‘There is a fiscal, political imperative to act’

The Organisation for Economic Co-operation and Development (OECD) recently came out with an interim report on the tax challenges arising from digitalisation. The final report is expected in 2020. Amidst consensus on the need to tax digital businesses, countries remain divided in their approach. In an email interaction, PASCALSAINT-AMANS, director, OECD Centre for Tax Policy and Administration, tells Sudipto Dey why countries are finding it challenging to tax digital businesses. Edited excerpts:

What is your reaction to the proposals by the European Union (EU) for a digital tax targeting technology giants?

The EU’s work on tax is largely connected with the OECD’s work. The EU Commission released some proposals on March 21. On short-term measures, they are fully aligned with our work. Our interim report we released on March 14.

However, worryingly, the EU will issue a directive and a recommendation for long-term solutions. These two documents seem to raise some fundamental issues about creating a new digital permanent establishment (PE) based on personal data that is collected in a country, but with a very broad definition.

PASCAL SAINT-AMANS Director of the OECD Centre for Tax Policy and Administration

Do you see the looming global trade war casting its shadow on the issue?

We consider that the tax challenges arising from the digitalisation are a really complex matter. Countries recognised that too and are committed to work together. In this process, the OECD is undertaking a role of facilitator. We are happy for having been able to get the 113 member countries and jurisdictions of the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) agreeing on the challenges to address and on preserving the possibility of durable and long-term solutions to such a complex issue by 2020.

Countries have different views, which are reflected in the OECD interim report. India has been part of the BEPS Project since its inception and has played a key role in its development through its engagement in the G20. Even though India has started to act unilaterally to tax digital

transactions, it remains committed to the adoption of a broader and widely accepted solution.

What are the key differences in the approach of countries?

Different perspectives of countries can be described as falling into three groups. The first group considers that the reliance on data and user participation may lead to misalignments between the location in which profits are taxed and the location in which value is created. The view of this group of countries is that these challenges are confined to certain business models and they do not believe that these factors undermine the principles underpinning the existing international tax framework.

A second group of countries take the view that the on-going digital transformation of the economy, and more generally trends associated with globalisation, present challenges to the continued effectiveness of the existing international tax framework for business profits. Importantly, for this group of countries, these challenges are not exclusive or specific to highly digitalised business models.

Finally, there is a third group of countries that consider the BEPS package has largely addressed the concerns of double non-taxation, although these countries also highlight that it is still early to fully assess the impact of all the BEPS measures. These countries are generally satisfied with the existing tax system.

Could unilateral, short-term action by different countries to tax digital businesses derail the consensusbuilding process?

In some countries, including in the EU, there are pressing calls for governments to take more immediate action to address the tax challenges arising from digitalisation. There is no consensus on the need for, or the merit of, interim measures with some countries opposing them. The countries considering interim measures recognise the challenges, but consider there is a fiscal and political imperative to act, pending a global solution which may take time to develop, agree and implement.

Full interview on www.businessstandard.