THE DIGITAL ECONOMY, BASE EROSION AND PROFIT SHIFTING: WHAT MIGHT CHANGE
Chas Roy-Chowdhury, head of taxation ACCA (the Association of Chartered Certified Accountants)
It still amazes me every time when I hear about tax on every politicians’ and member of the public’s lips. Even going down to the barber’s shop these days means that people break in to conversations about tax, especially when they know that I am an ACCA accountant.
Being in the UK we seem to be at the epicentre of the debate and discussion as many of our politicians seem to have made it their mission in life. The UK’s Public Accounts Committee (PAC) has made a name for itself grilling big businesses such as Amazon, Google and Starbucks more than once about their tax affairs.
This has created the climate of where everyone has their two pence worth to bring to the table on tax.
It is certainly on the agenda, rightly, in boardrooms across the UK and the world. Research this year by Taxand showed that 70 per cent of respondents saw corporate tax on board agendas, with the year ahead promising to see the same.
Tax has become entwined in the business management strategy of company with more at stake, including reputation and public profile, even CSR. From an accountancy viewpoint, a business whose chief financial officer or finance director does not have tax in their repertoire could be missing a major trick. Although tax is a key component of ACCA’s qualification, believe it or not, not all qualified accountants have that tax skill-set as part of their training.
The Area of Concern
The debate which lead to the Organisation for European Co-operation and Development (OECD) base erosion and profit shifting (BEPS) project work was kicked off by a letter to the Financial Times (FT) by the UK, German and French Finance Ministers, who promised to take the lead in bringing global tax rules in to the 21st Century for companies and tax jurisdictions.
The OECD took forward the work programme, publishing its 15 point plan, beginning with how to address the tax challenges of the digital economy.
On 24th March 2014 the OECD published a public discussion document. It ran through the story of the digital economy and then the situation in the here and now.
Originally we all operated on fixed line computers to interact with the digital economy, as well as by telephone. But today we use Wi-Fi from anywhere in the world, tablets, smartphones, watches, glasses, televisions, smart meters, smart fridges, smart heating systems. The list is endless before you even consider such things as cloud computing which could brush aside any geographical boundary attributions.
One statistic from the paper which is startling was that Cisco has estimated that between 10 and 15 billion devices are currently connected to the internet, representing less than 1 per cent of the total devices and things that could ultimately be connected.
A significant part of the paper tries to dissect and see if the digital economy can be compartmentalised so that it can be treated differently for tax purposes. One of the biggest problems is how do you actually monetarise some, let alone all, of this activity. Especially as some parts of the digital economy use its own currency in the form of bitcoins or by selling you hardware which incorporates software marketing systems on board such as Amazon with their Kindle tablets. You pay less for a Kindle which runs advertisements.
The consultation’s content on value added tax (VAT) is important because VAT is the panacea for the debate between the source and residence taxation. Quite significant amounts of source country tax revenues can be secured by the operation of VAT. The biggest issue being to make sure that sufficient measures and systems are in place to ensure that the VAT is charged and paid across to the source country.
In my view it is in the VAT part of the paper there seems to be an understanding that VAT rates, especially those in the European Union (EU), provide for a higher tax take than Corporation Tax. Take the UK for example; we have a Corporation Tax rate from April 2015 of 20% and the VAT rate is also 20%. In addition there will be Income Tax payable on the salaries of the employees.
Across the EU is that VAT tends to produce much more tax revenues than Corporation Tax. In the figures produced by the National Statistics office in the UK VAT yields over double the amount of Corporation Tax figures issued in May 2014 show the VAT yield as 21 per cent and the Corporation Tax yield as 8 per cent
The EU has been moving relentlessly towards applying VAT in the source country. Therefore, the end consumer where they were a private individual would usually be taxed in the source country. This has not always been the case in business to business (B2B) transactions. For instance, where a conference organiser in an EU state organises a conference in another country for a business situated in that other country they might not have always had to pay VAT in the country where the conference will be held, but almost certainly by 2015 all such activities will be taxable in the source country.
Many years ago the EU recognised that there was a real issue with pure digital sales. That is downloadable software, music, films, books and anything else of such a nature. In order to remedy the issue of non-EU country based companies, usually based in the United States, not paying any VAT at all. Rules were introduced where such companies were required to register in just on EU country for VAT. They then pay the VAT across to just that single tax administration at the rate which applies in that country.
While this will not capture all third country suppliers it probably does catch most.
The OECD also suggests some fairly common-sense ideas which would help stop leakage or avoidance of VAT.
Article 5 (Business Profits) and 7 (Permanent Establishment)
The point of greatest concern in this section of the BEPS project has been around article 5 and article 7.
The mistake in understanding this is always around the calculation of profit. They try to equate turnover with taxable profits. Governments cannot just tax as they wish or want. There must be rules and agreements around taxable profits, so broadly it is an area that cannot easily be changed.
However, article 7 comes from the perception that multinational businesses can choose to place their taxable profits anywhere and especially where they will not be taxable, specifically multinationals operating in the digital economy. There was a discussion in the consultation draft that some of the exclusions within paragraph 4 of article 7 were providing cover for digital economy companies to escape tax, for example, where marketing activities or storage took place in a set of premises that should not constitute a permanent establishment
The Happy Ending
Broadly speaking, the conclusions of the OECD paper, and the paper published by the European Commission expert group looking at the digital economy report published on 28th May 2014, came to similar conclusions. Neither wanted new or separate rules for the digital economy.
The digital economy work has to some extent been short circuited by the outsourcing of almost everything to the other work streams. But in many ways this was always likely to be the outcome as there could not be a practical conclusion to the work with concrete answers which had longevity by September 2014. So let’s see if anything else changes. It’s unlikely.