Tax Challenges of the Digitalised Economy
Summary of Loyens & Loeffs submission to the OECDfs Request for Input (13 October 2017)
Can we ring-fence the digital economy for corporate tax purposes?
Tax policymakers currently focus on the taxaton of the digital economy. They react to the
percepton that, in partcular, the U.S. tech giants do not pay their fair share of corporate tax
in large European countries. As digital economy businesses are able to achieve a substantial
turnover or profts without (signifcantt local presence, policymakers consider that they are
not or insufciently taxable in the consumerfs jurisdicton under current internatonal tax
rules.
In October 2015, the OECD issued its fnal report on Acton 1 of the BEPS Package (Tax
challenges of the digitalised economy). Recently, the European Commission listed several
optons to tax companies actve in the digital economy. Simultaneously, the OECD organised
a public consultaton requestng input on a number of questons related to the tax
challenges of the digitalised economy. Below is a summary of the submission fled by Loyens
& Loeffs digital economy taxaton experts, expressing doubts about the possibility (and
desirability) of ring-fencing the digital economy for corporate tax purposes.
Corporate tax challenge of digitalisation
The current corporate tax systems are stll largely based on the presumption of
locally organised businesses operatng in close proximity of their customers.
Nowadays, MNE businesses are ofen organised on a regional or even global basis.
The internet has expanded the opportunity to globalise businesses and achieve a
substantal income in a jurisdicton without a (signifcant) physical presence.
The digitalisaton of the economy fosters an INCREASING GEOGRAPHIC DISCONNECT
between the supply side and demand side of income producton. As tech businesses may
supply markets with no or a limited presence, lawmakers are tempted to turn to the
‘demand sidef (consumer markets) taxaton to get a grip on the value created by digital
businesses (ofen referred to as ‘destnaton-basedf taxaton). The current internatonal
taxaton principles are generally allocatng taxaton rights based on ‘supply sidef factors, i.e.,
the ‘originf of income producton, being the place where the signifcant people functons,
the assets and the risks are located.
BEPS is supply sided…
The BEPS Package so far has expressly and predominantly been looking for answers to
counter base erosion and proft shifing issues within the boundaries of the EXISTING
internatonal tax framework (and, of course, introduced many transparency tools). The
impact remains to be seen, once the diferent measures will have been implemented. The
BEPS moto is that profts should be taxed in the jurisdicton where the value creaton
occurs. As explained above, under current internatonal tax principles, the value creaton is
largely ted to supply side factors (people functionss assets and riskt.
Beyond BEPS?
The BEPS project does, however, not (or barely) address more fundamental politcal
questons about value creaton: in the digital economy, how to split value between the
Summary of Loyens & Loeffs submission to the OECDfs Request for Input (13 October 2017)
Can we ring-fence the digital economy for corporate tax purposes?
Tax policymakers currently focus on the taxaton of the digital economy. They react to the
percepton that, in partcular, the U.S. tech giants do not pay their fair share of corporate tax
in large European countries. As digital economy businesses are able to achieve a substantial
turnover or profts without (signifcantt local presence, policymakers consider that they are
not or insufciently taxable in the consumerfs jurisdicton under current internatonal tax
rules.
In October 2015, the OECD issued its fnal report on Acton 1 of the BEPS Package (Tax
challenges of the digitalised economy). Recently, the European Commission listed several
optons to tax companies actve in the digital economy. Simultaneously, the OECD organised
a public consultaton requestng input on a number of questons related to the tax
challenges of the digitalised economy. Below is a summary of the submission fled by Loyens
& Loeffs digital economy taxaton experts, expressing doubts about the possibility (and
desirability) of ring-fencing the digital economy for corporate tax purposes.
Corporate tax challenge of digitalisation
The current corporate tax systems are stll largely based on the presumption of
locally organised businesses operatng in close proximity of their customers.
Nowadays, MNE businesses are ofen organised on a regional or even global basis.
The internet has expanded the opportunity to globalise businesses and achieve a
substantal income in a jurisdicton without a (signifcant) physical presence.
The digitalisaton of the economy fosters an INCREASING GEOGRAPHIC DISCONNECT
between the supply side and demand side of income producton. As tech businesses may
supply markets with no or a limited presence, lawmakers are tempted to turn to the
‘demand sidef (consumer markets) taxaton to get a grip on the value created by digital
businesses (ofen referred to as ‘destnaton-basedf taxaton). The current internatonal
taxaton principles are generally allocatng taxaton rights based on ‘supply sidef factors, i.e.,
the ‘originf of income producton, being the place where the signifcant people functons,
the assets and the risks are located.
BEPS is supply sided…
The BEPS Package so far has expressly and predominantly been looking for answers to
counter base erosion and proft shifing issues within the boundaries of the EXISTING
internatonal tax framework (and, of course, introduced many transparency tools). The
impact remains to be seen, once the diferent measures will have been implemented. The
BEPS moto is that profts should be taxed in the jurisdicton where the value creaton
occurs. As explained above, under current internatonal tax principles, the value creaton is
largely ted to supply side factors (people functionss assets and riskt.
Beyond BEPS?
The BEPS project does, however, not (or barely) address more fundamental politcal
questons about value creaton: in the digital economy, how to split value between the
