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How to tax digital activities? Make it S.A.F.E., says TUAC

28 January 2019

On 23-24 January 2019, the TUAC presented its recommendations to the OECD on how to tax digital activities. The efforts towards more coordination at global level are highly needed. Multinationals should be taxed on their global profit based on rules that are Simple, Anti arbitrage, Fair, and Encompassing. This implies doing away with some of the current framework.    


On 23-24 January 2019, the OECD/G20 BEPS Inclusive Framework, bringing together over 115 jurisdictions, met to discuss and collaborate on OECD anti-tax avoidance measures. The theme for that meeting was the taxation of digital activities.


After more than two years of negotiations, the OECD delivered in 2015 a 15 points Action Plan to address ”Base Erosion and Profit Shifting” tax practices by multinational enterprises. The tax challenges arising specifically from digitalisation, however, were left over for further discussion with the objective of delivering an agreed framework solution by 2020. In the absence of international coordination, a series of countries are announcing that they have taken or intend to take the matter into their own hands (France, UK, Austria, Spain, India …).


At its meeting, the Inclusive Framework discussed several options, ranging from giving countries taxing rights whenever digital activities are generating value on their territory (and regardless of where the company is physically established) to establishing a minimum corporate tax rate, entitling countries to “tax back” if there is evidence that another country hosting part of the multinational is taxing below the agreed threshold. Presumably, one of the options must have been to keep the status quo and to continue treating profits arising out digital activities in the same way as the traditional economy. Keeping status quo, however, is unlikely to gather sufficient support. The OECD General Secretary, Angel Gurria, has announced at the 2019 World Economic Forum that he believed that the conditions exist to lay the foundations for an agreement on taxing digital activities in 2019, and an entry into force in 2020. ( ).


Tackling tax avoidance is highly relevant for the labour movement for at least two reasons. First, trade unions care about a fairer, more inclusive tax system. Governments must collect sufficient revenue to be able to invest in sustainable development, and consumers and workers should not bear the burden of insufficient corporate revenues. Second, bad taxpayers are often bad employers. The artificial constructions used by multinationals to diminish their tax accountability are very similar, if not the same ones, than those built to obscure employment relationships, bypass national labour laws and social security contributions.


The characteristics of the digital sector are, however, very challenging for the tax collector. Digitalised businesses enjoy local presence without physical establishment. Under the current rules, a formal establishment is required to assert taxing rights. Furthermore, digital business models rely heavily on intangible assets (data, software, algorithms) which not only can be shifted easily from one country to another, but are also hard to value according to traditional methods.


The TUAC therefore encouraged the Inclusive Framework to continue its work on the taxation of digital activities but warned governments to play it S.A.F.E.


S for Simple. The efforts should be on keeping the rules simple and, as far as possible, the same for everyone. The more complex the rules, and their exemptions, the bigger the playing field for tax consultants and creative accountants.


Some of the options on the table seek to divide profits into distinct categories (residual profits and routine profits), and apply different calculations accordingly. Other options pretend to make a distinction between different types of intangible assets, again with a view to apply different methods. This means that for the same company, and for one economic activity, a whole range of different tax rules would apply. This is an encouragement for complex schemes and manipulation of profits.


A for Anti Arbitrage. The objective should be to deter multinationals from shifting their profit to low tax jurisdictions. A mechanism designed to raise tax in every place where some value is created, regardless of where the multinational pretends to be physically established, should be welcomed. Every effort to move towards a minimum coordinated tax rate should also be welcomed. Several options can be mutually reinforcing and should therefore be considered in combination.


F for Fair. To be fair, the system promote economic development, especially in emerging countries which are more dependent on corporate tax. Increasing corporate tax revenues mostly for production countries is not fair. Everywhere in the world, employment is an essential aspect of value creation. This should be better reflected in the determination of the tax base. Sales and the presence of users are additional elements that can help measuring local impact on economy.


E for encompassing. The international tax framework should treat multinationals for what they are: unitary entities. The labour movement is critical of the so called “arm length principle”, which is the foundation of the current BEPS package. According to this principle, the different entities of a multinational are allowed to trade with each other to the extent that the transactions respect normal market conditions. The arm length principle is based on the fiction that subsidiaries are independent from each other. However, these legal entities are part of a same group and are supervised by the same parent company. Now comes the opportunity to move more clearly towards a “unitary taxation”, whereby profits at global level are divided between countries. This would make for a simpler and fairer system with potentially far less opportunities for tax avoidance.