The digital transformation spurs innovation, generates efficiencies, and improves services while boosting more inclusive and sustainable growth and enhancing well-being. At the same time the breadth and speed of this change introduces challenges in many policy areas, including taxation.

The tax challenges of the digitalisation of the economy were identified as one of the main areas of focus of the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project, leading to the 2015 BEPS Action 1 Report (the Action 1 Report).1 The Action 1 Report found that the whole economy was digitalising and, as a result, it would be difficult, if not impossible, to ring-fence the digital economy.

For indirect taxes, the Action. Report recognised new challenges related to the collection of Value Added Taxes (VAT)/Goods and Services Taxes (GST) on the continuously growing volumes of goods and services that consumers purchase online from foreign suppliers. It recommended implementing the destination principle contained in the 2017 OECD International VAT/GST Guidelines, together with the mechanisms for effective collection of VAT/GST on cross-border supplies of services and intangibles presented in those Guidelines. For direct taxes, the Action 1 Report observed that while digitalisation could exacerbate BEPS issues, it also raises a series of broader tax challenges, which it identified as “nexus, data and characterisation”. The latter challenges, however, were acknowledged as going beyond BEPS, and were described as chiefly relating to the question of how taxing rights on income generated from cross-border activities in the digital age should be allocated among jurisdictions. A number of potential options to address these concerns were discussed, but none were ultimately recommended. Instead, the Action 1 Report called for continued work in this area, notably by monitoring developments in respect of digitalisation, with a further report to be delivered by 2020. Notwithstanding the progress made in tackling double non-taxation as part of the BEPS package, and the widespread implementation of the OECD International VAT/GST Guidelines, ongoing concerns around the tax implications of a rapidly digitalising economy led the G20 Finance Ministers, at their meeting in Baden Baden in March 2017, to advance the timeline and request the Inclusive Framework to deliver an interim report by early 2018. In March 2018, the Inclusive Framework, working through its Task Force on the Digital Economy (TFDE), issued Tax Challenges Arising from Digitalisation – Interim Report 2018 (the Interim Report).

The Interim Report provided an in-depth analysis of new and changing business models that enabled the identification of three characteristics frequently observed in certain highly digitalised business models, namely scale without mass, heavy reliance on intangible assets, and the importance of data, user participation and their synergies with intangible assets. The ensuing potential tax challenges were discussed, including remaining BEPS risks and the question of how taxing rights on income generated from cross-border activities in the digital age should be allocated among jurisdictions.




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