Base Erosion Profit Shifting (BEPS) in the Area of Digital Economy

Author: William J. Seeger

The Organization for Economic Cooperation and Development (OECD) finalized the Base erosion and profit shifting (BEPS) initiative in 2015. BEPS refers to tax planning strategies that exploit gaps and mismatches in tax rules to make profits ‘disappear’ for tax purposes or to shift profits to locations where there is little or no real activity but the taxes are low, resulting in little or no overall corporate tax being paid.

At the center of the current tax debate is whether international income tax rules, developed in a "brick-and-mortar" economic environment more than a century ago remain applicable, and fit for purpose, in the modern global, digital economy. The fundamental elements of the global tax system which determined where taxes should be paid ("nexus" rules based on physical presence) and what portion of profits should be taxed ("profit allocation" rules based on the arm's length principle), have served their purpose well. Namely, they have enshrined tax certainty and helped to eliminate double taxation stimulating global trade.

However, the International Tax standard for nearly 100 hundred years, the Arm’s Length Principle, is under intense scrutiny in the highly digitized business environment. The OECD has proposed new rules relying on ‘digital’ nexus and formulary apportionment to meet BEPS challenges in the digital business environment.

Publication Date: September 2020

Designed For
Tax Directors, Tax Staff, Transfer Pricing Practitioners, Treasury, Internal Auditors, CPAs, and CFOS.

Topics Covered

• Nature of Digital Economy
• Digital Nexus
• Digital Service Taxes
• The OECD Unified Approach
• OECD Pillar One and Pillar Two
• Arm's Length Standard vs Formulary Apportionment
• Mutual Agreement Procedure and Multi-lateral Convention

Learning Objectives

• Identify how the digital economy and digital economy business models work
• Recognize how digital Companies share key features such as scale without mass, a heavy reliance on intangibles, data, and network effects
• Differentiate between digital and physical nexus
• Identify the fifteen (15) BEPS articles, especially Article 1 on the Digital economy
• Recognize the Unified Approach to taxing the Digital economy: Pillar One and Two
• Describe the new taxing right under Pillar One
• Describe the new Global minimum tax under Pillar Two
• Identify how Pillar One erodes the Arm's Length Standard as the basis for International Taxation
• Recognize the prevention of aggressive unilateral measures and the intense political pressure to tax highly digitalized Multi-national businesses
• Identify what the future of multilateral tax co-operation will look like

Level
Basic

Instructional Method
Self-Study

NASBA Field of Study
Taxes (1 hour)

Program Prerequisites
None

Advance Preparation
None