As digitalization is changing the economy and the way it works at an increased pace, lawmakers are working on adapting the legislative framework to the new digitalized business models. As the OECD, the EU and many local tax authorities take sometimes conflicting positions, Switzerland has made public its position, which strives at applying the arm’s length standard and at ensuring a fair and sustainable taxation model.
Authors: Céline Bulard, Senior Manager and Nate Zahnd, Senior Consultant, Transfer Pricing and Operating Model Effectiveness, Zurich
Challenges of taxing digital value creation
There is an inherent difficulty when determining the jurisdiction in which (digital) value creation occurs, because the value in digital can, and typically is, delivered from multiple locations. Further, the digital economy has an unparalleled reliance on intangible assets, which adds to tax complexity. Massive creation and use of data, the value of which is hard to measure (notably personal data) is a new phenomenon to taxing authorities. This all raises fundamental questions as to how enterprises rely on digital processes, workflows or tools to add value, and how the digital economy relates to the concepts of source and residence and the characterization of income for tax purposes. At the same time, new ways of doing business may result in a relocation of core business functions and, consequently, a different distribution of taxing rights. This combination of factors is one of the biggest unsolved issues in tax today.
Searching for a common approach to taxing the digitalized economy
It is a hotly debated topic and both the OECD and EU are trying to find consensus on a common approach. The OECD released a policy note addressing the tax challenges of the digitalization of the economy on the 23rd of January this year announcing the goal to find a long-term solution by 2020. Shortly after, the OECD released a public consultation on the digital tax challenges asking for comments on the different proposals for the introduction of a digital service tax. The 32-page consultation document has been summarized by EY in a Global Tax Alert and EY provides comments on the proposed methods. The EU released a proposal in March 2018 but failed to find a common ground. Various Member States (e.g. the United Kingdom, Austria, Italy, Spain or France) have chosen to implement unilateral solutions. These unilateral turnover-based taxes, however, heighten the risk for double taxation of affected companies.
Switzerland in the eye of the digital taxation storm
In the storm of these developments, the Swiss Secretariat for International Finance confirmed its goal for a state-of-the-art corporate taxation and fair tax competition in an official (updated) position paper on 15 January 2019. With the OECD and EU striving for a common approach and multitude of states proposing unilateral taxes on the digital economy it is undeniable that the transfer pricing environment is changing. Switzerland knows how important it is to have the best possible framework for digital business models and innovations, including in the area of taxation. Switzerland is thus in favor of tax rules that both enable and promote innovation and sustainable competition, and safeguard its tax receipts.
In view of the comprehensive efforts to increasingly tax digital aspects of businesses, it is advisable for Swiss companies whose value chain is impacted directly or indirectly by digital matters to systematically monitor current developments. The OECD consultation document contains proposals which, if implemented, would represent a significant departure from current international tax systems. Some of the proposals go way beyond current internationally-accepted transfer pricing norms. As is acknowledged in the consultation document, some of the proposals would have implications for a wide range of businesses whether digitalized or more traditional.
Please do not miss the chance to listen to our latest webcast, which is devoted to this topic. This webcast in the Taxation of the Digitalized Economy Series covers recent developments in the digital tax space and helps C-suite and tax executives secure clarity on several key issues and in critical areas that could have far-reaching impact on local, national and global taxation.