In 2013, the OECD and the G20 initiated a project on base erosion and profit shifting (BEPS). The fundamental idea behind this project was concerns about multinationals being able to avoid tax by artificially separating income from activities that generate it. The BEPS Action Plan sets out 15 Action Items to counteract BEPS strategies employed by multinationals.
BEPS Action Item 1 deals with tax challenges of the digital economy. Its aim is “to identify the main difficulties that the digital economy poses for the application of existing international tax rules and develop detailed options to address these difficulties.” On 24 March 2014, the OECD published a discussion draft that identified the major tax challenges raised by the digital economy and summarized several possible options to address these challenges. The discussion draft consists of 7 chapters and one annex.
On 16 September 2014, the OECD released the eagerly awaited final report on BEPS Action Item 1. The document, called “Action 1: 2014 Deliverable”, is exceptionally long (198 pages) and heavily builds on the discussion draft released by the OECD in March 2014. The 10-page executive summary is followed by 8 chapters, conclusions and two annexes.
Chapters 3 to 8 of the final report are almost identical to chapters 2 to 7 of the discussion draft. They discuss the key features of the digital economy, new business models, BEPS concerns in relation to both direct and indirect taxes, and potential options to address them. The final report includes only two new chapters that were not present in the discussion draft: a chapter that discusses the fundamental principles of taxation (chapter 2) and the concluding section. Since the discussion of the “overarching principles of tax policy that have traditionally guided the development of tax systems” sets the context for examining BEPS opportunities and tax challenges of the digital economy, it is surprising that this section was not included in the discussion draft to provide stakeholders with a good background for subsequent discussions and comments.
The concluding section of the final report does not make any recommendations. Instead, it identifies several “next steps”, i.e. areas that require further examination. The OECD observes that until the work on all Action Items is complete (December 2015), it is not possible to present any definite solutions for taxation of the digital economy.
It remains unclear why the OECD decided to publish the final report on Action Item 1 in the first set of “deliverables” in September 2014 while it was clear from the very beginning that the digital economy is affected by several BEPS Action Items.