BEPS Action 1 – Tax Challenges of the Digital Economy

BEPS Action 1 “Addressing the tax challenges of the digital economy” addresses the tax challenges of the digital economy and aims to identify and address the main challenges that the digital economy poses for the existing international tax rules.

The issues examined include:

  • The ability of a company to have a significant digital presence in the economy of another country without being liable to tax due to the lack of nexus under international rules;
  • The attribution of value created from the generation of marketable location-relevant data through the use of digital products and services;
  • The characterisation of income derived from new business models; the application of related source rules; and
  • How to ensure the effective collection of VAT/GST with respect to the cross-border supply of digital goods and services.

The Final Report on BEPS Action 1 refers to work done on other Actions that address the tax challenges of the digital economy, including on permanent establishments (Action 7), transfer pricing (Actions 8-10) and the controlled foreign company proposals (Action 3).
In that regard, the Final Report recommends:

  • Modifying the list of exceptions to the definition of permanent establishment (PE) regarding preparatory or auxiliary activities as they relate to a digital environment and introducing new anti-fragmentation rules to deny benefits from these exceptions through the fragmentation of certain business activities;
  • Modifying the definition of a PE to address artificial arrangements through certain “conclusion of contracts” arrangements;
  • A correlative update to the Transfer Pricing Guidelines; and
  • Changes to the controlled foreign company (CFC) rules addressing identified challenges of the digital economy.

The Final Report also addresses the indirect tax treatment of certain digital transactions, recommending that countries apply the principles of the OECD’s International Value Added Tax and Goods and Services Tax (VAT/GST) Guidelines as well as consider the introduction of the collection mechanisms included therein.

Future work in the area of BEPS Action 1 will be conducted in consultation with a broad range of stakeholders, and on the basis of a detailed mandate to be developed by the OECD during 2016 in the context of designing a globally inclusive post-BEPS monitoring process.

The Task Force on the Digital Economy will continue its work by monitoring new digital economy models and effectiveness of the BEPs measures.  A supplementary report reflecting the outcome of continued work on the overall taxation of the digital economy should be released by 2020.

The OECD intends to develop implementation packages to enable countries to implement the OECD’s International VAT/GST Guidelines in a coordinated manner.

Australia’s response

The Australia Government introduced new GST legislation that imposes GST on certain intangible supplies (such as imported digital products) by non-residents to Australia customers, from 1 July 2017. Under the measure, supplies of digital products, such as streaming or downloading of movies, music, apps, games and e-books as well as other services such as consultancy and professional services will receive similar GST treatment whether they are supplied by a local or foreign supplier. The amendments, made by the Tax and Superannuation Laws Amendment (2016 Measures No 1) Act 2016, were enacted in May 2016. The Act also made a number of changes to minimise compliance costs for non-resident suppliers.