Trending Video: OECD’s Digital Tax Proposal
Kat Saunders Gregor, Ropes & Gray tax partner and co-founder of the firm’s tax controversy group, discusses the OECD’s digital tax proposal as well as actions being taken by several countries to pass digital services taxes of their own.
I'm Kat Gregor, and I am a tax partner in Ropes & Gray's Boston office, and co-founder of the tax controversy group. Today, we're going to talk about the OECD's digital tax proposal and the unilateral action being taken by several countries, including France, to pass digital services taxes of their own. Over the last several years, the OECD and the EU, as well as many countries have started looking more closely at the way in which the international tax system is set up, fundamentally thinking about how different countries are entitled to tax the profits of multinational corporations. In particular, countries have become focused on whether or not they're entitled to a fair share of the profit of a large, multinational corporation that operates in the digital economy.
International tax in the digital economy
When we talk about the digital economy, we mean companies that sell products remotely, for example, over a digital marketplace and ship across borders, but we also mean companies that provide services digitally. Historically, the international tax system really focused on physical presence in a jurisdiction, so a company typically did not have to pay tax in a particular jurisdiction unless they had office space, other types of property, people or intellectual property in that jurisdiction – that physically presence is what actually entitled a country to tax a foreign corporation. Now, it has become increasingly common for companies to operate digitally and be able to remotely access the value in a market or economy without actually having to have physical presence. Over time, countries have begun to take the position that that's not fair, that they should have the right to tax at least a portion of the profit that is being derived from their own citizens and their own marketplace economy.
Global and inclusive framework
So in response to this global debate, the OECD has actually undertaken an initiative to develop an inclusive framework that would ideally be applied consistently by countries around the world. The goal of this project is to allow companies the ability to have predictability and consistency across multiple jurisdictions, while still allowing countries that feel as if they had not been historically entitled to tax their fair share of the profit of a multinational corporation the ability to pull some of that profit back into their tax base. But what has happened is while the OECD and also the EU have begun looking at this on a global, multinational basis, individual countries have been impatient and have begun developing laws of their own in advance of there being a global or inclusive framework that would include multiple jurisdictions.
France is actually the first country to take unilateral action and pass a digital services tax of its own. It did so in a preliminary fashion, intending to pass a tax where it could collect revenues now, but has announced that it would give refunds to companies once either the OECD or the EU passed an inclusive, multinational framework. After France passed its digital services tax, several other jurisdictions have evaluated passing laws of their own, adopting similar types of proposals, whether it's a gross revenues tax or simply sourcing income to their jurisdiction based on digital sales or digital revenues. So while these new laws have created uncertainty and a lack of predictability for companies that operate in the digital economy, they have created a sense of experimentation that could be a source of information for the OECD as it looks to what may be the most practical and inclusive framework to take into account many jurisdictions' different proposals or perspectives.
The OECD has circulated several proposals and is constantly taking comments from companies, industries and individual countries on the ways in which it could improve its inclusive framework. It will be looking to the various countries' laws that have been enacted on a unilateral basis to put together a proposal that is hopefully workable. Whether or not jurisdictions will then actually pass laws based on this proposal or framework is left to be determined, but at this point, we're hopeful that there will be a collective, uniform approach to taxing the digital economy.