Understand the tax challenges of the Digitalization of the economy Flashcards
New digital business model main features
Technology and hyper connectivity
Heavy reliance on data (data mining) and users
It is difficult, if not impossible, to ring-fence the digital economy from the rest of the economy. Attempting to isolate the digital economy as a separate sector would inevitably require arbitrary lines to be drawn between what is digital and what is not
No physical presence is required to gain profits –> source countries dont feel like they are getting a fair share
Benefit theory
the theory that taxes should be considered as payments for services rendered by the state to the taxpayers and so proportioned
Is value created in the virtual marketplace? i.e. in local
communities where firms establish high-end exchange
platforms and users share valuable information in order to
receive valuable services
Proposal Digital PE
If an enterprise resident in one Contracting State provides access to (or offers) an electronic application, database, online market place or storage room or offers advertising services on a website or in an electronic application used by more than 1,000 individual users per month domiciled in the other Contracting State, such enterprise shall be deemed to have a permanent establishment in the other Contracting State if the total amount of revenue of the enterprise due to the aforementioned services in the other Contracting State exceeds XXX (EUR, USD, GBP, CNY, CHF, etc.) per annum
Pillar 1 (amount A) for taxing
Scope:
For companies with global revenues of more than €20 billion (US $26.4 billion) and profitability above 10 percent, 25 percent of profits above 10 percent would be taxed according to a new formula based on where a company’s customers are located.
Pillar 1 of the OECD’s current proposal would expand a country’s authority to tax profits from companies that make sales into their country but don’t have a physical location there. This was decided as part of the OECD/G20 Inclusive Framework.
Pillar 1s impact would result in some companies paying more taxes in the countries where end users for a companys products are located or digital users are, even if the company has no permanent local establisment in that country
Pillar 2
Global minimum tax:
States levy taxes below 15% + top-up tax
- Effective tax rate (15%) in the jurisdiction!
The GloBE (Income inclusion rule + Undertaxed payment rule) will apply the MNEs that meet the 750 million euro threshhold
The Subject to Tax Rule (STTR) that allows source jurisdictions to impose limited source taxation on certain related party payments subject to tax below a minimum
nominal rate (9%) [no subject to quantitative thresholds]
Transfer pricing
an accounting and taxation practice that allows for pricing transactions internally within businesses and between subsidiaries that operate under common control or ownership.
BEPS (base erosion and profit shifting)
refers to tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax. Developing countries’ higher reliance on corporate income tax means they suffer from BEPS disproportionately. BEPS practices cost countries USD 100-240 billion in lost revenue annually. Working together within OECD/G20 Inclusive Framework on BEPS, over 135 countries and jurisdictions are collaborating on the implementation of 15 measures to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment.
BEPS (base erosion and profit shifting)
refers to tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax. Developing countries’ higher reliance on corporate income tax means they suffer from BEPS disproportionately. BEPS practices cost countries USD 100-240 billion in lost revenue annually. Working together within OECD/G20 Inclusive Framework on BEPS, over 135 countries and jurisdictions are collaborating on the implementation of 15 measures to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment.
BEPS action plan
The BEPS package provides 15 Actions that equip governments with the domestic and international instruments needed to tackle tax avoidance. Countries now have the tools to ensure that profits are taxed where economic activities generating the profits are performed and where value is created.
DEMPE factors to determine ownership
Control
Founding
Risk
DEMPE (Development, enhancement, protection and exploitation
determines whether an entity has economic ownership of an intangible asset, the OECD Guidelines prescribe that it should be delineated whether an entity performs the so-called ‘DEMPE functions
