer down a different track. The devil, as with everything, is in the detail of these designs. What may seem like a copy-and-paste approach to a DST we now know this is not the case as tax jurisdictions continue to introduce differing plans in attempts to shore up rapidly-eroding tax bases.

 


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