3 October 2018
In the 2018 Budget speech the then Treasurer, now Prime Minister, announced that, "The next big challenge is to ensure big multinational digital and tech companies pay their fair share of tax" and foreshadowed the release of a discussion paper to "explore options for taxing digital business in Australia" "in a few weeks’ time". Yesterday almost five months later the discussion paper was released.
The 2018 Budget followed the (more or less) coordinated release in March 2018 by the EU, OECD and UK of separate documents outlining possibilities or proposals for taxing the digital economy, in addition to the BEPS project, which as it turns out was the beginning not the end of troubled tax waters for companies operating in the digital economy.
The Treasury Discussion Paper draws heavily on the EU, OECD and UK papers both in relation to the policy analysis and the possible solutions for taxing the digital economy and provides a concise summary of that work in less than 40 pages instead of the many hundreds of pages produced in Europe, as well as some update on progress since then.
But unlike the deadlines that the EU (end of 2018) and OECD (further progress report in 2019 and final report in 2020) are working towards, Treasury sees any coordinated solution as "several"/"many" years away, and there is apparently little Australian enthusiasm for interim unilateral measures targeted specifically at largely digital companies relying on advertising or intermediation between buyers and sellers for their profits. The discussion of such measures follows the generally negative tone of the OECD and also highlights the emerging lack of consensus within the EU, WTO problems for Australia and US opposition, as well as the many technical challenges in implementation.
On the policy front Treasury notes the penetration of the digital economy in Australia and some of the broader economic and regulatory issues beyond tax to which it gives rise. It identifies the three important features of the digital economy in relation to taxation: scale without mass; reliance on intangible assets; and data, user participation and network effects.
In turn these give rise to different kinds of proposals for taxing the digital economy which are dealt with in reverse order in the paper: the EU/UK justifications for their proposals tend to rely on data and user participation and effectively incorporate the users into the multinational as a kind of unpaid worker, I.e. content and data generated from users is treated as effectively created by the multinational; other proposals suggest further tweaking of the transfer pricing of intangibles, in particular treating marketing intangibles which may explain the dominance of digital firms as generated in the country of the user and/or customer and attributing the return on that intangible accordingly; finally the broader scale without mass idea leads to a virtual PE concept – the requirement of a physical connection in the form of a place of business, people or physical assets in a country as the threshold for taxation has been undone by the digital economy and needs to be reformulated using criteria like country by country revenue and/or users/customers.
Treasury points out that none of these proposals provide any clear method for allocating part of the overall profit to a particular country while avoiding double taxation, though the intangible route at least does not require the abandonment of transfer pricing to achieve the allocation. And it is the allocation (fair share) question which is at the heart of the digital economy tax conundrum as the Treasurer recognised in the 2018 Budget. If a system is ever agreed and adopted it is clear from the Treasury discussion that it will involve various possible keys as rough and ready proxies to effect the apportionment.
No wonder the discussion paper has a somewhat pessimistic tone and that the urgency of tackling the digital economy in Australia seems to have abated.