OECD Program of Work, organization & resources to resolve digitalized economy taxation

Following its pre-announced calendar, the OECD published on May 29th, 2019 the “Program of Work” structuring the process and organization to achieve a global consensus based solution to tax the digitalized economy by December 2020.

The process and objectives has been agreed by the 129 “Inclusive Framework” BEPS countries and it resounds on the 2 pillars introduced in the early 2019 Policy Note  and following docs.

A one pager summary of the Process & Organization structured is presented in the following chart (click on it to enlarge):

Digitalized economy taxation

DET3 Comments:

It is positive to see that the really ambitious but necessary objective of reaching a global consensus based solution on the 2 Pillars in a limited timeframe, it is also spoiling the need for evolving the way of doing things at OECD level.  In person meetings are going to be supplemented on-demand by remote work as necessary, and likely incorporating the same kind of technological tools that enable big efficiency in today’s digitalized world when it comes to innovation fast development and iteration. Likely the new O.N.E. collaborative suite (OECD Network Environment) will be tested and stressed during the execution of this ambitious tax policy challenge.


Israel Tax Authority just shared its clear intention that once a new minister of finance takes office, the Digital Services Tax matter would be quickly raised on the top of the agenda and a detailed plan formulated. Not much information has been shared other than their initial idea is a 3-5% tax rate charged on these companies’ digital in scope turnover.

The information available indicates that the EU Directive will be a close to follow guidance and the French current advanced law draft will be of strong influence and inspiration for local regulators.

DET3 comments

Let’s remember that Israel was one of the earlier countries to set focus on Digital PE types, publishing the 04/2016 Circular addressing Corporate Tax and also VAT PE aspects of a foreign company with significant digital presence.

In theory, when those digital companies are conducting substantial business activity in Israel and providing services to customers in Israel, the circular in practice imposed a 25% tax on the income and also the obligation for VAT registration in some cases.

This has been generating relevant friction with foreign Digital giants, and it is to be seen if an approach that modifies and alters the treaty based in force PE definitions can be validly supported. If a digital services tax is added to the equation, tax landscape will be burdensome and not easy to navigate for foreign digital players in Israel.

All, at a moment when their own  Startup ecosystem is really booming and fueled by fresh capital, scientific resources and Government support.  Is it a coincidence ?


The Czech Finance Minister has recently mentioned that they have an advanced legal body text for local Tax on a digital services that is aiming to tax selected “global internet giants”.  

They expect to make the draft public by early June.

The ministry confirmed that this is their “reaction to the failure of solving this (issue) on the European Union level” and that the rate might be a 7% which is well above most of the other existing unilateral digital services tax measures.   

The activities / revenues in scope are expected to be very aligned to the European Union draft Directive, the well-known:

  • Targeted advertising on a digital interface
  • Use of multilateral digital interfaces
  • Sales of data collected about users of digital services

The same EU Directive global turnover of €750 million or more threshold would apply and the minimum threshold for in scope services revenue from local users has yet to be defined

The initial idea is for this legislation to be effective from the middle of 2020 onwards if finally passed.


As a measure included in the 2019 Budget law with the amendments for the Service Tax, the proposal is that from 1 January 2020 onwards, Malaysia will be imposing a service tax on digital services that are imported by consumers (B2C).  The proposal has yet to be approved by the Upper House of the Parliament.

A 6% service tax is to be levied on the value of any digital service that is provided by a foreign service provider (“FSP”) to any consumer in Malaysia.

  • “Digital service” definition includes “any service that is delivered or subscribed over the internet or other electronic network and which cannot be obtained without the use of information technology and where the delivery of the service is essentially automated”.

    Therefore, the services list to be captured is wide, amongst others:   music & video streaming, cloud services, provision of software online and digital advertising services.

  • “Consumer” is defined as any person who fulfils any two of the following conditions:

    • makes payment for digital services using credit or debit mean provided by any local financial institution or company;
    • acquires digital services using a Malaysian IP address or through a smart phone with a country code assigned to Malaysia; or
    • resides in Malaysia.

Once law is finally passed, any FSPs who meet the mandatory registration threshold will be required to register for service tax before September 31st, 2019, being possible to exercise an online registration.

Compliance obligations derived from the registration:

  • charge 6% service tax to local consumers
  • issue an invoice on the captured transactions
  • file a service tax return
  • keep transaction records for 7 years

DE3 Comments

This tax does not seem to be an OECD BEPS Action 1 DST type, nor a DST special indirect tax but not VAT/GST, but in this case is an indirect tax that is to be inserted in  as a part of the recently created services tax, that was replacing the general sales tax in the country.

As the definition of consumer is wide, there are some doubts about the fact of companies also falling there and having to exercise the self-assessment rule in their B2B returns, something critical to be clarified, specially for SaaS and PaaS value foreign value propositions, but seems they are part of the targeted approach.


The UK government’s consultation on the design of a new 2% tax on digital services revenue closed at the end of last February.  

These are some of the insights from the approach we can infer behind the consultation document:

  • The tax is very narrowly targeted to certain digital business models to reflect the value they derive from the participation of UK based users. So rather than try to capture specific transactions, the target are full business models whose main elements are properly defined. Many of the definitions are based in practical observation of the operation of the targeted business models.
  • User base is a central value driver critical to success or failure of the business.

  • User participation is defined as:

    • Generation of content
    • Depth of engagement: many time spent in the platform, generation of content and inter-actuation with other users & content tailored to users based in their platform use.
    • Network effect & externalities
    • Users Co-contribute to the business offering and contribute to the brand of the platform by reviewing and rating content.
  • Business models / activities taxed:
    • Social Media Platforms
    • Search Engines: Much of the content delivered directly or indirectly by users of the platform. Experiences tailored to individual users. Key revenue driver is advertising.
    • On-line marketplace:  Facilitating sales. Development of a large user network in either side of the platform, encouraging users for public reviews to regulate the quality of the products they intermediate.
      Providing a platform to third parties to list products & services & communicate with prospective buyers.
  • Not in scope: 

    • Financial or payment services
    • Sale of own goods online (including direct sales of market places where they take title).
    • Revenue generated from direct sale of online content (TV-cine- music subscription services or online newspapers) where the business either owns the content or has acquired the right to distribute content.

The document makes an effort to define ‘user contribution’ but ask for input.

Once you fall in, likely all transactions should fall in principle unless you can probe that you have revenue of out of scope activities that is not ancillary to business model catch by the tax and is clearly identifiable.   

The UK DST would be tax deductible from the tax base, but its tax quota not creditable as it is not a corporate tax.

If a foreign digital company principal has a limited risk distributor in the UK, the DST generated for the portion of revenue billed locally will be a deductible expense in the UK LRD, but HMRC expects the cost of it to be passed to the principal with no decrease in UK Corporate Tax liability.

This UK proposal is based in user participation in selected digital business models and does not pretend to solve the taxing issue fundamentally but in the short run as the UK is also working at OECD level where some of the current options on the table to address action 1 would have a much wider spectrum.

But the document confirms that time to action on this topic is NOW, being the DST a temporary measure to be discontinued if an “appropriate global solution is successfully agreed and implemented”.

As for now, UK Government maintains DST expected entry into force target date April 2020.


Country Prime Minister indicated in March 2019 that it is not fair in the way their tax system treats individual tax payers, versus multinationals, announcing that the country will soon open consultation to tax highly digitalized companies like those offering social media networks, trading platforms, and online advertising, as they earn a  big sized income from New Zealand consumers without being liable for income tax.

Revenue Minister further informed that the DST could come into force by 2020 at a rate between 2-3%.

DET3 Comments

Seems NZ idea is having the country ready to implement an interim DST measure like some EU and LATAM countries are doing or exploring, even before OECD finalizes its final document expected in late 2020.

To be noted is that Australia has been considered by many a policy influencer to the country and Australia has recently released communication expressing that based on their recent Public Consultation feedback on this topic and in parallel international developments, “the government has decided to continue to focus our efforts on engaging in a multilateral process,”;

In other words, Australia will hold any local digital services tax measure at least until the time for the mentioned OECD work is concluded.


On March 6th, 2019 France has published its draft of a 3% Digital Services Tax that will affect companies with global revenues of at least EUR750m and sales of in-scope services in France of EUR25m or more.

The tax will be targeting on-line intermediation services and digital advertising revenues from services that rely on data collected from internet users, and the sale of user data for advertising purposes. The targeted companies are in essence on-line marketplace platforms and digital advertising platforms.

The Draft is based in the recent EU Directive proposal that was not finally passed, and like on it, content distribution is not subject to tax, nor regulated financial transactions.

Following French Finance Minister, around 30 companies are expected to be within the scope of the new tax, many of which are likely American.

DET3 Comments

The French DST draft does not come as a surprise as indicated in our previous news as after all the French efforts at the supranational level, it was expected a “lead by example” local approach as a default.

The initially considered tranches based incremental French tax rate up to 5% has been abandoned and aligned to EU previous draft, and the threshold to fall in the tax is more prudent and logical than other EU drafted or passed proposals.  

Expectation is there won’t likely be significant political opposition to convert this tax draft in final regulation.



The 2 days were very focused in getting real-time public stake-holder’s inputs during he sessions, with countries Tax Administration representatives mainly observing the dynamics.  The very collaborative & inclusive nature of the session was very appreciated by attendees.



Almost general acceptance that this is an overall economy topic and ring-fencing not necessary nor appropriate. Someone pointed that “there is no real difference between a marketplace intermediary and a financial intermediary”.


Commitment to work for tax system change was shown by all stake-holders.

Any solution must accommodate future changes and not just current situation.

Getting the BEPS Inclusive Framework 129 countries coalition consensus will be a challenge as there will be winners and losers.

For some it is not possible to reach deep & general consensus, universally binding dispute resolution and to do it all in two years.

For others timeline to consensus is triggered by unilateral measures and the fact that there is a mandate for a quick resolution because countries’ need for revenue is urgent.

Others, like DET3, we are of the opinion that the international tax community needs to focus on timely solutions now. The sooner we are all “hands on” on alternatives, the better.


TFDE) is currently developing a work program for discussion and approval by the Inclusive Framework by the end of May. The “hard technical work” on the alternatives will be between May and 2019 end or 2020 January, when a progress document for discussion will be presented.


  • Deep articulation of principles required by some of the participants.

  • Some preferred a solution based on a value creation framework instead of a destination framework cause of potential economic distortions.
  • Important for any solution to take into account the cost of capital and how it affects trade and investments. If education & innovation country is not rewarded, incentive to invest decreases, with potential impact on environment & climate change.

    Any solution must have balance between the reward to innovation and the reward to destination. Any residual allocation of taxing rights should not provide much taxing power to market countries.
  • Adopting some of these tax proposals could undermine the ability of potential creditors to assess a company’s solvency risk (likely referring on stand-alone legal entity basis).
  • Any proposal adopted must be simple enough to be enforced throughout the world.


  • For some stake holders, TP is the principle to protect at maximum, but others welcome a shift to a greater use of formulary-based methods.
  • Trade Unions: TP rules & the arm’s length principle are “a recipe for fragmentation.” They support moving to formulary apportionment and disputes the notion that nations cannot agree on a formula. 
  • Commentators like DET3 indicated that if to a right work in selecting the factors and the combination of those, it can be a very rational representation of facts & circumstances and ultimately value creation. But just 3 factors won’t do it. See DET3 suggestion/proposal contained in our comments.
  • A movement to the location of “value realization” concept (versus creation) was also suggested by a scholar.
  • Any move away from the arm’s length principle should be based on a deep principled approach in the opinion of some.
  • Distinctions should be made between distributors versus component manufacturers, raw material manufacturers, or intermediate goods manufactures.
  • A number of observators asked to just improve the Arm’s length standard rather than Pillar 1 options, as it is based on sound economic principles, though it may need be tweaked to achieve fairness.
  • It was mentioned that TP is not about transactions but about allocation of profits, and if changing Art.9 to introduce un-related transactions/activities coverage was an option?.


  • User participation was the less accepted option in general as it may not lead to the same amount of value in different businesses, can cause distortions and ring fences.
  • Formulary solutions or SEP, perhaps with rebuttable presumptions, safe harbors, and controlling mechanisms were mentioned by many of the commentators.

  • Many stakeholders, including DET3, pointed that SEP and the economic presence test would more comprehensively address the international tax challenges arising from the digitalization of the economy. In our view it can be a good enough technical path to articulate a transition to the future international taxation system.

  • Marketing intangibles option (MI) liked by many commentators. Spirit in the air that day little more inclined to this option although many pointed the absence of development of the SEP alternative as a reason for a limited analysis on it versus MI.

The problem with marketing intangibles approaches almost everyone agreed is complexity and many mentions to the fact that MNEs sell cause of great products and not only great marketing. Marketing intangible not to be overvalued.

Also, the determination of where is consumers demand generated, if locally or through external efforts??

  • Although the OECD provided a hybrid alternative joining user and marketing intangible options, almost no reference was made to such.
  • Certainty over accuracy preferred by the business representative’s majority.


Johnson & Johnso proposal, departing from AL but traceable, simple and providing certainty to resolve the perceived market country under compensation.

Some representatives urged the OECD to do impact assessment about the options on the table with real data.

Richard Bradbury said the OECD lacks access to needed data to evaluate impact and they would really appreciate companies to share their insights or impact analysis on their business with the OECD on a confidential basis.


Surprise in part of the audience about this pillar sudden emergence. Many controversies.

Some mentioning that a minimum tax would relive tension from Pillar 1, others questioning it frontally cause of the potential damage to economy of this new rules on top of the existing measures.

Focus should be addressed to low/no economic activity and substance.  Substance test to manage any income inclusion or deduction denial rule.  Something we clearly endorse from DET3.

Commentators pointed that any minimum tax should work on foreign consolidated accounting basis using ultimate parent financials and imposing the tax at the ultimate parent level.

OECD Jan 19 policy note on Digitalized Economy Taxation: focus in resolving, tone-change, roadmap & Sprint needed

OECD released yesterday a 3 pager policy note with the proposed way forward on the analysis of the difficult Digitalized economy taxation global issue.

To resolve the fundamental question of how taxing rights on income generated from cross-border activities in digital era should be allocated, the intensified and renewed discussions will focus on two central pillars:

The first pillar will focus on allocation of taxing rights including nexus issues:

  • Specific work on how to allocate profit to Active User Contributions,
  • how to value Marketing Intangibles created by the market jurisdiction,
  • how to determine nexus based on significant economic/digital presence.

The second pillar will focus in addressing other remaining BEPS issues:

  • Addressing profit shifting to countries with significantly disparate tax rate, providing residence and source countries a right to “tax-back” profit subject to low rates or where not commensurate substance is placed. Specific tools are described to achieve this, including proposals like the “minimum tax”.

The note confirms the agreement of the inclusive framework members to examine proposals in the 2 pillars with the objective of defining the solution by 2020.

The paper openly recognizes straight basis that “all” Pillar 1 proposals would lead to solutions that go beyond the arm’s length principle. Some of the proposals will break the corner-stone decades old rule of the need for physical presence to allocate taxing rights.

It is clear from the note that one of the key focus areas that is seen as a solution is allocating more profit to the market country based in locally created marketing intangibles in limited risk distribution structures.  After BEPs reviews, this would force an additional deep-dive review into hundreds of these structures in the world, in any industry.

The other proposals related to user related profit attribution and Digital Era PE creations will have far reaching consequences. One way or the other, the members have agreed to look beyond the edge of the current international tax architecture and take a deep but accelerated dive as it is said the solutions consensus is to be made by the end of 2020.

Simplicity and practicality of solutions are also principles agreed in the last meeting.

All-together, something tremendously challenging considering the legacy mindset of the international taxation negotiation process, the certainty some negotiators tend to request and all that needs to happen before the solution is inked-in. 

But we sense a clear change in the tone of the OECD message, and in the focus towards disruptive solutions as the path forward. Something that we consider as positive and needed.  


After receiving a huge number of comments from public stake-holders during the public consultation period, the Spanish Government approved an additional stage of the digital-services tax regulatory process at a cabinet meeting last January 18th.

The Spanish DST draft law still require parliamentary approval before entering into effect.

The Spanish Government spokeswoman indicated at press-conference that Spain is in its route “to be the first EU country to adapt taxation to the new digital business models, to make companies pay taxes in the places where they generate profits…”.

The tax, she said, is referred to platforms that were working on a “privileged manner” and expressly said it was representing “unfair competition”.

She is not a technical person from the Minister of Economy nor Taxes, but in the explanations she provided she mentioned that the tax is aimed at “Platforms”, describing them as elements that put users in contact, precising also that the type of digital advertising to be taxed is “Targeted on-line advertising” that has “already  studied user preferences and behaviors….”.

As indicated in our previous DET3-post, the tax follows quite closely the EU Draft Directive text, and it will apply to companies with global revenue above EUR750 million, that generate at least EUR3 million of “in-scope” digital-services revenue in Spain.

Relevant changes and DET3 Comments

The key changes the text incorporates after the public hearing are the following:

• Confirmation that in the “in-scope” data transfers there is only place for those being supplied for consideration (being priced and charged).

The text precise that not only sales but also licenses of user generated digital data.  No precision about sales of data captured with sensors (IOT) or sale of data by a regulated financial entity as not subject to the tax like in the updated version of the EU DST Directive draft released during last December ECOFIN.

• A new definition of “Targeted Advertising” is inserted in the text, whereby “any form of digital commercial communication aiming to promote a product, service, or brand, targeted to the users of a digital interface through the data collected from them” would fall into it.

The most concerning inclusion here is a “Iuris Tantum presumption” that all advertising is “targeted”.

Charging the burden of proof to the tax payer in this complex determination is something that might generate important friction levels and cumbersome workload and analysis for companies above the 750EM threshold in any industry and not only digital players as more and more companies are moving to platform-based business models or have develop a deeper company website-based interaction as the first step of such transformation.

All these is connected to the inclusion of an additional formal obligation for companies to “establish the systems, mechanisms or agreements” enabling the user devices localization for the purposes of this tax application, and its connected new penalty regime around hiding IP addresses.

• A relevant difference with the EU draft was the fact that Inter-company transactions fall in scope of the Spanish DST.

Like in the targeted advertising case, we worked with the General Taxation Directorate during consultation to assist illustrating the practical cases where that measure could generate important inconsistencies across international value chains and multiple taxation situations difficult to correct.

The evolved text temper this inclusion down, by excluding transactions with related parties with 100% direct or indirect participation. It won’t resolve all cases but is a very welcome measure by the Multinationals community.

• Elimination of the difficult previous definitions about “systematic internalizers….” etc. in the financial services industry, being replaced by the introduction of a more understandable definition of “Regulated Financial Services” and “Financially Supervised (regulated) entity”.

This is in line with the last version of the EU Draft Directive released previous to last December ECOFIN.

Penalty CAP: Establishment of a range & CAP for the 0,5% penalty charged on last year Net Revenue in the case of being fined for not having appropriate control on the process of determining if user device was in Spanish taxable territory. Minimum penalty will be €15.000, and caped to €400.000.

If the Tax gets final approval in Parliament, smooth cooperation between the technological and technical arms of the Spanish Tax Administration in their analysis to ensure adherence to the “place of realization” declaration obligation should be required, but the new and additional formal obligation explained above moves a relevant part of that effort to the tax payer’s side.

The Italian and Spanish local DST versions are making progress towards approval with the draft Directive “full scope of services version”; That means the 3 initially targeted services in scope, not less, not more.

If the Franco-German approach generates a reduction in the scope in case of a potential unanimous agreement at EU level next March, both Governments will need to re-evaluate their internal timings or correct it the following years budget law (Spanish elected option). Likely the deficit levels pressure affecting both countries will impact their decisions.

On that, French Finance Minister Bruno Le Maire said yesterday that at EU level he is “convinced that a deal is within arm’s reach between now and the end of March” after the adjustment and alignment of the German-French positions.

In any case, he is firmly supporting EU Commission plan to eliminate the EU tax veto and has regrouped forces internally to have the French DST version ready in parallel.

A version that could tax Digital companies with WW gross sales higher than 750 million and 25 million euros of in-scope services in France, with a tax rate up to 5% and an a very expeditious regulatory approval process expected.