Colin Garwood, head of group tax at InterContinental Hotels Group, provides an industry view on BEPS related issues and responds to a recent call for a top-up tax.
Tax Journal has kindly published a paper I have written concerning the BEPS process and related issues (this is available to view here). My particular focus is on issues associated with the digital economy and intangibles. That includes consideration of some related withholding tax and foreign tax credit issues, which are outside the scope of the current BEPS review. I link the analysis with consideration of the more fundamental principles and concepts which underlay the current international system and consideration of whether those principles can still produce outcomes which align with subjective public expectations of where taxing rights should arise.
The paper was prompted by a paper by John Watson concerning the current tax debate. That paper set out and commented on the key reports and suggestions over the years concerning what the best design is for a well-functioning international tax system for taxing corporate profits. It set the current context as a problem of tax-avoidance by multinationals and the need to consider what system is best able to counter that problem. After considering various alternatives for more fundamental reform (for example, unitary tax systems and a pure form of destination tax), he suggests the retention of the current system but supplemented by a destination based top-up tax. As I understand it, that is seen as a means of addressing avoidance which results in supplies being able to be attributed to low-taxed supplier jurisdictions and also incur little or no tax in the customer jurisdiction.
It struck me that we have (at least) two parallel processes and
Where I would hope that there is common ground is that international trade and a thriving business community is a good thing which, within the framework of a well-functioning system, makes a major contribution to the well-being of societies generally. The common challenge
The second area of common ground is that public trust in the system and in business has been
My paper approaches the subject by a consideration of the OECD’s BEPS review; of what we might expect that to deliver in the key action areas linked to the digital economy, intangibles and transfer pricing; and of whether that is likely to deliver outcomes which meet the subjective expectations of both tax professionals and the broader public (concerning both the existence of profits which should be taxed and concerning the allocation of taxing rights between jurisdictions).
One of my fundamental factual contentions is that there is not a discrete economy which can properly be ring-fenced and described as the digital economy. There is rather the technological development of digital functionality which pervades all modern businesses to a greater or lesser degree and which enables functions to be carried out remotely and carried out more rapidly. One consequence of that is that it is questionable whether tax rules can be designed which target companies whose core profit sources come from that digital functionality without having an unintended and punitive impact on digital functionality used within a cost centre function or used for a lower margin peripheral profit centre function.
I conclude from that that the right sequence in which to approach the tax problems arising from this digital
I suggest that whereas that is likely to be the best analytical sequence, we should not lose sight of the fact that the technological capability which now exists to perform functions from a distance is not something which would have been anticipated when the current international tax rules were developed. The current rules thus almost certainly assumed that customer jurisdictions would receive a share of tax on profits from sales in the jurisdiction. This is because it was assumed that business practicalities would mean that there would have to be sufficient nexus to generate one.
There is
When considering BEPS Action 7 permanent establishment issues I suggest
It is important to remember that the existence of a PE will not in itself generate taxes if, after taking into account associated arms' length charges to the PE there would be no attributable profit. The existence of additional tax is thus dependent on transfer pricing considerations. It is
When considering intangibles I contend that the current international tax rules are generally based around the premise that intangibles are passive assets generating pure income profits. The tangible asset comparable would be to a building generating rental income. Whereas there are still classes of intangibles which meet that profile the more general profile nowadays is of active assets whose development, maintenance and exploitation play a dynamic role in a business, and which have significant functions and costs associated with them.
The BEPS process starts to catch up with this profile. In particular, Action 8, concerning transfer pricing of intangibles, might be seen as helping address excessive allocations of profit to legal ownership based on a failure to properly reflect and compensate functions which support many modern intangibles. Its backdrop is still shot through however with implicit assumptions that the profile will be of a few long life intangibles which go through a process of development and then have a long static life of royalty generation-rather than the active profile of continuous creation, modification and replacement which may often apply.
I contend that the result of digital functionality, this modern intangible profile, and its taxation in accordance with the principles of Action 8, has double taxation consequences which the current international framework does not
This is
I suggest that this double taxation problem should be correctable via standard provisions to allow flow through of credits on a pro-rata basis – and should be addressed by the OECD as a follow on
My conclusion from my review of BEPS Actions 7 and 8 (and also 9 and 10, which I do not go into here) is that the types of corrective actions under consideration in the BEPS process should go a long way towards correcting any misallocation of profits resulting from digital functionality or otherwise. If, however, it is concluded that that would still not leave an equitable allocation of taxing rights to customer jurisdictions, then I suggest a system which may give some workable
The system I suggest is one which would make revenue based charges in the source jurisdiction (on a tax return rather than withholding tax basis) where revenues from the jurisdiction exceed a suitably high de minimus threshold. That
Colin Garwood, head of group tax at InterContinental Hotels Group, provides an industry view on BEPS related issues and responds to a recent call for a top-up tax.
Tax Journal has kindly published a paper I have written concerning the BEPS process and related issues (this is available to view here). My particular focus is on issues associated with the digital economy and intangibles. That includes consideration of some related withholding tax and foreign tax credit issues, which are outside the scope of the current BEPS review. I link the analysis with consideration of the more fundamental principles and concepts which underlay the current international system and consideration of whether those principles can still produce outcomes which align with subjective public expectations of where taxing rights should arise.
The paper was prompted by a paper by John Watson concerning the current tax debate. That paper set out and commented on the key reports and suggestions over the years concerning what the best design is for a well-functioning international tax system for taxing corporate profits. It set the current context as a problem of tax-avoidance by multinationals and the need to consider what system is best able to counter that problem. After considering various alternatives for more fundamental reform (for example, unitary tax systems and a pure form of destination tax), he suggests the retention of the current system but supplemented by a destination based top-up tax. As I understand it, that is seen as a means of addressing avoidance which results in supplies being able to be attributed to low-taxed supplier jurisdictions and also incur little or no tax in the customer jurisdiction.
It struck me that we have (at least) two parallel processes and
Where I would hope that there is common ground is that international trade and a thriving business community is a good thing which, within the framework of a well-functioning system, makes a major contribution to the well-being of societies generally. The common challenge
The second area of common ground is that public trust in the system and in business has been
My paper approaches the subject by a consideration of the OECD’s BEPS review; of what we might expect that to deliver in the key action areas linked to the digital economy, intangibles and transfer pricing; and of whether that is likely to deliver outcomes which meet the subjective expectations of both tax professionals and the broader public (concerning both the existence of profits which should be taxed and concerning the allocation of taxing rights between jurisdictions).
One of my fundamental factual contentions is that there is not a discrete economy which can properly be ring-fenced and described as the digital economy. There is rather the technological development of digital functionality which pervades all modern businesses to a greater or lesser degree and which enables functions to be carried out remotely and carried out more rapidly. One consequence of that is that it is questionable whether tax rules can be designed which target companies whose core profit sources come from that digital functionality without having an unintended and punitive impact on digital functionality used within a cost centre function or used for a lower margin peripheral profit centre function.
I conclude from that that the right sequence in which to approach the tax problems arising from this digital
I suggest that whereas that is likely to be the best analytical sequence, we should not lose sight of the fact that the technological capability which now exists to perform functions from a distance is not something which would have been anticipated when the current international tax rules were developed. The current rules thus almost certainly assumed that customer jurisdictions would receive a share of tax on profits from sales in the jurisdiction. This is because it was assumed that business practicalities would mean that there would have to be sufficient nexus to generate one.
There is
When considering BEPS Action 7 permanent establishment issues I suggest
It is important to remember that the existence of a PE will not in itself generate taxes if, after taking into account associated arms' length charges to the PE there would be no attributable profit. The existence of additional tax is thus dependent on transfer pricing considerations. It is
When considering intangibles I contend that the current international tax rules are generally based around the premise that intangibles are passive assets generating pure income profits. The tangible asset comparable would be to a building generating rental income. Whereas there are still classes of intangibles which meet that profile the more general profile nowadays is of active assets whose development, maintenance and exploitation play a dynamic role in a business, and which have significant functions and costs associated with them.
The BEPS process starts to catch up with this profile. In particular, Action 8, concerning transfer pricing of intangibles, might be seen as helping address excessive allocations of profit to legal ownership based on a failure to properly reflect and compensate functions which support many modern intangibles. Its backdrop is still shot through however with implicit assumptions that the profile will be of a few long life intangibles which go through a process of development and then have a long static life of royalty generation-rather than the active profile of continuous creation, modification and replacement which may often apply.
I contend that the result of digital functionality, this modern intangible profile, and its taxation in accordance with the principles of Action 8, has double taxation consequences which the current international framework does not
This is
I suggest that this double taxation problem should be correctable via standard provisions to allow flow through of credits on a pro-rata basis – and should be addressed by the OECD as a follow on
My conclusion from my review of BEPS Actions 7 and 8 (and also 9 and 10, which I do not go into here) is that the types of corrective actions under consideration in the BEPS process should go a long way towards correcting any misallocation of profits resulting from digital functionality or otherwise. If, however, it is concluded that that would still not leave an equitable allocation of taxing rights to customer jurisdictions, then I suggest a system which may give some workable
The system I suggest is one which would make revenue based charges in the source jurisdiction (on a tax return rather than withholding tax basis) where revenues from the jurisdiction exceed a suitably high de minimus threshold. That