Options to address the broader direct tax challenges

In the context of its work, the TFDE received and discussed several proposals for potential options to address the broader direct tax challenges raised by the digital economy. As there is a substantial overlap between the challenges related to nexus, data, and characterisation, it was considered that rather than attempting to individually target them, any potential option should instead focus more generally on the ability of businesses in the digital economy to (i) derive sales income from a country without a physical presence, and (ii) use the contributions of users in the value chain (including through collection and monitoring of data), and monetise these contributions by selling the data to third parties, by selling targeted ads, by selling the business itself, or in any other way.

The options analysed by the TFDE in 2014 included modifications to the exceptions from PE status, alternatives to the existing PE threshold, the imposition of a withholding tax on certain types of digital transactions, and the introduction of a tax on bandwidth use.

With respect to the exceptions from PE status, work in the context of Action 7 of the BEPS Project (preventing the artificial avoidance of PE status) analysed whether activities that may previously have been preparatory or auxiliary should continue to benefit from exceptions (contained in Article 5(4) of the OECD Model Tax Convention) to the permanent establishment definition where they have become core components of a business. As a result of this work, these exceptions have been modified to ensure that they are available only for activities that are of a preparatory or auxiliary nature.

The technical details of the other three options have been developed further and are presented below. Like the challenges they are intended to address, the impact of these options overlaps in a number of respects. They have therefore been conceived in a way that allows them to be either combined into a single option or chosen individually. More specifically, elements of the three potential options could be combined into a new concept of nexus for net-basis taxation (a “significant economic presence”), with the intent to reflect situations where an enterprise leverages digital technology to participate in the economic life of a country in a regular and sustained manner without having a physical presence in that country. In this context, the application of a withholding tax on digital transactions could be considered as a tool to enforce compliance with net taxation based on this potential new nexus, while an equalisation levy could be considered as an alternative to overcome the difficulties raised by the attribution of income to the new nexus.