OECD has decided to go ahead with a global digital tax

The OECD member states have agreed to move ahead with the plan to reach a global solution by 2020 to harmonise tax regimes on the digital companies.

The OECD and the G20 have a joint working mechanism, called Inclusive Framework, to address the tax issues related to digital economy, what are covered under an umbrella concept of Base Erosion and Profit Shifting (BEPS). After the most recent Inclusive Framework meeting held 23-24 January, a Policy Note was published to outline the agreed framework of the future solution.

“The international community has taken a significant step forward toward resolving the tax challenges arising from digitalisation. Countries have agreed to explore potential solutions that would update fundamental tax principles for a twenty-first century economy, when firms can be heavily involved in the economic life of different jurisdictions without any significant physical presence and where new and often intangible drivers of value become more and more important,” said Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration. “In addition, the features of the digitalised economy exacerbate risks, enabling structures that shift profits to entities that escape taxation or are taxed at only very low rates. We are now exploring this issue and possible solutions,” Saint-Amans added.

In essence, the solution will be based on consensus on two key areas, or “pillars”: “One pillar addresses the broader challenges of the digitalised economy and focuses on the allocation of taxing rights, and a second pillar addresses remaining BEPS issue,” as the Note put it.

The first pillar will focus on how to modify the current tax practices based on physical locations of the businesses, re-examining the so-called ‘nexus’ rules, that is how to determine the connection a business has with a given jurisdiction, and the rules that govern how much profit should be allocated to the business conducted there.

The second pillar refers to the issues not yet addressed by the on-going BEPS project. In the past two years, a Forum on Harmful Tax Practices (FHTP), under the aegis of OECD/G20 BEPS Project, has reviewed and assess 255 tax regimes (there can be multiple tax regimes in one tax jurisdiction). The majority of them are either deemed not harmful, or amended to be not harmful, or abolished. These are submitted by signatories on the “Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting”. So far, 87 jurisdictions have signed on the Convention. 19 of them have completed their domestic ratification processes, where the Convention has already become effective, or are going to come into effect soon.

However, the Inclusive Framework recognises that BEPS would not be able to cover every loophole, and there would be “continued risk of profit shifting to entities subject to no or very low taxation through the development of two inter- related rules, i.e. an income inclusion rule and a tax on base eroding payments”. Therefore the second pillar will be on how to make the solution more future-proof.

More detailed proposals will be published in the coming weeks, and they will be submitted to the next G20 Summit meeting in June.

The OECD/G20 programme is part of a global move to hold the webscale companies accountable to their tax obligations. Earlier countries like France and Spain have taken the matter in their own hands, while the EU was working to reach a Union-wide consensus but failed be approved by the Council of Finance Ministers. However, if the OECD consensus is accepted by 2021, the EU would withdraw its own tax anyway, according to the original plan.

Tax regulations can become draconian. For example, the US tax code has gone from 400 pages in 1913 to nearly 75,000 pages now. The Inclusive Framework is mindful of the danger, therefore demand the member jurisdictions “to make any rules as simple as the tax policy context permits, including through the exploration of simplification measures.”

And the spin war over net neutrality begins with a letter

465 words followed by 17 pages of signatures has showed some of the tactics the internet players will use to fight the net neutrality battle.

With the telcos putting forward strong statements last week in support of FCC Commissioner Ajit Pai’s strategy to dismantle net neutrality rules, a horde of internet-based businesses, including Twitter and Tumblr, have penned an open letter arguing the benefits of the open internet. And some might say it is a pretty clever move.

“This economic growth is possible because of the free and open internet. Our current net neutrality rules support innovation and give all businesses the opportunity to compete equally for consumers,” the letter reads.

“With strong net neutrality protections, the internet is an open marketplace where any business can compete, allowing individuals to start companies easily, market their products across the country, and connect with customers anywhere worldwide.”

Whether this tactic works remains to be seen, but it could turn out to be a useful one. The internet companies are fighting on behalf of all the small businesses, all the entrepreneurs and all those who have been swallowed up by the corporate machine but still harbour a dream of making their own millions with a brilliant idea. The message here is clear, remove net neutrality rules and you will kill the ambition of the individuals; you will destroy the American dream.

This is what might hurt Pai and his cronies. Not the fact that there is the possibility corporates might take advantage of big bank accounts and effectively remove the level playing field that the internet created, but it will kill the ambition of the individual.

“Businesses may have to pay a toll just to reach customers,” the letter continues. “This would put small and medium-sized businesses at a disadvantage and prevent innovative new ones from even getting off the ground. An internet without net neutrality protections would be the opposite of the open market, with a few powerful cable and phone companies picking winners and losers instead of consumers.”

All of a sudden Pai is the bad guy. He isn’t granting the telcos the opportunity to be creative and connect the rural economy anymore, he’s the guy who said that little Timmy can’t sell blueberries over the internet anymore because the big blueberry monster is paying to have traffic prioritised to its site.

PR spin moves are nothing new in the often complicated and contradictory US, but remember, Pai isn’t just a lawyer. Since taking office at the FCC he is now also a politician. A move like this could make him unpopular, and cost the Republicans votes. We’ll see how far Pai’s camera-friendly smile will get him now.

Of course, it would silly to presume that net neutrality rules will destroy all and every opportunity for you and your multi-billion dollar idea. Facebook for example will not prioritise traffic on its own platform, as you have to pay for it anyway. And Twitter’s platform will allow you to get out there if you are a savvy enough tweeter. But this is what you can come to expect over the next couple of months.

Because the net neutrality rules probably lie too far on the side of over-regulation, and Pai’s wild west internet will probably offer too much freedom to the corporates, the claims of advocates on either side will be extreme as well. As soon as a middle ground for net neutrality is found, the world will probably carry on pretty reasonably; the telcos will be able to make money, and the internet will offer the small guys an opportunity to compete with the corporates.

That said, if which you were hoping to see any logic portrayed in this political battle field, we’d probably recommend keeping your opinions to yourself for the moment. This is quickly turning into the playground for the partisan, the exaggerators and the divas.