04/10/17

OECD Requests Input On Further BEPS Action 1 Work

Tax-News -- The OECD released a request for input on further work on base erosion and profit shifting Action 1, on addressing the international tax challenges raised by the digitalization of economic activities.

The request for input was released shortly after ten EU countries, led by France, Germany, Italy, and Spain, threw their weight behind the concept of an "equalization tax" on digital companies that are subject to a low tax burden or an alternative measure.

The OECD's "Final Report" on BEPS Action 1 report, on addressing the tax challenges of the digital economy, was published in October 2015. It recognized that digitalization, and some of the resulting business models, present challenges for international tax policymakers. However, the report also acknowledged that it would be difficult, if not impossible, to "ring-fence" the digital economy from the rest of the economy for tax purposes because of the increasingly pervasive nature of digitalization.

In the context of direct taxation, the 2015 report considered a new tax nexus concept of "significant economic presence," the use of a withholding tax on certain types of digital transactions, and a "digital equalization levy." None of these options was recommended for adoption, although it was acknowledged that countries could introduce any of these options in their domestic laws as additional safeguards against BEPS, provided they respected existing tax treaties and international obligations. Instead the OECD recommended instead that other areas of its BEPS Action Plan would address the digital economy, such as Actions 3, 6, 7, and 8-10, and put forward indirect tax proposals instead.

However, the OECD is now revisiting the work on direct taxation, which has seen increasing focus from the EU. It has specifically asked for feedback on the design of an "equalization levy" and proposals for digital permanent establishment rules. It seeks comments on the impact of digitalization on business models and value creation, challenges and opportunities for tax systems, and on the implementation of the measures outlined in the BEPS package.

Comments must be received by October 13, 2017.