Presentation used during the October 23rd 2019 Seminar at the Central University of Finance and Economics, Beijing. Part of the slides are taken (and adapted for the Chinese audience) from my previous lectures in the UK and Turkey.

1. The “Great Game” of Digital Taxation:
International Latest Developments
Professor Marco Greggi
Beijing, October 23rd 2019
1

2. Outline of the Presentation
• Digital Taxation, history repeating ?
• Similarities and differences with the conflicts of the XIX Century;
• The core issues of digital taxation;
• The OECD Recommendation in the BEPS Plan, Action 1;
• Latest developments as on October 9th 2019
• The European Experience (and the Italian one).
2

3. Where’s Ferrara ?
3
Ferrara

4. What’s in Ferrara ?
4
www.giuri.unife.it

5. The State of the Art,
introducing the the Great Game
5

6. Similarities with the 大博弈
Russians: «Tournament of Shadows»
1. New, unchartered
territory;
2. Conflict between two
Empires (with minor
players, such as China);
3. Soft attrition, no full scale
conflict;
4. Importance of the
confrontation, going
beyond the specific
theatre.
1. New Taxable Base,
unveiled;
2. Conflict between the US
(so far) an many other
developed countries;
3. Policy decisions,
proposal,
recommendations;
4. Digital war as a segment
of a vast confrontation
(commercial conflict, …)
6

7. The Latest Developments in the
Great Game
• OECD Recommendations in the framework of Action 1;
• The Wayfair vs South Dakota decision by the US Supreme Court ?
• Proposals by the European Commission on Digital taxation / Fair
Taxation / … (March 21st 2018);
• Decision by States to “go alone”.
7

8. Preliminary Findings …
• Taxation has always been connected with the territory (on some
occasions, with citizenship);
• Power to tax has been traditionally justified on different grounds
with a link (allegiance) with (to) the territory and the state;
• European Concept of sovereignty (Cuius Regio, Eius Tributum) –
(Whose Realm, Its Tax).
8

9. The Westphalia Paradigm
9
1648, in cities of Osnabrück and Münster the
European wars of religion ended
Shunzhi Emperor (1638 –1661), third Emperor of the
Qing dynasty, first Qing emperor to rule over China after
the defeat of the Ming dynasty.

10. … and How Digital Economy
has changed
• Digital taxation (1999 – 2018);
• The Net as it was:
• Facilitate contacts and connections;
• Increase business opportunities;
• A channel of contact trough which content is conveyed;
• The Net as it is:
• A place where content is stored (cloud);
• A place where data are managed and operated;
• A new territory is born.
10

11. The OECD Position
• Base Erosion and Profit Shifting project, Action 1: addressing the Tax
Challenges of the Digital Economy;
• October 5th 2015, the Final report focuses on three main areas of
intervention;
1. Permanent establishment;
2. Transfer pricing (taxation ancillary to value creation);
3. CFC update, as to address digital businesses.
• Not recommended:
• Equalization levy, digital presence test, specific WHT.
11

12. Theory and Practice
12Marco Greggi
Mario Greggi
Trade Marks of the respective owners. The business circumstances described on the slide do not necessarily match the real situation.

13. The “Fortnite” model
13
Trade Marks of the respective owners. The business circumstances described on the slide do not necessarily match the real situation.

14. … and Why It Matters
• Value Creation is hard to be defined if a new territory is considered:
• Emphasised the role of the content providers / services related businesses;
• Use of reasonable Proxies:
• Place where pro-users are resident ?
• In the VAT: place where consumers are ?
• No sound solutions so far.
14

15. Chinese position
and policy strategy
• China as hardware provider less affected by Digital concerns so far;
• Nintendo …
• Apple …
• …
• In the long run ?
• Software provider ?
• Necessity / possibility to confront other countries in the taxation of services
delivered in China ?
• Management of the local market as to confront global competitors from an
advantageous position, now.
15

16. Case 1
16Trade Marks of the respective owners. The business circumstances described on the slide do not necessarily match the real situation.
delivery
Sale

17. Case 2
17Trade Marks of the respective owners. The business circumstances described on the slide do not necessarily match the real situation.
delivery
Sale

18. Case 3
18Trade Marks of the respective owners. The business circumstances described on the slide do not necessarily match the real situation.
Order placement

19. The Commissioner's Strategy
• Two Prongs approach:
• Soft law:
1. Recommendation to the Member state to re-negotiate wherever / whenever possible
DTCs with third countries consistently with the necessities of the digital economy;
• Hard Law:
1. Directive proposal addressing the definition of permanent establishment where DTCs
are not in force with third countries, as to attract more income in the EU in qualified
circumstances COM (2018) 147;
2. Directive proposal introducing a new Digital Tax to target specific digital operations
COM (2018) 148.
19

20. Digital Presence and the PE
• Article 4, § 3 of the (proposed) Directive.
• A digital presence occurs when:
• Revenue originated via digital services in the country exceeds € 7.000.000 or
• The number of users exceeds 100.000 or
• The number of business contracts exceeds 3.000;
• And is applicable to:
• Both EU and non-EU resident businesses;
• And is applicable if:
• A conflicting DTC is not in force with the third Country.
20

21. The Web Tax
• "Third kind" of (digital) taxation targeting (Article 3):
1. Advertising;
2. "Multi-sided digital interface" (aka social networks);
3. Transmission of data collected about users (for advertising purposes);
• It is triggered if the taxpayer's:
• Worldwide revenue accounts for more than € 750.000.000 and
• EU revenue accounts for more than € 50.000.000;
• …
• It is applied with a rate of 3%;
• Around 19 articles out of the 27 of the Directive deal with compliance duties
(…).
21

22. Is This for Real ?
• European solution is VAT-centric in the case of digital presence and PE
definitions, and is Excise-centric in the case of the Digital tax;
• Arguments against the actual implementation:
• Lack (so far) of unanimity within the EU (not a zero-sum game);
• Arguments in favor of it:
• South Dakota v. Wayfair, Inc. (US Supreme Court, June 21 2018) overruled
Quill;
• States already acting unilaterally.
22

23. Solutions to be Explored ?
• Digital tax is an Indirect tax (Article 113).
• Enhanced cooperation between member States as a way to overtake
unanimity where needed ?
• Article 20 EU Treaty;
• Articles 326 –334 TFEU;
• Need to consider the Internet as a whole, including the neutrality
paradigm:
• Withholding taxation;
• The role of the intermediaries (access providers and network managers);
23

24. Italy playing the Great Game
• Italy so far has:
• Unilaterally extended the scope of permanent establishment in 2018
including the hidden PE concept “A continuous economical presence of a
non resident business arranged in a way as not to match the physical
presence test”;
• Introduced a targeted digital service tax, inspired by EU guidelines (as
from January 1st 2019: §§ 35 – 52 Italian Finance Act 2019).
24

25. The Possible Impact of the Tax
• 3% tax on profits generated on the territory (according to the
place where consumers are);
• Selective target:
• Business with a turnover of more € 750.000.000 worldwide (any source)
…
• … and more than € 5.500.000 in Italy (Digital source);
• Selected services delivered;
• Advertisement;
• Data management;
• User-generated contents;
• …
25

26. The OECD October 9th 2019
Proposal
• Two Pillars identified in the Programme of Work by the Inclusive
Framework on BEPS (G-20 approved on June 2019);
• Pillar I: New allocation of taxing rights;
• Pillar II: other BEPS issues as they may arise.
• Although prompted by the Digital debate, Pillar I is far reaching, and
somehow systematic;
• State of the art: filtering various options in the attempt to “Drain the
swamp” of the various solutions.
26

27. Pillar I
Issues under scrutiny:
1. Allocation of taxing rights between States / jurisdictions;
2. Definition of PE (fine-tuning of it ?);
3. Arm’s length application (stretching length ?);
4. Multilateral tax cooperation;
5. Reinforcement of multilateralism;
6. Taxation of MNEs active on the digital market.
27

28. In a Nutshell (OECD Proposal)
• New Nexus (of a different kind of income ?): a self-standing Treaty
provision.
• This should open the floor to …
• New profit allocation rules, going beyond the transaction approach
• This should be mitigated using …
• “Three tier” allocation mechanism
• Whose Schwerpunkt (center) should be:
1. Residual profits to be calculated using a formula approach;
2. Fixed remuneration for local function;
3. Robust Dispute prevention and resolution system.
28

29. The State of the Art
(One Example)
29

30. Continued
30

31. The End of the Story
31
Netflix announces a partnership with
Mediaset and a new legal seat in Italy.
Reed Hastings: «We are considering a legal
seat in Italy as to address the increasing
number of tax disputes Netflix
is experiencing».
Note: Netflix currently has approx.
2.000.000 clients (source: ANSA) in Italy for
a minimal monthly payment of € 14 each.

32. The Great Game of Nexuses
• Classic nexuses;
• Original and daring ones;
• Adv. Kokott opinion in C-482/18 (Google
Ireland) on September 12th 2019.
Language (?) §50 “The connection to the
use of the country’s own official language
provides a sufficient reasonable territorial
link in principle. ”
• Pillar I:
• Revenue threshold in the market as
primary indicator of involvement
irrespective of the business sector (§§ 22
and 23).
32

33. The Proposal
• Overtake the constraints of OECD Model Articles 7 and 9, considering
income generated when “no function are performed, no assets used,
no risk assumed” (§ 27);
• Strategy:
• Conceive a Nexus for an item of income generated by the MNE which is
carved out from the overall income produced on a global scale.
• This “carved out” income (necessitating the new nexus) is defined as Deemed
residual profit.
33

34. The Features
• This sort of qualified formulary apportionment would:
1. Prevent double (or multiple) taxations;
2. Minimise compliance costs, as it would …
3. … “involve how domestic and treaties rules to relieve double taxation could
operate as under the unified approach”
34

35. The Cornerstone
of the Proposal
• Distinction between Routine and Non-routine income, to be
calculated according to the RPS “Residual Profits Split” approach as
per Transfer pricing rules (with some variations);
• Overall income to be apportioned (according to the Routine – Non-
routine dichotomy) to be calculated according to consolidated
financial statements (as per TP Documentation and Country by
Country reporting) – Action 13 on the basis of:
• Generally accepted accounting principles – GAAP;
• International Financial Reporting Standards – IFRS.
35

36. Graphics: as It is
36
Holding
Subsidiary
Routine profits
Non-routine profits

37. Graphics: as It will be
37
Holding
Subsidiary
Routine profits
Non-routine profits

38. New Means, old Problems ?
38
October 15th Reuter News;
Meeting took place on October 16th and «retaliation»
is confirmed although uncertainty in the amount and
causation (WTO Airbus litigation ?).

39. Thanks you for your Attention
marco.greggi@unife.it
39https://www.education-in-taxation.li/
The author wishes to express his gratitude to Professor Wuyao Weng for his support in the development of this project.