► Digital economy is raising complex issues for VAT systems ► OECD (November 2015): “International VAT/GST Guidelines” published with a heavy focus on the place of supply of cross-border supplies of services and intangibles and the application of the principles of destination and neutrality ► Trend toward digital supplies becoming taxable in the country of consumption ► Businesses increasingly needing to make VAT decisions in real time (at the point of sale) ► Policymaking is developing – typical developments: ► Joint and several liability for online marketplaces ► Active searches for non-established ESS suppliers ► Removal of low value import thresholds ► Tax authorities are going digital ► Plus increasing inter-governmental cooperation ► Reputational risk rising

1. Taxation of the
digitalized economy
Recent developments
worldwide: is there a
consensus on what to do?
Kuala Lumpur, Malaysia
12 September 2018

2. 2 | Taxation of the digitalized economy
Today’s agenda
How did we get here and what is the current state?
What to expect next
1
2

3. 3 | Taxation of the digitalized economy
Digital tax effectiveness
Managing interconnected themes
Emerging production and consumer
models, as well as new technologies
– all enabled by the proliferation of
the connected economy – are
affecting all companies in every
industry.
Digital breaks down barriers to entry
and growth, enabling companies
instantly to access and monetize
global consumers, reshaping markets
and supply chains, and creating new
business opportunities and risks.
These tax implications offer new
opportunities as well as risk.
Any digital transformation
invariably has multiple tax
implications.
Governments are demanding greater
transparency and introducing new
rules and regulations for the digital
economy. Others are adapting
existing tax and legal concepts for the
new world – creating further
uncertainty.
Industries are blurring and integrating
elements of the technology sector into
aspects of legacy business processes
at an accelerating rate. Existing
enterprises now risk disruption from all
sides. New, forward-looking alliances
are also changing the landscape.
Significant
global shift
in digital
policy
Converging
industries
The digital
revolution
Instant
globalization
Digital tax
effectiveness

4. How did we get here, and
what is the current state?
39784962

5. 5 | Taxation of the digitalized economy
Three issues at the heart of the digital debate
Scale without mass
The ability to have a significant
economic presence in a
country without a major
physical presence.
Reliance on
intellectual property
Particularly heavy reliance on
intangible assets, including
intellectual property.
User
participation and
the value of data
Many evolving business models include
elements of data, user participation,
user-generated content and
network effects.

6. 6 | Taxation of the digitalized economy
Taxation of digitalized activity
A condensed history …
► European Commission
► We don’t agree that the digital economy cannot be ring-fenced
► October 2017: Four Member States (France, Germany, Italy and Spain) call on the EU to
introduce measures
► October 2017: Presidency paper “Unfortunately, it has so far proved difficult to agree on the
solutions at global level, as is evident from the OECD report in October 2015. The time to act
has now come.”
► 21 March 2018: Proposals issued
► 28-29 April – ECOFIN meeting, Bulgaria
► OECD BEPS project
► 2015: “No such a thing as a separate digital economy, but that
companies are now participating in the digitalized economy”
► Addressed via BEPS actions 5, 7, 8-10, plus VAT
► Interim report was bought forward to 16 March 2018
► “A significant number of multinational enterprises (MNEs) have
taken proactive measures to realign their tax arrangements with
their real economic activity”
► No consensus on interim measures
► Outlines framework of design considerations

7. 7 | Taxation of the digitalized economy
The digital tax debate: a timeline of key events
1
2
3
6
5
March 2017:
OECD report to G20
Finance Ministers
identifies digital as one of
three key areas
September 2017:
EU Finance Ministers meeting in
Tallinn, Estonia, covering
corporate taxation challenges of
the digital economy
September 2017:
European Commission
publishes communication to the
European Parliament and
Council confirming direction
November 2017:
OECD holds a public
meeting in San
Francisco
December 2017:
EU Finance Ministers call for the
European Commission to
present its options in early 2018
for EU action
March 2018:
European
Commission
publishes its digital
tax proposals
4
11 12 13 14 15 16 17
1998
OECD report: Electronic
Commerce Taxation
Framework Conditions
2015
OECD final report on
Action 1 published
2018
European Commission
publishes proposals
2018
OECD publishes
interim report
2019
OECD to
publish update to G20
2020
EU Member States to apply
provisions by 1 January
2020
OECD to publish
final report to
G20
Overview2017–2018

8. 8 | Taxation of the digitalized economy
2 4
1 3
The OECD’s interim report
Issued on 16 March 2018
Provides analysis of the main
features frequently observed
in certain highly digitalized
business models and value
creation in the digitalized age.
Describes the complexities of
the issues involved, and the
positions that different
countries have in regard to
these features.
[BEPS IF] Members
agreed to undertake a
coherent and
concurrent review of
the “nexus” and “profit
allocation” rules.
5
Members will work
toward a
consensus-based
solution, noting that
divergent views
exist.
Notes that “There is no consensus on the need for, or merits of, interim measures, with a number of countries
opposed to such measures on the basis that they will give rise to risks and adverse consequences.”
What didn’t we get? 1). Consensus 2). Specific recommendations
6
Will produce a
final report in
2020, with an
update to the
G20 in 2019.
Outlines framework
of design
considerations
regarding interim
measures

9. 9 | Taxation of the digitalized economy
Five categories of national action
What we are seeing around the world
Alternative PE thresholds
Argentina, India, Israel, Italy,
Saudi Arabia, Slovakia
!! Watch list !!
ASEAN Countries, EU countries, Saudi
Arabia (SDP), Taiwan, UK, US (South Dakota
vs. Wayfair)
Equalization levies/turnover
taxes
Austria, Greece, Hungary, India,
Italy
Application of VAT/GST
Argentina (intermediary to
collect), Australia, Belarus, Chile
(anticipated) New Zealand,
Singapore, Thailand, Turkey (!)
Withholding taxes (new or
increased)
China, Malaysia, Poland, South
Africa, Taiwan, Thailand, Ukraine
Specific anti-abuse regimes
Australia, New Zealand,
UK, US

10. 10 | Taxation of the digitalized economy
Digital Indirect Tax Trends
► Digital economy is raising complex issues for VAT systems
► OECD (November 2015): “International VAT/GST Guidelines” published with a heavy
focus on the place of supply of cross-border supplies of services and intangibles and the
application of the principles of destination and neutrality
► Trend toward digital supplies becoming taxable in the country of consumption
► Businesses increasingly needing to make VAT decisions in real time (at the point
of sale)
► Policymaking is developing – typical developments:
► Joint and several liability for online marketplaces
► Active searches for non-established ESS suppliers
► Removal of low value import thresholds
► Tax authorities are going digital
► Plus increasing inter-governmental cooperation
► Reputational risk rising

11. 11 | Taxation of the digitalized economy
Recent indirect tax developments
► B2B ESS
► Russia
► South Africa
► Switzerland
► Low value import
thresholds
► Australia
► EU
► Switzerland
► UK
► Online
marketplaces
► Australia
► Germany
► UK
► Digital
transaction tax
► Italy
► Real-time
reporting
► China
► LATAM
► Russia
► Spain
► B2C ESS
► Argentina
► Australia
► GCC
► Israel
► Turkey

12. 12 | Taxation of the digitalized economy
Sales tax considerations: The US expansions to
the definition of nexus to no longer require
physical presence
► Affiliate nexus: Remote seller of taxable tangible personal
property or services must register and collect tax based on
relationship with in-state retailer (e.g., sell under same or
similar trademarks)
► Click-through: Nexus with the state is created if an in-state
online business leads a customer via (click-through) links to an
out-of-state business
► Marketplace facilitator: Compels or coerces operators of an
internet marketplace (website where multiple sellers can list
and sell their products) to calculate, collect, and remit sales tax
for certain sales of tangible goods conducted on their platforms
► Consumer Noticing Requirements (Type 1): Retailers must
notify consumer that use tax is due on purchase despite the
fact that the retailer is not required to collect
► Consumer Noticing and State Reporting Requirements (Type
2): Remote retailers must provide information to the state
and/or customer, rather than requiring the remote retailer to
collect the use taxes themselves
► “Cookie nexus”: Interests in or use of in-state software (e.g.,
“apps”) and ancillary data (e.g., “cookies”) distributed to or
stored on computers or other physical communications devices
of vendor’s in-state customers constitutes a physical presence
► Economic presence: Retailer is deemed to have nexus with a
state, regardless of whether it has any physical presence in the
state, if it makes a certain number or dollar amount of sales
into the state
State jurisdiction to
tax
Physical
presence
standard
Attributional
nexus
Economic
nexus
Click-through
nexus
Notice and
reporting
Affiliate nexus
Market-place
provider/facilita
tor
Cookie nexus
In order to be taxed, the taxpayer needs to
have nexus with the state. Over time, what can
create nexus has expanded well beyond the
physical presence of Quill.

13. 13 | Taxation of the digitalized economy
European Commission’s “interim” solution
Digital Services Tax: 3% tax on gross revenues
In
scope
Less clear
Base and rate
► Levied on gross revenues
► Applied at a uniform rate of 3%
across the EU Member States
Thresholds
► The entity has total annual
worldwide revenues of €750m or
more; and
► The entity has annual EU taxable
revenues of €50m or more
Timing
► Member States adopt by
December 31, 2019
► Member States apply from
January 1, 2020
Out of
scope
► The placing on a digital interface of advertising targeted at
users of that interface; (channel owner not taxed on
revenue share from ads).
► Making available to users of a multi-sided digital interface that
allows users to find other users and to interact with them, and
which may also facilitate the provision of underlying supplies
of goods or services directly between users; (user revenues
not taxed)
► Transmission (for consideration) of data collected about
users and generated from users' activities on digital
interfaces.
► Online marketplaces without user-to-user selling
► Payment providers/processors
► Transactions between members of a consolidated group
► Financial Services regulated in Directive 2014/65/EU
► (Some but not all) crowdfunding
► Bundled or hybrid activities
► Social media forums with
user selling occurring but
no commission paid?
► Companies deriving
business intelligence value
from business users
► Companies deriving value
from non-internet sources
(e.g., connected cars)
► Unregulated financial
services

14. 14 | Taxation of the digitalized economy
Digital Services Tax
Challenges (a selection)
Different margins for
different business /
parts of the business
life cycle
Potential economic
incidence of taxation
on business – loss
making businesses?
Interim measure
may prove to not be
temporary
Double and over
taxation
May actually
encourage unilateral
moves
Unintended
consequences?
Deductibility
requires profitability
(or deferral)
Potentially
discriminatory
No reward to IP
developer/reward to
investor/value on non-
EU, user contributions
(etc)
Defining location of
users/possible to
comply with?
Unconsolidated joint
ventures?
No concept of
differing value-per-
user

15. 15 | Taxation of the digitalized economy
HM Treasury approach
Corporate tax and the digital economy – consultation and position paper
Users creating value:
► Generation of content by users that supports a business’ ability to attract
and retain users and generate revenue
► Deep engagement with the platform allowing tailoring of platform and
content and collection of valuable behavioral data
► Development of networks through engagement and actions that create
connections between users
► Contribution to a business’ brand through provision of content, goods or
services and through moderation and the rating of content
Potential approaches
► Define the characteristics through which users create value and then tax the businesses where
such characteristics are most relevant
► Define the categories of business which derive most value from user participation; this could
include social media platforms, search engines and online marketplaces;
► Define revenue streams commonly generated from user participation in such businesses, such as
online advertising revenues

16. 16 | Taxation of the digitalized economy
The US perspective
US
perspective
► Permanent establishment issues are no longer a
factor in the digital tax debate because the largest
MNEs have shifted or are in the process of shifting to
structures that use local low-risk distributors to report
income on locally filed tax returns, relying on transfer
pricing principles to determine how much profit to
report.
► The only remaining issues concern how much profit
should be allocated to the jurisdiction where
customers are located.
► There is no principled basis for arguing that a different
amount of profit should be allocated to a low-risk
distributor of digital services located in France as
compared to a luxury goods manufacturer’s low-risk
distributor located in the US.
► In the absence of a principled distinction between
those business models, the US does not believe it is
appropriate to have a separate tax regime limited to
digital business, and that “Special regimes aimed at
digital business models are not an appropriate way to
go.”
“I have stated my concerns
with Amazon long before the
election. Unlike others, they
pay little or no taxes to state a
local governments, use our
postal system as their
delivery boy (causing
tremendous loss to the US),
and are putting many
thousands of retailers out of
business! “
President Trump
“The US firmly opposes
proposals by any country to
single out digital companies”
US Treasury Secretary
Steven Mnuchin

17. 17 | Taxation of the digitalized economy
Significant Digital Presence (“Digital PE”)
European Commission’s proposed long term solution
Supplies
► Services delivered
over the internet or
an electronic
network
► Nature of which
renders their
supply essentially
automated and
involving minimal
human intervention
and impossible to
ensure in the
absence of IT
► Lists of services
specifically
included and
excluded
1 Through a
digital
interface
► Software,
including a
website and
applications,
including mobile
apps
2 Thresholds
exceeded
► One of:
► Annual revenues
of EUR 7m from
digital services,
► 100,000 users of
digital services,
or;
► Number of
business
contracts for
digital services
concluded in
period exceeds
3,000.
3 Profit split
applied
► Profit split method
will look to factors
such as R&D cost,
marketing cost,
number of users,
data collected, etc.
► Amend CCCTB for
these proposals
Rate
► CIT rate of Member
State applied
54

18. 18 | Taxation of the digitalized economy
Significant Digital Presence
Activities in scope: Annex II of the proposal
► Website hosting and webpage hosting
► Automated, online and distance maintenance of programs
► Remote systems administration
► Online data warehousing where specific data is stored and
retrieved electronically
► Online supply of on-demand disc space
► Accessing or downloading software (including
procurement/accountancy programs and anti-virus software)
plus updates
► Software to block banner adverts showing, otherwise known
as Bannerblockers
► Download drivers, such as software that interfaces
computers with peripheral equipment (such as printers)
► Online automated installation of filters on websites
► Online automated installation of firewalls
► Accessing or downloading desktop themes
► Accessing or downloading photographic or pictorial images
or screensavers
► The digitized content of books and other electronic
publications, subscription to online newspapers and journals
► Weblogs and website statistic
► Online news, traffic information and weather reports
► Online information generated automatically by software from
specific data input by the customer, such as legal and
financial data, (in particular such data as continually updated
stock market data, in real time)
► The provision of advertising space including banner ads on a
website/web page
► Use of search engines and Internet directories
► Accessing or downloading of music on to computers and
mobile phones
► Accessing or downloading of jingles, excerpts, ringtones,
or other sounds
► Accessing or downloading of films
► Downloading of games on to computers and mobile phones
► Accessing automated online games which are dependent on
the Internet, or other similar electronic networks, where
players are geographically remote from one another
► Automated distance teaching dependent on the Internet or
similar electronic network to function and the supply of which
requires limited or no human intervention, including virtual
classrooms, except where the internet or similar electronic
network is used as a tool simply for communication between
the teacher and student
► Workbooks completed by pupils online and marked
automatically, without human intervention.
i.e., everything …

19. 19 | Taxation of the digitalized economy
The Commission’s proposals
Deciphering the timing
2018 2019 2020 Beyond
Digital Services Tax (DST)
Significant Digital
Presence(SDP)
Common Consolidated
Corporate Tax Base
(CCCTB)
OECD Model Tax
Convention changes?

20. 20 | Taxation of the digitalized economy
What to expect next from the EU
► Delivered via a stand-alone Directive –
Article 113 of the TFEU (other forms of
indirect taxation).
► Uncertainty on dates : Member States shall
adopt and publish, by [31 December 2019.]
at the latest, the laws, regulations and
administrative provisions necessary to
comply with this Directive and that they shall
apply those provisions from [1 January
2020.]
► Requires adoption in the Council by
unanimity
► Enhanced cooperation not foreseen at
this stage
► Possibility for a group of like-minded
nations to group together independently
► Also delivered via a Directive, under Article
115 of the Treaty for the Functioning of the
European Union (direct tax on net profits).
► Member States to adopt and publish, by 31
December 2019 at the latest, the laws,
regulations and administrative provisions
necessary to comply with this Directive and
to apply those provisions from
1 January 2020 with respect to tax periods
beginning on or after that date.
► Also requires adoption in the Council by
unanimity.
► “Should be included in the Common
Consolidated Corporate Tax Base
(CCCTB) negotiations”.
Digital Services Tax Significant Digital Presence

21. 21 | Taxation of the digitalized economy
Recap
► This is not about abuse or avoidance; it is about taxing retained profits and
the division of taxing rights
► It is not about taxing the consumer
► Many (but not all) countries agree on broad areas of focus – Scale without
mass/intensive use of IP/user/data value
► This is a very political exercise (trade and tariffs, US tax reform, CCCTB,
European Parliament elections, etc.); many countries now realize that there
may be significant local implications of Commission proposals
► … But many Member States may not be willing to use their veto on this
issue, retaining it for more substantial future issues
► Comprehensive reform will take significant time and will require treaty change
– which is also driving a cooling of some countries
► But lack of unanimity on gross revenues tax may actually drive widespread
unilateral actions if Commission continues to push it
► Unilateral actions continue – in and outside of the EU

22. End

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