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International taxation in the digital economy: challenge accepted?
14 August 2017, by Christoph Spengel and Marcel Olbert

The digitalization of the economy is considered as a key driver of innovation, economic growth, and societal change. At the same time, it poses a major challenge to the international tax system.

The OECD has addressed this challenge in its extensive Action 1 Final Report as part of the BEPS project, which also includes a diverse set of scholarly reform proposals and unilateral initiatives. The EU has issued a similar report confirming the OECD’s view.

Neither the OECD’s Final Report on Action 1 nor the academic literature produce a clear and unanimous answer to the question of how to address the tax challenges of the digital economy. With regard to the determination and taxation of corporate profits, the OECD and the EU are unlikely to propose a departure from the current principles of assessing the “functions, assets and risks of the enterprises concerned”. Rather, they promote selective adoptions of current standards.

BEPS Actions will not make much difference

The implementation of specific BEPS action points in national or supranational law faces obstacles of compatibility with EU law, and proposals regarding transaction and withholding taxes for the digital economy might collide with international trade law. Several scholars highlight that the key question for taxing businesses in the digital economy is how to allocate profits generated by the underlying new types of business models.

Yet, the OECD’s preferred proposal to amend the exception of auxiliary and preparatory activities from the permanent establishment (PE) status will not significantly affect income allocation in the digital economy (amended Paragraph 4 of Article 5(4) of the OECD-Model).

Read the full article at Austaxpolicy blog.

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