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ETNO
European Telecommunications Network Operators' Association

2014

| ETNO

ETNO response to the OECD’s Public Discussion Draft on the Tax Challenges of the Digital Economy

An invitation for comments on the OECD public discussion draft on BEPS Action 1 (Address the Tax Challenges of the Digital Economy) was published on the OECD Website on 24 March 2014, with a deadline of 14 April 2014. 

The ETNO-GSMA Tax Policy Committee (The Committee) appreciates the opportunity to provide its input at this stage of the process and provides the following comments.

The Committee welcomes and supports the purpose of the Task Force and is willing and available to provide its contribution in this or future phase of this complex work.

The Committee strongly supports the principle that the possibly complex tax challenges that are posed by an evolving economic environment should be addressed in a comprehensive way at OECD level. The Committee anyhow acknowledges that some European Union countries have tried to unilaterally deal with the problem: this is not the way. The lack of coordination could be very harmful: double taxation (or even double deduction) situations might arise.

Businesses operating in the field of digital economy are aware of the urgency to find a solution to the BEPS issue. In this perspective, it seems appropriate to establish a set of common rules; such rules should be:

  • Compliant with EU fundamental  principles, Directives and Regulations
  • Capable to ensure a fair level of taxation, in accordance with some agreed drivers and guidelines referring to some key questions (e.g., the appropriate place of taxation both for direct and indirect taxes; the appropriate compensation in case of intergroup transactions)

  • Capable to ensure a level playing field (as far as taxation is concerned) in the competitive scenario

  • Workable from a business point of view (even in a cross-border scenario, which is often the rule for the digital economy transactions) and easily auditable from the tax administrations’ point of view

  • According to this set of rules, there should be no room for any case of double taxation (nor for any case of zero/close to nil taxation as a result of wholly artificial arrangements or unintended consequences of legislative mismatches), since such cases could be very harmful for the definition of a fair competition environment, and a co-operative relationship with the tax authorities.

  • A last, but not least, fundamental principle of the digital economy (future) taxation guidelines, should be the neutrality in the tax treatment of operations and supplies, in comparison with the corresponding physical products; lack in neutrality might result in a lowering of digital economy huge potential.

  • The same neutrality should be applied to the telecommunications services and the various business arising from the digital economy; it’s clear that the relationship between them is significant, and shall become even more. Taxation principles have surely to consider this perspective, in order to avoid discriminations and lack of workability.

  • Currently clear distortion exists between services being offered by nationally regulated telecoms operators and trans-national Internet service providers which offer services across borders which can offer clear advantages in terms of industry specific taxes or even corporate income taxes.

  • Specifically the negative impact of mobile-specific taxes on consumers, the operators and the country economic development should be considered and assessed carefully in order to try and avoid as far as possible the introduction of distortive measures which heavily affect the creation of even playing field.

A. General comments on the Discussion Draft.

  1. The Committee fully endorses the Task Force’s view that  the "Ottawa Taxation Framework Conditions", i.e. Neutrality, Efficiency, Certainty, Simplicity, Effectiveness, Fairness, Flexibility are still relevant today. The Committee considers that the above principles should be the basis to evaluate any options to address the tax challenges of the digital economy.

  2. The Committee fully supports the Task Force’s decision that ring-fencing the Digital Economy as a separate sector and applying ad hoc tax rules is neither appropriate nor feasible. The Committee is of the opinion that the Digital Economy is not characterized  by the presence of new business models, instead ‘digital’ is really just a means of delivery and any concerns should be addressed by the appropriate application of transfer pricing rules, tax treaties and challenges to artificial arrangements. If BEPS Action Points 6-10 are appropriately addressed then there should be little need to focus on special measures for digital goods and services, data analytics, IP, and other intangibles. 

  3. The Committee does not share the Task Force’s statements in some paragraph of the Discussion Paper (e.g. 126, 127, 128, 129) where it is somehow envisaged that multinational systematically misrepresent to tax authorities the actual functions, assets and risks located in a jurisdiction. Reference to words like "alleged", "purported" etc. does not help in creating a cooperative environment to find an effective solution to the BEPS issue. The Committee  thinks that current rules do already exist in most jurisdictions to effectively target these alleged behaviors which are not typical anyhow of the Digital Economy. The Committee considers that there is no need to introduce new rules, options, taxing models to this purpose.

  4. The Committee considers that ways to improve the current dispute resolution mechanism are a necessary part of the BEPS initiative in the Digital Economy (actually not just in the Digital Economy). The Committee has noted that no reference to this very critical issue exists in the Discussion Paper and would very much welcome its inclusion.

  5. The Committee is particularly concerned that formulary approaches are considered in different parts of the Discussion Draft where the Task Force deals with interest deductions (Para 157) or business risks (para 163) or base eroding payments (Para 165). The Committee considers this potentially disruptive as it could erode the Arm’s Length Principle.

  6. The Discussion Draft deals with the topic of Cloud Computing Taxation (para 187 and 188): this is a highly complex topic which requires careful consideration of the consequences of any possible option. The Committee is of the opinion that any attempt to qualify the relevant payments requires an in-depth analysis of the very complex technical implication of Cloud Computing and is available to support in this field, if required.

B. Potential Options to address the broader tax challenges raised by the digital economy.

  1. Modification to the exemptions from PE status: the Task Force is considering several variation, included the elimination of the paragraph 4 of article 5 of the OECD Model Tax Convention. This needs to be carefully managed and its consequences assessed in order to avoid to trigger undue taxation in jurisdiction where mere preparatory and auxiliary activities are carried out.

  2. The Committee noted that the Discussion Draft defines a "fully dematerialized digital activity" by means of a list of qualifying elements (para 213). Starting from that, the Discussion Draft tries to identify a “significant digital presence” in a jurisdiction by considering a number of features. The Committee considers that this is exactly the way of ring-fencing the digital economy which the Task Force itself has stated to be neither appropriate nor feasible.

  3. The whole concept of  "Virtual PE" is also seen as potentially creating some real challenges to operators merely wanting to transact across borders.

  4. Creating a WHT on digital transactions: in general terms, revenue is a poor proxy for net income and in any case, the principle of introducing a wht on digital transactions stems, once again,  from the ring-fencing of the digital economy.
  5. The Committee acknowledges that the Discussion Draft deals with the potential challenges of collection of VAT in the Digital Economy.  The Committee appreciates that remote digital supplies to consumers are currently being dealt with by WP9 through the OECD VAT/GST TAG process (to which The Committee contributes). The Committee is of the opinion that the TAG process is the most effective and appropriate considering the highly technical subject.  The Committee here wants anyhow to highlight two comments:
  • The Committee welcomes the Task Force’s statement at paragraph 223 that registration thresholds should be used to alleviate burdens on business and to make VAT systems workable in practice. This is important to ensure that businesses are not forced to register for VAT and to deal with all the complexities of a different VAT system in relation to a small number of supplies. The use of thresholds is therefore important in order to ensure that the cost of compliance is proportionate for business. In this respect, it is important to note that simplified registration procedures is only part of the answer to alleviating the burden of business of having to register for VAT remotely – it must be coupled with registration thresholds in order to ensure that businesses  are only required to register for VAT where there is a sufficient level of supplies in order to make this worthwhile for both the business and the tax authority.

  • The Committee considers that it is extremely important that the VAT place of taxation/registration rules remain separate and distinct from the rules which apply to the determination of a PE in a corporate tax context.

We look forward to continued dialogue on this important topic.

Best regards,

Daniel Pataki, Director, ETNO 

Martin Whitehead, Director, GSMA Europe



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  • Ericsson
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  • Nokia
  • Prysmian Group
  • Qualcomm Europe Inc.
  • Verizon

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