OECD consultation regarding the tax challenges of the digitalisation of the economy

On February 13, 2019 the OECD (Organisation for Economic Co-operation and Development) launched an online consultation on possible solutions to address the tax challenges arising from the digitalisation of the economy. The objective is to provide external stakeholders an opportunity to provide input upfront of the public consultation of the OECD on March 13 & 14, 2019 in Paris, France. As part of the online consultation, the OECD released a detailed consultation document which describes the already existing proposals regarding the tax challenges of the digitalisation of the economy and outlines a number of policy issues and technical aspects.

The OECD invites interested parties to send in their written comments before March 6, 2019. The comments provided will assist the members of the OECD/G20 in the development of a solution for its final report on the tax challenges of the digitalisation of the economy, which is expected to be published in 2020. The consultation paper outlines (among other items) three proposals that focus on (i) user participation, (ii) marketing intangibles and (iii) the digital presence issue.

The ‘user participation’ proposal

This proposal focuses on the value created by certain highly digitalised businesses through developing an active and engaged user base, and soliciting data and content contributions from them (i.e. Facebook). The proposal is premised on the idea that soliciting the sustained engagement and active participation of users is a critical component of value creation for certain highly digitalised businesses. The activities and participation of these users contribute to the creation of the brand, the generation of valuable data, and the development of a critical mass of users which helps to establish market power.

The ‘marketing intangibles’ proposal

The second proposal is based on the concept of marketing intangibles and is intended to have a broader scope and apply not only to a subset of highly digitalised businesses. It addresses a situation where an MNE group can essentially “reach into” a jurisdiction, either remotely or through a limited local presence (such as an limited risk distributor), to develop a user/customer base and other marketing intangibles. This proposal recognizes a functional link between marketing intangibles and the market jurisdiction.

The ‘significant economic presence’ proposal

Under this proposal, a taxable presence in a jurisdiction would arise when a non-resident enterprise has a significant economic presence on the basis of factors that evidence a purposeful and sustained interaction with the jurisdiction via digital technology and other automated means. Revenue generated on a sustained basis is the basic factor, but such revenue would not be sufficient in isolation to establish a nexus. Only when combined with other (secondary) factors, revenue would potentially be used to establish a nexus in the form of a significant economic presence in the country concerned. Suggestions for secondary factors may involve users, volume of digital content derived, websites implemented with the local language, sustained marketing activities and responsibility for delivery and/or support services.

What will our response look like?

Before March 6, 2019 we will touch base with clients and interested parties to provide the OECD with input on the aforementioned matter. It should be noted that we are also considering the decision of the US Supreme Court in South Dakota v. Wayfair in drafting our letter to the OECD. In the context of the current debate on the taxation of the digital economy, the South Dakota v. Wayfair decision may have a significant impact. This decision made it clear that for indirect taxation purposes, non-resident sellers operating on the internet may be deemed to have a digital nexus at source in the country of the customer.

Ultimately the comparison made in South Dakota v. Wayfair is between the physical place of business of resident shops v. the deemed digital nexus of the non-resident company. This comparison makes sense to create a level playing field. Otherwise the non-resident (internet) company would be entitled to a competitive advantage opposite to the local shop. This comparison between residents and non-residents however is similar as the debate on taxation of the digital economy in direct taxes. It will be interesting to see if and how South Dakota v. Wayfair will inspire tax authorities and government institutions.

Before March 6, we will have contributed our input through the online consultation forum of the OECD, which in turn will also be published on our website.