TEI Submits Comments to the OECD Regarding Digitalization of the Economy Consultation.

PositionTax Executives Institute, Organisation for Economic Co-operation and Development

On March 4, 2019, TEI submitted comments to the OECD regarding its public consultation document entitled Addressing the Tax Challenges of the Digitalisation of the Economy. TEI will also participate in in the upcoming public consultation on March 13-14 in Paris. TEI's comments were prepared under the aegis of the Institute's European Direct Tax Committee, whose chair is Giles Parsons. Benjamin R. Shreck, TEI Tax Counsel, coordinated the production of TEI's comments.

The OECD launched its base erosion and profit shifting (BEPS) project in 2013. Action 1 of the BEPS project was entitled Addressing the Tax Challenges of the Digital Economy and the OECD published a final report under that action on 5 October 2015 (the Final Report). Among the conclusions of the Final Report was that "because the digital economy is increasingly becoming the economy itself, it would be difficult, if not impossible, to ring-fence the digital economy from the rest of the economy for tax purposes." (1) The Final Report noted that the OECD would continue to monitor developments in this area, along with implementation of the other BEPS actions, with a view toward producing a follow-up report on the digital economy in 2020. (2)

Subsequent developments and political pressure, however, have overtaken this "wait and see" approach. As a result, the OECD issued an interim report entitled Tax Challenges Arising from Digitalisation in March 2018 (the Interim Report), two years earlier than anticipated in the Final Report. The Interim Report was followed by a policy note, published on 23 January 2019 (the Policy Note), and a public consultation document, published on 13 February 2019 (the Consultation Document), each entitled Addressing the Tax Challenges of the Digitalisation of the Economy. The Consultation Document sets forth a number of proposals to address the tax challenges of the digitalization of the economy, some of which would reach beyond "digitalization" to all sectors of the economy. The OECD asked for input from interested stakeholders no later than 6 March 2019 in preparation for a public consultation to be held on 13-14 March 2019 in Paris.

On behalf of Tax Executives Institute, Inc. (TEI), I am pleased to respond to the OECD's request for input. TEI also requests the opportunity to speak in support of these comments at the upcoming public consultation.

TEI Background

TEI was founded in 1944 to serve the needs of business tax professionals. Today, the organization has 57 chapters in Europe, North and South America, and Asia. As the preeminent association of in-house tax professionals worldwide, TEI has a significant interest in promoting sound tax policy, as well as the fair and efficient administration of the tax laws, at all levels of government. Our nearly 7,000 individual members represent over 2,800 of the leading companies in the world. (3)

TEI Comments

General Comments

TEI commends the OECD for its work on the BEPS project over the past nearly six years and the work of its Task Force on the Digital Economy (TFDE) regarding digitalization. The Final Report, Interim Report, Policy Note, and Consultation Document represent substantial effort in this area with broad implications for both highly digitalized and more traditional businesses. As outlined in the Policy Note, the work in this area is now encapsulated in two groups of proposals referred to as "pillars," each of which, if implemented, would represent substantial changes to the current international tax regime - in addition to the changes already wrought by the BEPS project. The first pillar (Pillar I), focuses on the allocation of taxing rights and nexus issues with an eye toward allocating more taxing rights toward "user" or market jurisdictions. The second pillar (Pillar II), would "strengthen the ability of jurisdictions to tax profits where the other jurisdiction with taxing rights applies a low effective rate of tax to those profits" through a global anti-base erosion rule. (4)

Given the sweeping changes contemplated by the two pillars, as further delineated in the Consultation Document, it is unfortunate that the OECD is under political pressure to have its Inclusive Framework on BEPS (the Inclusive Framework) agree on a solution by May of this year, followed by a report to the G20 Finance Ministers in June, and a final recommendation to be publicly delivered in 2020. (5) A mere three-week comment period on these potentially sweeping changes to the international tax system is simply insufficient for interested stakeholders to fully consider the options set forth in the Consultation Document and to formulate and provide informed input to the OECD. While we understand this extremely accelerated timeframe is in part intended to head off additional unilateral actions by individual countries with respect to tax issues exacerbated by the digitalization of the economy, in TEI's view the timeframe will likely result in final guidance full of generalities that will likely lead to disputes and controversy between taxpayers and tax authorities down the road.

Similarly, the relatively sparse detail in the document regarding the three options for modifying the profit allocation and nexus rules, as well as the global anti-base erosion proposal, makes it difficult to provide informed input on the Consultation Document. For the same reason it is difficult to formulate a view as to which of the three profit allocation and nexus options is preferable. With respect to the global anti-base erosion proposal, it is also disconcerting that the Consultation Document spends only a single paragraph discussing "rule co-ordination" to avoid overlap across jurisdictions--and thus double taxation--and merely notes that "further technical work" is needed to explore these approaches. (6) This is especially troubling as the rules outlined in the Consultation Document, if finalized, would add to the already voluminous complexity of the BEPS project, materially increasing the compliance burden of multinational taxpayers and further complicating their ordinary business affairs.

More broadly, the Consultation Document describes countries as aligning into three groups when it comes to making changes to the profit allocation and nexus rules subsequent to the BEPS project. Overall, TEI is aligned with the third group, as countries "which [are] supportive of the existing... international tax system and [do] not see the need for any significant reform of the profit allocation and nexus rules." (7) The bulk of the BEPS project was only finalized in October of 2015. Further, many of the action items required additional work through 2016, 2017 and 2018. Indeed, the multilateral instrument only entered into force on 1 July 2018 and country-by-country reports under Action 13 have only been shared across jurisdictions for a single taxable year. Further, the profit allocation work under Action 7 is still not final. Thus, while it is obviously too early to fully assess the impact of all the BEPS measures, it also seems too soon to embark on a reallocation of taxing rights between source and residence countries, especially on such an accelerated timeframe. It is TEI's view that the BEPS project, once fully implemented, will largely address the underlying concern of double non-taxation (also known as "stateless income").

Moreover, in addition to the BEPS project, other recent significant actions undercut the need to implement the approaches described in the Consultation Document. For example, to the extent that Action 1 of the BEPS project (and the BEPS project generally) was driven by concerns regarding ability of U.S. based technology companies to supposedly earn significant amounts of low-taxed income outside of the United States, such concerns should be substantially addressed by the U.S. tax reform legislation passed in 2017, colloquially known as the "Tax Cuts and Jobs Act," which includes many of the aspects of the global anti-base erosion proposal set forth in the Consultation Document (as discussed further below), as well as anti-hybrid rules and a limitation on interest expense. Similarly, the European Union's Anti-Tax Avoidance Directives (ATAD I and II), when fully in place, should also alleviate many of the concerns falling within the scope of the digitalization of the economy and the other issues outline in the Consultation Document. In sum, from a pure tax policy perspective, TEI does not see the need to revise the profit allocation or nexus rules or recommend a global anti-base erosion proposal.

Nevertheless, despite the many drawbacks of proceeding in this direction with such haste, given current political realities it appears some near-term revision to the profit allocation and nexus rules is likely. It also seems likely, if unfortunate, that the OECD will recommend countries adopt some form of a global anti-base erosion rule. In light of these realities, set forth below are TEI's comments on the two sections of the Consultation Document, along with answers to the specific questions posed by the OECD therein.

Comments on Revised Profit Allocation and Nexus Rules

The Consultation Document describes three proposals that would revise the current OECD approach to profit allocation and nexus: (i) a "user participation" proposal; (ii) a "marketing intangibles" proposal; and (iii) a "significant economic presence" proposal (in combination, the Proposals). The user participation proposal would largely be confined to "certain highly digitalised businesses" that have developed "an active and engaged user base" and that have solicited "data and content contributions" from those users. (8) The marketing intangibles proposal would not be so confined, and would apply broadly to any business with non-routine or residual income in a jurisdiction attributable to marketing intangibles. (9) Finally, the significant economic presence proposal would attribute a taxable presence in a jurisdiction to a...

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