OECD weighs in on digital taxation saga

The Organisation for Economic Co-operation and Development (OECD) has put forward its own proposals on new tax regimes in the digital economy as the threat of fragmentation lingers.

With the proposal now open to public consultation, the OECD will make the relevant adjustments over the coming months. While this does look like a reasonable approach to creating a fair taxation landscape, there will of course be objections, perhaps from the US and those countries which cultivate the creative tax strategies which exist today.

As it stands, multinational corporations are able to shift tax payments to cheaper locations and regions, as many tax laws are defined by the physical presence of the company. With more businesses employing digital business models, this presents a greater risk moving forward. Big Tech are of course some of the biggest profiters of the inability of regulation to keep up with technological progress. In theory, the new rules will make tax avoidance much more difficult.

“We’re making real progress to address the tax challenges arising from digitalisation of the economy, and to continue advancing toward a consensus-based solution to overhaul the rules-based international tax system by 2020,” said OECD Secretary-General Angel Gurría.

“This plan brings together common elements of existing competing proposals, involving over 130 countries, with input from governments, business, civil society, academia and the general public. It brings us closer to our ultimate goal; ensuring all MNEs [Multinational Enterprises] pay their fair share.

“Failure to reach agreement by 2020 would greatly increase the risk that countries will act unilaterally, with negative consequences on an already fragile global economy. We must not allow that to happen.”

This is perhaps the biggest worry for the OECD and enterprise organizations around the world; failure to introduce new rules will lead to a much more regionalised approach. This would create difficulties for everyone involved.

The aim is of course to provide more stability and certainty in the international community, though there are a couple of elements to the proposal which are critical.

First and foremost, while these new rules will be applicable to every organization, they have seemingly been designed with digital front of mind. The proposal creates new marker definitions removing the necessity of a physical presence in a market to create tax liabilities.

“The new nexus rule would address this issue by being applicable in all cases where a business has a sustained and significant involvement in the economy of a market jurisdiction, such as through consumer interaction and engagement, irrespective of its level of physical presence in that jurisdiction,” the proposal states.

Revenue threshold levels will be created dependent on the size of the market in question. The OECD hopes this will encourage innovation while also removing the ability to dodge tax through working with third-parties and local distributors.

While this is a much more reasonable approach, designed for the digital economy, there are a few issues which need to be ironed-out, and it won’t be long before the objections to the plans are aired. One area where more thought will have to be applied are the double-taxation clauses; the OECD needs to ensure the concept of fair and reasonable works both directions of course.

What you might also see over the next couple of weeks are objections from countries like Ireland and Luxembourg who benefit so handsomely from the status quo, and perhaps the US who feels it should be the only country allowed to tax the residents of Silicon Valley.

Although there also has been some criticism levelled at the OECD for creating a proposal which favours the wealthiest countries not taking into consideration the developing regions, this is a step-in the right direction. Tax rules were woefully outdated, leaving ample opportunity for abuse. Timelines are short, but this is progress.