taxation of the digital economy - uniglobal · suggested nexus rules –a critical review from the...

T A X A T I O N O F

T H E D I G I T A L

E C O N O M Y

6 T H C O R P O R A T E

T A X S U M M I T

D O N A T A K O R E N

X A V I E R C A M P S

1 8 - 1 0 - 2 0 1 9

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This material has been prepared for general informational and educational

purposes only and is not intended, and should not be relied upon, as

accounting, tax or other professional advice. Please refer to your advisors

for specific advice.

The views expressed by the presenter are not necessarily those of Zalando

SE or Electronics Arts.

D I S C L AI M E R

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1. Introduction

2. OECD proposal

3. Status of the EU proposals

4. Summary

T A B L E O F C O N T E N T

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1 . I N T R O D U C T I O N

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> 400,000product choices

Z AL AN D O AT A G L AN C E : F Y 2 0 1 8

~ 5.4billion EURO

revenue 2018

> 80%of visits viamobile devices

> 300million

visitspermonth

> 27millionactive customers

> 15,500employees in Europe

17countries

~ 2,000brands

E L E C T R O N I C AR T S AT A G L AN C E : F Y 2 0 1 9

20 major

gamesConsolidated portfolio

~ 5.0billion USD

revenue 2019

> 50MRegular FIFA players

10,000employees worldwide

1.5 billion USD

Cash flow

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• Three common characteristics of the digital economy

according to OECD:

• cross-jurisdictional scale without mass

• heavy reliance on intangible assets, especially intellectual

property (IP)

• the importance of data, user participation and their

synergies with IP

• Impossible to “ring-fence”: the BEPS Action 1 draft

says:

“In other words, because the digital economy is increasingly

becoming the economy itself, it would be difficult, if not

impossible, to ring-fence the digital economy from the rest of

the economy”

D I G I T AL E C O N O M Y ( 1 O F 2 )

The notion „digital

economy” was

coined in Don

Tapscott's 1995

best-seller Digital

economy: promise

and peril in the

age of networked

intelligence

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D I G I T AL E C O N O M Y : T H E R O AD T O G L O B AL C O N S E N S U S

2015

• Report OECD

• BEPS Action 1

2016• Multilateral

• instrument

• (MLI) finalised

2017• Countries sign

• MLI

2018• 2 EU proposals

• on DST (short and

• long term)

• Interim OECD

• report on tax

• challenges

• arising from

• digitalisation

2019• European Council

• cannot reach an

• agreement on

• EU DST

• OECD publishes

• consultation

• documents in February (Pillar 1 & 2) and October (Pillar 1) and will publish in December (Pillar 2)

2020• Final OECD

• Report expected

BEPS Action

1 Report

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2 . O E C D P R O P O S A L

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O E C D P U B L I C C O N S U L T AT I O N P AP E R

PILLAR 1

“USER

PARTICIPATION”

“MARKETING

INTANGIBLES”

“SIGNIFICANT

ECONOMIC

PRESENCE”

PILLAR 2

“INCOME

INCLUSION

RULE”

“TAX ON BASE

ERODING

PAYMENTS”

OECD

ADDRESSING THE TAX

CHALLENGES OF THE

DIGITALIZAT ION OF THE ECONOM Y

PUBLIC CONSULTATION DOCUMENT 03.2019

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PILLAR ONE

Revised profit allocation and nexus rules

• User participation – social media platforms, search engines and online

marketplaces;

• Marketing intangibles – applicable to all businesses

• Significant economic presence – applicable to all businesses

Proposals to be discussed:

• new profit allocation rules:

• modified residual profit split method (‘MRPS’)

• fractional apportionment method

• distribution-based approaches

• new nexus rule - a concept of taxable business presence in a market

jurisdiction outside of physical presence requirements

• implementation and efficient administration of any ‘new taxing right’

O E C D P R O G R AM M E O F W O R K O N T H E T AX C H AL L E N G E S AR I S I N G F R O M

T H E D I G I T AL I S AT I O N O F T H E E C O N O M Y

PILLAR TWO

Global anti-base erosion

proposal

• Income inclusion rule

• Tax on base-eroding

payments

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PILLAR ONE

Suggested nexus rules – a critical review from the entertainment industry

• User participation

• User identification issues: IP/Data privacy

• Cross-border gaming

• Online/social functionality value

• F2P modes. Profit allocation issues to market jurisdiction

• Marketing intangibles

• Marketing intangible of a jurisdiction - definition

• User identification issues, non-routine returns allocation under TP rules

• Significant economic presence

• Departure from international tax architecture – basis of factors

• Benchmarking

• Enforcing rules – withholding tax

O E C D P R O G R AM M E O F W O R K O N T H E T AX C H AL L E N G E S AR I S I N G F R O M

T H E D I G I T AL I S AT I O N O F T H E E C O N O M Y

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UNIFIED APPROACH UNDER PILLAR 1 – SECRETARIAL PROPOSAL

Scope:

“consumer facing” multinationals

tthresholds (global & local) and exemptions

New nexus rules

sales to a country (not profits) - without physical presence - will be sufficient to allow to tax profits

Profit allocation rule – three-tier profit allocation

(Amount A) Residual profits of a global MNE are allocated to different market countries using a formula

(Amount B) In-country marketing and distribution functions are allocated a fixed-return (which is similar to the current TP

approach)

(Amount C) Tax authorities can agree an additional profit allocation for in-country functions which exceed the standard in-

country functions

Mandatory dispute regime & elimnation of double taxation

O E C D P R O G R AM M E O F W O R K O N T H E T AX C H AL L E N G E S AR I S I N G F R O M

T H E D I G I T AL I S AT I O N O F T H E E C O N O M Y

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UNIFIED APPROACH UNDER PILLAR 1 – SECRETARIAL PROPOSAL

O E C D P R O G R AM M E O F W O R K O N T H E T AX C H AL L E N G E S AR I S I N G F R O M

T H E D I G I T AL I S AT I O N O F T H E E C O N O M Y

Step 1

• Identification of the MNE group’s profit from a consolidated SFS, possibly based on segments

Step 2

• Deduct from the identified profit approximation of the profit coming from routine activities

Step 3

• Split the non-routine profit applicable to the market jurisdiction and to other factors

Step 4

• Allocate the relevant portion of profit among the eligable market jurisdiction eg. with the factor „sales”

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UNIFIED APPROACH – EXAMPLE 1

O E C D P R O G R AM M E O F W O R K O N T H E T AX C H AL L E N G E S AR I S I N G F R O M

T H E D I G I T AL I S AT I O N O F T H E E C O N O M Y

GROUP PROFIT FROM FINANCIAL STATEMENT

ROUTINE ACTIVITIES NON-ROUTINE ACTIVITIES

Consolidated SFS readily available

Cannot be easily manipulated

Operating segments available

Proposal: simple percentage +

variance by industry

CU

ST

OM

ER

DA

TA

BR

AN

D

AL

GO

RIT

HM

S

SO

FT

WA

RE

Proposal: simple percentage +

variance by industry

STEP 1

STEP 2

STEP 3

STEP 4C

OU

NT

RY

X

CO

UN

TR

Y X

CO

UN

TR

Y Y

CO

UN

TR

Y Y

Allocate by allocation key

„sales”

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UNIFIED APPROACH EXAMPLE 2

O E C D P R O G R AM M E O F W O R K O N T H E T AX C H AL L E N G E S AR I S I N G F R O M

T H E D I G I T AL I S AT I O N O F T H E E C O N O M Y

Country a

IP owner

Non routine

profits

Country c

Country b

Subsidiary

Support services

(marketing and

distribution)

“online sales”

from A

Parent co

Sub co

Country c

No A direct

presence

No Group

subsidiary

“online sales”

from A

Amount A

Amount B and C

Amount A

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UNIFIED APPROACH vs VIDEOGAME INDUSTRY

A digital industry?

Evolution of the entertainment business. Role of R&D and marketing. Business decentralization;

presence vs value

Combined business models – background and history

• Traditional arcade game mode: The old good hardware days

• PC and console at home: Born of packaged good business. AAA games and franchises developed

• The internet era: Connectivity and online downloads. Online gaming. New cohort of digital native gamers

• Mobile gaming: Partnerships

• New modes: Social gaming, F2P. Online gaming. Connectivity issues. Development of AI.

O E C D P R O G R AM M E O F W O R K O N T H E T AX C H AL L E N G E S AR I S I N G F R O M

T H E D I G I T AL I S AT I O N O F T H E E C O N O M Y

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UNIFIED APPROACH vs ONLINE SALE OF GOODS

Role of R&D: what will happen to the old profit split method for tech industries/DEMPE analysis?

Identification of entrepreneurial vs routine function in highly digitalised tech environments

Keep it simple, Sherlock: new safe harbours emerging?

O E C D P R O G R AM M E O F W O R K O N T H E T AX C H AL L E N G E S AR I S I N G F R O M

T H E D I G I T AL I S AT I O N O F T H E E C O N O M Y

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3 . S T A T U S O F T H E E U

P R O P O S A L S

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E U C O M M I S S I O N P R O P O S AL :

AN I N T E R I M T AX O N C E R T AI N R E V E N U E F R O M D I G I T AL AC T I V I T I E S

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E U C O M M I S S I O N P R O P O S AL :

A C O M M O N R E F O R M O F T H E E U ’ S

C O R P O R AT E T AX R U L E S F O R D I G I T AL AC T I V I T I E S

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D I G I T AL S E R V I C E S T AX P R O P O S AL S I N E U R O P E

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C H AL L E N G E S W I T H R E S P E C T T O T AX AT I O N O F D I G I T AL E C O N O M Y ( 1 O F 3 )

DESCRIPTION CHALLENGE COMMENTS

Compatibility with the double

taxation framework

Not included in the current

treaty framework

DST is not included in DTT or

MLI

Durability Interim proposal No sunset clause

Taxable events No unified notion of taxable

event

Taxable events may vary from

country to country

Size Ring-fencing Two criteria: global turnover

and revenues from digital

services

Tax rate 3-5% Tax on revenues not income,

also on loss making business

Compliance No unified enforcement

mechanism

Compliance and advisory

costs, no one-stop shop tool

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C H AL L E N G E S W I T H R E S P E C T T O T AX AT I O N O F D I G I T AL E C O N O M Y ( 2 O F 3 )

DESCRIPTION CHALLENGE COMMENTS

Place of taxation Definition of taxable event Country of taxpayers’

residence vs. country where

value is created vs. country of

recipient

Arm’s lenght principle Allocation of taxable revenues Deviation from substance

principle to users principle

Double taxation Tax imposed twice No mechanism for deduction

of tax paid

Value creation Digitalisation of all businesses Brick-and-mortar vs. online

businesses

Data related value Question who creates value User vs. data collector vs. data

analyser vs. data purchaser

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* Art.107 par.1 of TFEU: Save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form

whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, insofar as it

affects trade between Member States, be incompatible with the internal market”

C H AL L E N G E S W I T H R E S P E C T T O T AX AT I O N O F D I G I T AL E C O N O M Y ( 3 O F 3 )

DESCRIPTION CHALLENGE COMMENTS

Intercompany transactions May be subject to DST More scrutiny to set up the

intercompany pricing in a

correct way

State’s aid regulation* Repeal of the local DST

regulation

Qualification as state’s aid

regulation if differentation of

treatment is confirmed

Classification Type of tax Direct, indirect, WHT?

Disputes Dispute mechanism No reaty/dispute mechanism in

case of cross-border litigation

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4 . S U M M A R Y

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• Implementing, computing, collecting, and monitoring will be extremely

challenging and complex for both tax payers and tax authorities.

• Taxpayers will be required to have systems, mechanisms or agreements

in place that will allow them to e.g. track user information.

• Taxpayers will have to comply with certain formal obligations, e.g. to

register in a special registry or to appoint a tax representative.

• The GDPR limits the possibilities and causes problems in terms of data

collection, storage, etc.

• Changes to the legal framework will be necessary.

S U M M AR Y

T A X A T I O N O F

T H E D I G I T A L

E C O N O M Y

Q & A

D O N A T A K O R E N

X A V I E R C A M P S

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