Tax Consequences of the Digitalised Economy - Issues for Developing Countries

We have made a submission to the UN Committee of Experts for consideration at its meeting on 22-26 June 2020.

Summary

We welcome the decision of the UN Committee to examine the tax consequences of digitalisation independently, while giving due consideration to work in other fora, and taking account of the limitations of its resources. Regrettably, the G20/OECD project on base erosion and profit shifting (BEPS) has produced little to benefit developing countries, and even the current negotiations in the Inclusive Framework for BEPS continue to be dominated by OECD countries, and to favour residence-based taxation.

Taxing income where activities take place means giving priority to source taxation, which has always been the concern of developing countries, as reflected in the UN model convention. They long ago pointed out the defects of a purely physical definition of a ‘permanent establishment’, particularly with the dematerialisation of economic activity, reflected in the shift from goods to services, now exacerbated by digitalisation. This enables extensive cross-border involvement in the society and economy, through close and continuous relations with customers, through a retainer, licence or subscription, rather than discrete one-off transactions. Digitalisation now also enables systematic collection of valuable data, and contributions of content by users, sometimes involving the appropriation of national heritage for profit, often through business-to-business relationships.

We support the proposal that the Committee should give priority to developing a new definition of taxable nexus for automated digital services. To cover services more generally, it should also consider reviewing article 5 of the UN model, particularly 5.3.b, which allows taxation of income from services delivered through the presence of personnel. A report on this issue should also examine the related aspects of attribution of profits to PEs, particularly the force of attraction principle in article 7.1, and the provision for fractional apportionment in article 7.4.