The OECD’s Advisory Group, Business and Industry Advisory Committee (BIAC), released a report on “Business Principles for Addressing the Tax Challenges of the Digitalizing Economy”. The group set out 11 principles that should be taken into account as nations work to update the international tax rules to account for the modern economy. The paper comes as the OECD is working to reach consensus among countries on how to appropriately tax the digital economy and is preparing a final report on these issues, due 2020.
BIAC reiterates that the revised framework in the digital economy should be applicable to all digitalizing businesses. As such, the framework should not ring-fence the digital economy to avoid distortion and be flexible to accommodate future business model evolution.
Another principle raised by BIAC is the alignment of the revised framework with the long-standing and well-founded underlying principles of international taxation. Any reform in digital taxation should be in line with international principles (including taxation of net income, nexus, permanent establishment, and transfer pricing based on the arm’s length standard) to establish the regulation that is coherent, pro-growth, and do not inhibit the innovation of digitalization.
Moreover, the revised framework should reduce instances of double taxation by introducing a comprehensive package and enforcing the framework through treaties instrument. Agreement over the allocation of taxing rights should ensure that profits are allocated in a consistent and clear way to reduce the potential instances of double taxation. The treaties should be used to implement the revised framework to avoid unilateral action taking by the jurisdiction that leads to double taxation.
Besides reducing double taxation, providing strong dispute resolution is also need to take into account since any changes to the international tax rules increase the potential for double taxation. As such, Business at OECD supports arbitration mechanisms and further strengthening of Mutual Agreement Procedures (and other initiatives such as ICAP).
BIAC, through the report, strongly counsels against fragmentation in international taxation and encourages all countries to avoid action outside of an Inclusive Framework (IF)-led consensus, particularly within the already agreed international timeframe of reaching consensus by 2020. The reforms must be affirmatively agreed by all IF member countries.
The OECD is the only organization that garners such global support, and an agreement should reflect and balance the concerns of all nations – large and small, developed and developing, importers and exporters.
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