When it comes to the taxation of services provided digitally (usually remotely from territories away from the consumer), the spotlight has been on the OECD for some time, as it strives to find a consensus on the taxation of the digital economy – it previously committed to do this by the end of 2020. A failure to agree a consensus is likely to result in double taxation for affected taxpayers – including the likes of Amazon, Google, Airbnb, Facebook etc.
Digital services taxes – a global perspective
The United States has already made its objections very clear as to what it considers to be the discriminatory new digital services taxes rules enacted by countries like the UK and has withdrawn from the OECD negotiations.
The OECD is expected to publish its latest proposals regarding the taxation of the digital economy in October. This timing, although imminent, suggests that the OECD is going to have its work cut out if it is going to achieve a global consensus on its proposals by the end of 2020, particularly given the absence of the US from the negotiating table.
Pressure is mounting on the OECD to deliver, as Finance Ministers from countries such as France have been arguing that ‘the only winners of the economic crisis are the digital giants’, a view echoed by the European Commissioner for Economics . The strong implication here is that if a consensus is not reached, the European Union may go it alone . This may achieve regional consensus on this matter but, perhaps more importantly, may also provide governments with another tool to repair some of the holes in their domestic finances caused by the pandemic.
Digital services tax and the UK
By being one of the first movers when enacting its own digital services tax, and resisting subsequent pressure from the US to step back from this legislation, the UK is potentially very well-placed to benefit from the surge in revenues enjoyed by the digital giants during the pandemic.
The revenues raised by this tax are likely to be closely monitored by the UK press and, whilst the targeting of the tech giants has proved popular with UK voters, it will be interesting to see if that popularity is sustained given that Amazon has already announced that it will pass on the extra cost of the tax to the consumer.
Finally, if the UK digital services tax is to be a bargaining chip in the upcoming UK/US trade deal negotiations, the UK government will need to consider carefully how to use it to achieve its goals without appearing to back down.
Coronavirus and transfer pricing
The coronavirus outbreak has had an impact on most multinational businesses and for many, it has resulted in significant reductions to profitability or in them sustaining a loss. As a result, where companies have used profit-based methods to allocate profits to certain business functions for transfer pricing purposes, they may no longer even have profits to attribute.
In addition, businesses may have needed to relocate certain functions to different jurisdictions , as a result of the pandemic, sometimes just to be in a position to keep trading , whether that involves people, assets, production etc or a combination of these. Such changes will likely mean that adjustments are required to groups’ transfer pricing arrangements, as the premise upon which the policies were originally based no longer reflects the current situation.
Businesses need to therefore consider whether the profit allocation methods and pricing that have been identified historically are still appropriate under current trading conditions and whether adjustments need to be made to the current basis.
For many, this will not be an easy task, with the lack of accessible current comparable data available at present, so it will be essential for businesses to plan and consider now how to approach this challenge.