Towards an International Corporate Tax Framework for Pure

Towards an International (Corporate? ) Tax Framework for Pure Digital Transactions Dina Scornos – Ph. D Candidate K. U. Leuven 24 th Annual Ius Commune Conference Leuven 28 November 2019

Outline 1. Brief description of the Ph. D research 2. Permanent Establishment Rules a) OECD Model Convention (2017) b) Long-Term Reform Proposals: Current Status i. ii. EU Significant Digital Presence (2018) OECD “Unified Approach” (2019) 3. Permanent Establishment Issues – Cloud Computing Simplified Case Study 4. Some Open Questions 2 Faculteit Rechtsgeleerdheid

Brief Description of the Ph. D Research Context • Significant increase in digitalisation in the last 30 years (use of the Internet) • Digitalisation has had 2 major consequences for businesses: • Facilitation of transactions e. g. use of websites to provide information on products or even conduct sale (e. g. Amazon’s retail business) • Development of new types of transactions that are essentially digital, e. g. cloud computing (e. g. AWS), sale of digital content like software over the Internet, social media platforms, etc. • Ph. D research focusses on the second type of transactions – also commonly referred to as highly digitalised business models (in my Ph. D: pure digital transactions) 3 Faculteit, departement, dienst …

Brief Description of the Ph. D Research International Corporate Tax Challenges • Characterisation of income • It is not always clear how to characterise new types of digital transactions – relevant for taxation purposes (e. g. royalty vs. business income) • Lack of physical presence in the State where the activities are taking place • Pure digital transactions are carried out to consumers located in a market without requiring any physical presence there • Profit allocation • Even if taxing powers could be allocated to the market jurisdiction, current international tax rules are not suited to determine the amount of profits to tax • Data as a new source of income • New element to take into account for purposes of taxation – does it provide for nexus? How to value? Etc. 4 Faculteit, departement, dienst …

Brief Description of the Ph. D Research Main research question and sub-questions • What is an appropriate international corporate tax framework for pure digital transactions? • How is the current international corporate tax system applied to pure digital transactions? • How are taxing powers allocated amongst States in the case of pure digital transactions under the current international corporate tax system? • How do current profit allocation rules apply to pure digital transactions? • What are the relevant criteria to assess the appropriateness of the current international corporate tax system for pure digital transactions? • How could the current international corporate tax rules be improved or amended in light of the relevant criteria (under 3) 5 Faculteit, departement, dienst …

Permanent Establishment Rules OECD Model Convention (2017) • Fixed place of business PE • Place of business such as premises, facilities but also machinery or equipment at the disposal of the non-resident enterprise • The place of business must be fixed • The business of the enterprise must be carried through the fixed place of business and it is not of an auxiliary or preparatory nature • A server can constitute a PE if all the conditions are complied with • Agency PE • Presence of dependent agents in the non-resident state that habitually conclude/negotiate contracts • Agents should be people not relevant for pure digital transactions 6 Faculteit, departement, dienst …

Permanent Establishment Rules Long-term Reform Proposals: Current Status • 2018: Recent proposal by the EU: Significant Digital Presence (eventually incorporated in the CCCTB) applicable to digital services Currently on hold • 2019: Recent proposal made by the Secretariat of the OECD: A “Unified Approach” for “consumer-facing businesses” attempt to design a uniform approach at global level Ongoing discussions on this proposal: Public consultation took place on 20 -21 November 2019 Outline of this approach would need to be agreed on by January 2020 – Final report to appear by the end of 2020 7 Faculteit, departement, dienst …

Permanent Establishment Rules EU Significant digital presence (2018) • Applicable to digital services performed through a digital interface to users located in a MS • When one of the following quantitative threshold is exceeded: • Proportion of total revenues obtained from the supply of digital services to users in a MS > 7 M € • N° of users located in a MS > 100 K • N° of business contracts in a MS > 3 K • The term ‘users’ is broadly defined as “any individual or business” • A user is deemed to be located in a MS when it uses a device in that MS to access the digital interface through which the digital service is supplied 8 Faculteit, departement, dienst …

Permanent Establishment Rules OECD Unified Approach (2019) • New nexus rule on top of the traditional PE rule applicable to ‘consumer-facing businesses’ but also businesses dealing indirectly with consumers • Nexus is established in a jurisdiction simply when a certain threshold (e. g. amount of revenues generated in that jurisdiction) is exceeded simplification • The OECD points out that the new nexus rule would be applicable “in all cases where a business has a sustained and significant involvement in the economy of a market jurisdiction, such as through consumer interaction and engagement, irrespective of its level of physical presence in the market” • The term ‘market jurisdiction’ has not been defined 9 Faculteit, departement, dienst …

Permanent Establishment Issues Cloud computing – Simplified Case Study fee LUX Cloud computing ACo streaming NCo DE FR S 1 S 2 BE NL Facts: • ACo Lux has a contract with its customer NCo NL for various CCS: e. g. storage but also AI such as analytics, chatbot • A fee is paid by NCo NL to ACo LUX for the CCS provided • Servers used are located in France and Germany • NCo’s customers are located in Belgium (and are streaming in Belgium) 10 Faculteit Rechtsgeleerdheid

Permanent Establishment Issues OECD Model Convention (2017) fee LUX Cloud computing ACo FR S 1 S 2 PE? 11 streaming NCo DE PE? BE NL • Assumption: business profits • ACo Lux does not have a fixed place of business in the state of the customer (NL) /end-user (BE) No PE • Server PE in DE and FR? • Server <-> website • At the disposal of? • Preparatory or auxiliary? Could apply in theory but desired effect? • location of server ≠ location of customers Faculteit Rechtsgeleerdheid

Permanent Establishment Issues EU Significant Digital Presence (SDP) (2018) fee LUX Cloud computing ACo DE S 1 12 BE NL streaming NCo FR S 2 ACo SDP? • Potential SDP in the NL • CCS are provided to a user in the NL • Potential SDP if quantitative thresholds are exceeded in the NL • Potential SDP in BE? • Term ‘user’ very broadly defined, which could also include end-users • Too far? Since BE customers do not download anything on their computer Faculteit Rechtsgeleerdheid

Permanent Establishment Issues OECD Unified Approach (2019) fee LUX Cloud computing ACo DE S 1 PE? 13 BE NL streaming NCo FR S 2 PE? ACo New Nexus? • New nexus rule • NL? It can be argued that ACo has a sustained and significant involvement in the Dutch economy • BE? Same reasoning could be applied; BE customer receives services through combined efforts from ACo and NCo Importance of the term ‘market jurisdiction’ • Quid old PE rules? Still PE exposure in DE and FR based on the server PE rule? Faculteit Rechtsgeleerdheid

Some Open Questions • New tax rules proposed from the OECD are designed primarily with simplification in mind step away from the value creation principle? • Old PE rules should remain undisturbed will the interaction between the new nexus rule and the old PE rule be clear and adhere to the principle of tax certainty ? • Does this new design ultimately lead to a ‘fair’ result for all parties concerned? 14 Faculteit, departement, dienst …