Digitization has profoundly changed the way people interact with each other. And it has undoubtedly improved the way we do business around the world. Following this innovative and stimulating scenario, the Organization for Economic Co-operation and Development (OECD), as well as some rich countries, have been discussing for a decade the imposition of a tax on digital services (DST) on multinational companies. largest and most profitable (MNE) within the framework of a fair international system of taxing rights.
In early 2019, the OECD / G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) developed a work program (PoW) to reach consensus on the tax challenges of digitization. A public consultation was available to stakeholders, who could send their written comments no later than December 14, 2020. However, the controversy persists. As the international community struggles to reach a multilateral agreement to keep a level playing field for taxpayers, some countries have already unilaterally decided to adopt DST in the years to come.
Controversial aspects of imposing a DST
Concepts involving tax complexity regarding the imposition of a DST should be widely discussed and not limited to only the possible effects regarding the violation of tax treaties or the avoidance of double taxation. Nevertheless, it also reveals whether the share of the profit margin of the MNE determined by a formula attributed to a market jurisdiction, despite a minimal presence of companies on site, represents a better solution.
Led and encouraged by the commitment of the OECD / G20, the international community has focused its work on adopting standardized terms, unifying methods, formulas and harmonized definitions, such as category of services (positive / negative list or bundled package), the sectors concerned, threshold tests, residency, segmentation and responsibilities in order to avoid unnecessary litigation and future tax competition between jurisdictions.
Nevertheless, there are still doubts about these abstract methods and events. For example, if the relative importance of revenues in the scope of the Automated Digital Service (ADS) and Business to Consumer (CFB) categories is considered to be substantial or highly integrated as part of a general service.
The establishment of a mechanism for reallocating margins to market jurisdiction comes up against opposing arguments supported by a dose of criticism. Historically, corporate tax has triggered in-depth discussions stemming from (i) different business models; (ii) the accuracy of the marginal tax rate; (iii) the rules for carrying forward tax losses; (iv) transfer of profits to low income jurisdictions; and (v) the use of different accounting methods.
Despite an advanced approach to the MNE profit margin reallocation method, adopting a tax system based solely on the direct cause and effect relationship between service providers and users appears to be much less complex. Indeed, applying the principle of a gross rather than a net base taxation would make things more transparent and would benefit the economic life of the countries where consumers are located even if the companies do not have a physical presence.
In this context, joint and several liability would be limited to the jurisdiction where the company maintains a permanent establishment or a subsidiary, being mainly taxable. Otherwise, a resident company valued in different countries would certainly be subject to double taxation.
Given the potential challenges of imposing RST by adopting the principle of taxation on the basis of gross income, the preventive measures and the obligation for companies to comply with specific obligations could be as follows :
• The introduction of provisions relating to the obligation for companies to maintain a permanent legal establishment or a subsidiary in their jurisdiction;
• Adopt a tax substitution mechanism in which the DST must be borne by the permanent establishment or the subsidiary for the provision or intermediation of certain digital services in their jurisdiction;
• Assess different tax treatment with respect to national and export income generated by the provision of certain services (activities) by a resident enterprise in their jurisdiction;
• Creation of a database system to facilitate analysis between annual DST declarations filed by companies and standardized excise tax reporting requirements.
The possibility of DST legislation coming into force next year in some jurisdictions is real. Thus, as an alternative to the allocation of taxing rights, a gradual approach or even a transitional period during which the tax rate could be distributed among countries with or without a physical presence would increase the likelihood of reaching a multilateral agreement.
The huge expectation of imposing a DST on large corporations on the basis of a multilateral solution between rich nations undoubtedly strengthens the international community. However, it also comes with an in-depth analysis that involves a complete overhaul of the concept of tax residency. And it is possible to shed light on the principle of gross income rather than that of a minimum reallocation of the profit margin within the framework of the international tax rules in force. Finally, the perception that the expected benefits can be achieved is certainly a step forward in the effort to achieve a goal by removing barriers to trade.