The Organisation for Economic Co-operation and Development (OECD)’s Business and Industry Advisory Committee (BIAC) on 21 January 2019 released 11 principles to guide tax reform for the digital economy. According to the BIAC, the recommendations are to ensure that “reforms to existing tax principles are coherent, pro-growth, and do not inhibit the innovation and digitalization that is transforming our world.” The BIAC underscored that the OECD Base Erosion and Profit Shifting (BEPS) project itself recognized that it would be “difficult, if not impossible, to ring-fence the digital economy from the rest of the economy for tax purposes,” which is one of the BIAC’s recommendations.

Among the positions taken, the BIAC says that any tax reform in the context of the digital economy should be based on “well-founded underlying principles of international taxation including taxation of net income, nexus, permanent establishment, and transfer pricing based on the arm’s length standard.” They add that any revised framework should apply to all digitalizing business and be flexible enough to address future business models. Among other things, the BIAC takes a strong stand against countries taking unilateral action, suggesting that the OECD is the only forum that can garner global support and point to the agreed-to international timeline of reaching consensus by 2020.

The BIAC’s recommendations come as the OECD is trying to develop a consensus-based, “comprehensive” solution to address the tax challenges of the digital economy. It is becoming clear that the OECD approach will address more than just digital business activity, however, potentially impacting other IP-intensive business models. This comprehensive approach reportedly will address two key pillars: profit allocation and nexus rules, underpinned by additional measures to address BEPS challenges associated with the digital economy. At least some elements of the proposals are said to have the support of policymakers in G7 countries, including the United States, Germany and France.

The BEPS Inclusive Framework met in Paris on 23-24 January. An OECD communication coming out of this meeting may provide further details on the contemplated changes to international tax policy. Pascal Saint-Amans, Director of the OECD’s Centre for Tax Policy and Administration, said last December that the OECD would release an update on its work on the taxation of the digital economy by the end of January.

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP, International Tax Services, Washington, DC

• Arlene Fitzpatrick | arlene.fitzpatrick@ey.com
• Joshua Ruland | joshua.ruland@ey.com

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