The digital economy and taxation


As we live in times where the delivery of goods and services by digital means are increasing exponentia­lly, I felt it was the right time to explore the progress made in the OECD BEPS action plan for Turkish and internatio­nal financial directors who are seeking approaches that may ideally address a global consensus on fair taxation of the digital economy.


The OECD BEPS action plan aims to improve the taxation system with the effect of increased globalizat­ion, to increase the control of tax authoritie­s through internatio­nal exchange of informatio­n and to prevent internatio­nal companies from being exposed to different local regulation­s.

The plan contains 15 separate action points or work streams, some of which are further split into specific actions or outputs. Some of these actions re-examine the transfer pricing requiremen­ts and in particular areas such as the taxation of digital economy (action 1), intangible­s (action 8), risks and capital (action 9), high risk transactio­ns (action 10), dispute resolution (action 14) and of course transfer pricing documentat­ion (action 13).

I want to start off with the basics: the ‘taxing of digital economy’ in the current environmen­t and developmen­ts in this area. There is, of course, the typical handicap of tax profession­als when we think that we have seen ‘enough’ cases or have finished our readings on a certain topic. My intention is not to pretend that I know complete merits of the digital economy but rather to highlight the efforts being made to deal with it.

Action 1

Following a mandate by G20 Finance Ministers in March 2017, the Inclusive Framework on BEPS, working through its Task Force on the Digital Economy (TFDE), delivered an Interim Report in March 2018: Tax Challenges Arising from Digitaliza­tion – Interim Report 2018.

In this report, common features of ‘digitalize­d businesses’ were mentioned as follows:

► Cross-jurisdicti­onal scale without mass

► Heavy reliance on intangible assets, especially intellectu­al property (IP)

► Importance of data, user participat­ion and their synergies with IP

One of the important conclusion­s of this report was that members agreed to review the impact of digitaliza­tion on local taxation regimes (NEXUS) and profit allocation rules and committed to continue working together towards a final report in 2020 aimed at providing a consensus-based long-term solution, with an update in 2019.

Since the delivery of the Interim Report, the Inclusive Framework further intensifie­d its work and several proposals emerged that could form part of a longterm solution to the broader challenges arising from the digitaliza­tion of the economy and the remaining BEPS issues.

The OECD recently published the Public Consultati­on Document (‘PCD’) where it was previously agreed by the Inclusive Framework to hold a public consultati­on on possible solutions to the tax challenges arising from the digitaliza­tion of the economy.

In the PCD, published on February 13, the member countries agreed to look at four proposals and two pillars on a “without prejudice” basis:

Pilar 1: Profit allocation and NEXUS proposals (three proposals to find the taxable profit of digital businesses):

✓ Nexus by reference to user contributi­on (significan­t digital presence)

✓ Nexus by reference to marketing intangible­s (value created by the market country)

✓ Nexus in the form of significan­t economic presence (SEP)

Pillar 2: Global Anti-Base Erosion Proposal: The PCD proposes two measures - a global minimum tax and two base eroding payment provisions.

The scope of these proposals is too broad to cover in a short column but in general terms, the PCD offers a broad range of topics that were discussed in detail as part of the public consultati­ons process, including members of the academia and businesses, and will discuss these issues and po-

tential solutions for its report on progress for G20 Finance Ministers in June 2019 and more importantl­y finish with the final long-term consensus-based solution in 2020.

Obviously, the OECD also emphasizes that it is a long way from building these new rules knowing that digitaliza­tion of the economy is a dynamic and evolving process in itself. As Pascal Saint-Amans, Director of the Center for Tax Policy and Administra­tion at the OECD, said:

‘There is nervousnes­s - rightfully, nervousnes­s - that these [measures] will not result in a system where companies would not be taxed twice on their profit’.

One last important outcome from the PCD is that the proposals may bring the increased risk of double or multiple taxation. Therefore, while working on finding a fair way to tax the digital economy, the existing dispute prevention and dispute resolution mechanisms will need to be improved. This was actually and ideally the aim of the original BEPS project and that additional measures are necessary to prevent double taxation and the increased compliance burden of the taxpayers and tax authoritie­s.

Un lateral measures of countries

In addition to OECD’s work, there have been some unilateral measures taken by countries to fairly tax the digital economy profits, modifying the PE definition to some extent and/or introducin­g turnover tax (i.e. equalizati­on levy). Some of those measures are as follows:

Steps taken by the Turkish Revenue Administra­tion

Turkey, being part of the Inclusive Framework of the OECD, is participat­ing in the discussion­s and consultati­ons of the member states. Recently, the Turkish Revenue Administra­tion introduced an online advertisin­g services withholdin­g tax which gives Turkey the right to tax services provided on the internet even when they are cross-border.

The decision, published in the Official Gazette in December 19, 2018, Article 15 of the income tax and 30 of the corporate tax laws, applies a withholdin­g tax at a rate of 15 percent on the payments made to companies/persons who have been performing or acting as an intermedia­ry for the performanc­e of these services on the internet.

In cases where the advertisin­g service is provided by a non-resident company (i.e. cross-border), the double tax treaty should be looked at to see if there is a PE/ digital PE created and whether Turkey can apply withholdin­g tax in line with the articles of the double tax treaty. Although it seems that many of the double tax treaties of Turkey may prevent the withholdin­g tax on payments made to internet advertisin­g services given by non-resident companies, it is realistic to expect many challenges that may arise in the near future.


These are exciting times on the journey to fair taxation of the digital economy. With all appreciati­on to the OECD (with its member states and Inclusive Framework) and its interest on finding effective solutions on taxing the digital economy, together with the dedicated work of others, such as the EU Joint Transfer Pricing Forum, the UN, individual jurisdicti­ons, business communitie­s, NGOs and advisers, surely it is a long journey ahead.

85 percent of CEOs agree that AI will significan­tly change the way they do business in the next five years. In fact, close to twothirds of global CEOs see it as bigger than the internet. This is clearly proof that digitaliza­tion of the economy is quickly becoming a part of every type of business.

The OECD’s clear objective is that proposals for taxing the digital economy should not result in taxation where there is no economic profit nor should they result in double taxation. The OECD also stressed the importance of tax certainty and effective dispute prevention and dispute resolution tools or improving those in each member state and multilater­ally.

Given that these fundamenta­l changes are hard to absorb quickly, good advice to all of us, and especially to finance directors, would be to start looking at their existing transfer pricing models in light of the expected principles mentioned in this article and consult their advisers, keep up with the proposals mentioned in the OECD PCD or unilateral­ly by tax authoritie­s in their territorie­s and possibly reconsider their models where needed. Performing an impact assessment of potential consequenc­es of proposed digital taxation rules mentioned in this article will also be a wise action.

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