Taxing the digitalised economy: Targeted or system-wide reform?

2019

Taxing the digitalised economy

Despite having only recently undergone ‘the most significant re-write of the international tax rules in a century’ during the BEPS process, members of the OECD Inclusive Forum turned their attention in 2018 to broader issues of the allocation of tax rights, as the OECD acknowledged that ‘BEPS measures do not necessarily resolve the question of how rights to tax are shared between jurisdictions, which is part of the long term issue’. The presenting issue has been around the taxation of ‘highly digitalised businesses’ (HDBs) for which the existing system is particularly unsuitable.  Although one group of countries took the view that the BEPS process had ended the need for further reform, the key debate was between countries that believed there was a need for a special regime for HDBs and those that argued that a reform that applied to all businesses was more appropriate. In March 2018 the EU Commission put forward two proposals targeted at certain HDBs, which were thus aligned with the views of the first group. Individual countries have done likewise, including the UK. Yet since then the OECD has moved further towards fundamental reform for all businesses.

This research project addressed the central issue of special taxation for HDBs from an academic and policy perspective. Digitalisation exacerbates and exposes clearly the problems plaguing the  existing system, for example, in dealing with ‘hard to value intangibles’. Nevertheless, the problems that are faced in taxing HDBs are also present for other businesses. This research project set out four high level critiques of proposals to tax HDBs separately: (a) they are based on a guiding principle that is conceptually flawed and unable to provide guidance in practice; (b) they seek to ring-fence a set of companies in a way that is conceptually unjustified and practically difficult; (c) they are likely to involve considerable complexity; and (d) they fail to deal with the broader challenges faced by the international tax system. It therefore favoured more fundamental reform which does not differentiate between sectors.

Michael Devereux, and John Vella ‘Taxing the Digitalised Economy: Targeted or System-Wide Reform?’, British Tax Review 2018, Issue 4, Pages 301-320, and Oxford University Centre for Business Taxation Working Paper 18/23.

2018

Proposals to tax profits in the digitalised economy
 

Digitalisation of the economy has brought the international corporate tax debate to a critical point, with different reform options being considered by the 122 countries participating in the OCED’s Inclusive Framework. One group of countries favours reform targeted at certain highly digitalised businesses, a second group favours system-wide reform and a third argues that there is no immediate need for further reform. This issue will dominate the international corporate tax policy debate for the next few years and its outcome could have a lasting effect on the international corporate tax system. The situation has been addressed in two CBT papers.

The first argues that digitalisation exacerbates a number of problems that have long troubled the existing system, including: real economic distortions, profit shifting, complexity and instability due to competition among states. As these problems ultimately stem from the fact that under the existing system companies are taxed where their mobile factors are located, the paper explores reform options that address the problem directly by taxing companies where their immobile factors are located – namely shareholders and consumers.

The second addresses proposals targeting highly digitalised business favoured by a group of countries including the UK. The paper critically discusses both the short-term measures (such as Digital Services Taxes) and long-term measures (digital PEs) with a particular focus on the latter. It sets out four high-level criticisms of proposals for digital PEs: (i) they are based on a guiding principle (the value creation principle) which is conceptually flawed and problematic in practice; (ii) they seek to ring-fence a set of companies in a way that is conceptually unjustified and practically difficult; (iii) they are likely to involve considerable complexity; and (iv) they fail to deal with the broader challenges faced by the international tax system

Michael Devereux and John Vella, “Implications of digitalisation for international corporate tax reform” in S Gupta, M Keen, A Shah and G Verdier (eds) Digital Revolutions in Public Finance, 2017, IMF. Reprinted in Intertax, 46, 6&7, June/July 2018, 550-559.

Michael Devereux and John Vella (2018) “Taxing the digitalised economy: targeted or system-wide reform”, British Tax Review 4, 387-406. 

Michael Devereux, The Digital Services “Sutton” Tax, CBT Blog. 

John Vella, Taxing Digital Business: a Plea for Holistic Thinking, CBT Blog.