The BMG has submitted its response to the OECD discussion draft on Addressing the Tax Challenges of the Digital Economy: BMG Digital Economy submission 2014.
We agree with the OECD that `ring-fencing the digital economy as a separate sector and applying tax rules on that basis would be neither appropriate nor feasible’. In fact, we consider that it is more appropriate to refer to the `digitalised economy’. We believe that segregating specific types of digital transactions, so-called ‘fully dematerialized digital activities’ as suggested in the OECD report constitutes ring-fencing, and thus is neither appropriate nor feasible.
In our view, the shift to a digitalised economy has made it starkly apparent that the traditional test of taxable presence, the concept of Permanent Establishment, must be revised. We explain the reasons for this in more detail in the submission. Without such a change the BEPS project would not comply with its mandate from the G20 that `the existing international tax rules on tax treaties, permanent establishment, and transfer pricing …[must…] ensure that profits are taxed where economic activities occur and value is created’.
The submission proposes that taxable presence should be defined in terms of a Significant Presence, which should reflect the contribution to value added resulting from the closer and interactive relationships with customers characteristic of the digitalised economy. These should include:
(a) relationships with customers or users extending over six months, combined with some physical presence in the country, directly or via a dependent agent;
(b) sale of goods or services by means involving a close relationship with customers in the country, including (i) through a website in the local language, (ii) offering delivery from suppliers in the jurisdiction, (iii) using banking and other facilities from suppliers in the country, or (iv) offering goods or services sourced from suppliers in the country;
(c) supplying goods or services to customers in the country resulting from or involving systematic data–gathering or contributions of content from persons in the country.
Although broad, these criteria would still exclude many businesses involved in the digitalized economy. For example, a software designer which supplies a program in digital form to customers all over the world from a single website in the language of its residence country would not be covered. The aim of the definitions is to capture situations where the firm has a significant presence in the host country although digitally, and to include the element of value added from systematic collection of data and contributions of content from persons in the host country.