Taxing the digital economy – a safe harbour solution?

The first meeting of European Commission‘s group on the Digital Economy met on 12 December and it set me thinking about the issue.

I had attended the launch of the Chatham House report on Conflict and Co-existence in resources (a report on which I contributed comments). One of the key issues explored was trying to understand the causes of conflict and finding mechanisms to reduce and resolve them.

This led me to thinking about the current conflicts over taxing the Digital economy. Were there any mechanisms which could be used to solve the current conflicting views of revenue authorities and business?

The route cause of the current conflict is that a number of revenue authorities believe that the current allocation of taxing rights, short changes the value of the market in digital sales. They don’t see this as a general problem with allocation of taxing rights but one specific to digital sales. So this leads one to finding a specific solution rather than changing the international tax framework wholesale. Coming as I do, from a background in the extractive sector, I sympathise with this. A root and branch reform of international tax would need a number of carve outs, one of which would be extractive profits where producing countries do and will insist on taxing the vast bulk of profits wherever the market for the commodities is.

Digital business doesn’t want a separate regime for digital sales. This is clear from the position taken by USCIB in international fora as their representative. I’ve written about the dangers of this tactic for the rest of business in a previous blog (Taxing the Digital Economy).

So is there a tried and tested mechanism which could be used on digital sales? Well it seems to me that a safe harbour would possibly work here. What I would envisage is that countries would agree a profit split safe harbour in regard to digital sales allocating a set % to the market country and the balance to the provider of the services outside the market. Business would have the option to use this agreed safe harbour profit split or arguing any different treatment filed for tax purposes.

Such an agreed multilateral profit split would make clear what revenue authorities expected as the profit split and would allow business to either accept this ( with no risk of double taxation as it would be a multilateral standard) or argue the basis for their specific treatment filed. Business would benefit from certainty if the safe harbour was used. Equally the public would know what tax authorities expected in terms of the allocation of taxing rights for digital sales.

Now for this to work, revenue authorities would need to agree , on a multilateral basis, the profit split. This is a challenge but would reap dividends.

I’m not going to propose what the appropriate profit split would be. Any safe harbour is always rough and ready, but it gives certainty.

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