Duff & Phelps Featured in Bloomberg BNA Transfer Pricing Forum – Taxation and Digitalization of the Economy

Managing Director Simon Webber, Director Andrew Cousins and Vice Presidents TJ Michaelson and Daniel Othmann in Duff & Phelps’ global Transfer Pricing practice, provide U.S. and UK perspectives in the August 2019 issue of Bloomberg BNA’s Transfer Pricing Forum.

The phrase, “the world is a global village” was initially coined in the 1960s to reflect the growing interconnectivity of the world due to the proliferation of media technologies; and is more relevant now than ever before with digitalization transforming every aspect of our lives. It is becoming more apparent that existing international tax rules are not sufficient to meet the needs of a growing digital economy. With the evolution of business models that do not require a physical presence in the market to derive profits, multinationals now derive substantial income in jurisdictions where they have no physical presence (and therefore no tax obligations). The OECD is spearheading efforts to develop a consensus-based, long-term global solution to address these concerns.

In this issue, international transfer pricing practitioners provide their insight on how the tax authorities, as well as multinationals in their jurisdictions, are preparing for the anticipated OECD harmonized global approach to the digitalization of the economy.

Read the full issue here.

The topic on taxation and digitalization of the economy included commentary on the following questions:

1. Please describe your jurisdiction’s (i) preliminary discussions or consultations; (ii) proposed measures; and/or (iii) enacted legislation associated with the taxation of digital activities. The discussion should include income tax and/or value added tax measures. Is there an estimation of the tax revenues that would be collected as a result of the enactment of these measures?
2. What challenges has your jurisdiction faced in the (i) development; (ii) implementation; and/or (iii) tax audit of measures related to the taxation of the digitalized economy? What has been the reaction of multinational enterprises (MNEs) to any of these unilateral measures?
3. (a) In light of the proposed guidance outlined in the OECD’s Public Consultation Document, Addressing the Tax Challenges of the Digitalisation of the Economy, what do you perceive are the key advantages of the i) profit split approach or the ii) fractional apportionment approach in tackling the challenges of the digitalization of the economy? (b) What are the challenges that you see, in practice, when applying these approaches considering the existing transfer pricing framework (e.g., feasibility of splitting profits between routine and non-routine, and then isolating those profits derived from a subset of marketing intangibles; reliability of the use of “place of sales,” “number of employees,” or other factors to spread the profit among jurisdictions; necessary information that should be available to taxpayers and tax administrations)?
4. As the OECD works to develop a harmonized global approach to the taxation of the digitalized economy (anticipated in 2020), what are multinational enterprises (MNEs) in your jurisdiction doing to adapt their operations and business models, in light of the uncertainty during this period? Is it feasible for MNEs to isolate “digital” activity or to segment financial information by activity, product line, or region? Is this already done for purposes other than tax? If not, what would be the main obstacles to producing such information?