Taxation and Digitalization of the Economy: International Responses

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As the OECD works to develop a harmonized global approach to the taxation of the digitalized economy, we’re looking at what multinational enterprises are doing to adapt their operations and business models. Some jurisdictions have acted unilaterally, some have made failed attempts, while some have adopted a ‘‘wait and see’’ approach. The one consistent theme is that we are in for quite a ride over the next few years, as the global efforts to address this topic are further developed and implemented.

We asked experts in five key countries to answer questions around these issues. In particular:

  • Is it feasible for multinationals to isolate ‘‘digital’’ activity or to segment financial information by activity, product line, or region?
  • Is this already done for purposes other than tax? If not, what would be the main obstacles to producing such information?


Cristian E. Rosso Alba is Partner in Charge of the tax practice at Rosso Alba, Francia & Asociados in Buenos Aires, Argentina.

While the taxation of the digitalized economy in Argentina is yet immature, some general guidelines could be anticipated from the recent transfer pricing developments.

Functional segmentation has been aggravated by the recent Decree 1170/18, enacted on December 2018. Section 21.22 anticipates that taxpayer´s shall be required to keep segmentation by business line and by transactions, according to new guidelines to be set by the ARS. While these guidelines have not been yet released, it is expected that digital services will be one of the business lines to be benchmarked separately.

In addition, the same implementing decree (Decree 1170/18) provides that the taxpayer has the burden to explain to the ARS any change in the transfer pricing methodology used for each functionally separated line of business. In addition, such changes should be properly documented, elaborating the reasons for the changes.

While it is certainly difficult for MNEs to isolate digital services from the remaining related-party supplies, the recent changes to the transfer pricing framework compel such companies to implement functional segmentation and to keep robust, supporting documentation.

The ARS is carefully monitoring the OECD multilateral response expected for 2020, while it continues tuning up the requirements for more detailed transfer pricing information.


Marco Valdonio and Aurelio Massimiano are Partners at Maisto e Associati, and Mirko Severi is an Associate at Maisto e Associati.

Companies operating in the digital world in Italy have been the subject of several aggressive tax audits and have therefore already reacted in order to protect themselves. In particular, MNE groups operating without a subsidiary in Italy have in some cases set up a local company in order to avoid disputes regarding permanent establishment. On the other hand, companies that already had a local company have decided in some cases to initiate an APA procedure (often bilateral) to avoid (other) audits by local offices that may attempt, for example, to overvalue the so-called marketing intangibles.


Rahul Mitra is a Partner, Aditya Hans is a Partner, Ranjeet Mathani is a Partner, Ashish Jain is a Senior Associate, and Nischal Agarwal is a Senior Associate at Dhruva Advisors LLP.

The final global approach on the taxation of the digital economy may be expected by 2020; however, in the interim, the OECD has given substantial guidance on its thought process and the application of the arm’s length principle with regard to complex digital business models. The OECD Interim Report, 2018, highlights how value creation analysis could be undertaken by applying different concepts; (1) value chains, (2) value networks, and (3) value shops, depending on the level of digitalization in the business model. As far as Indian outbound companies are concerned, they are taking due care to undertake robust value creation analysis for their business and to determine key value-driving activities in the overall business chain.

This will help to establish how to segregate routine and non-routine activities. After remunerating for the routine activities by applying one-sided TP methodologies like CPM, RPM or TNMM, the non-routine profits are split between the value-driving activities identified by way of the value creation analysis.

Substantial guidance has been issued by various international forums22 on considering profit splitting factors when applying PSM for determining the returns of non-routine activities. Indian headquartered companies operating in the digital space are learning from the discussions taking place in the international forum23 and leading economies like the UK24 and New Zealand25 with respect to the taxation of the digital economy, the existence of a virtual PE, and attributing profits to such a PE.

However, in the absence of any guidance on attributing profits to data and user participation, the taxpayers’ allocation of non-routine profits is limited to trade and marketing intangibles.

With amendments made to business connection provisions (with regard to significant economic presence) for establishing a digital nexus for non-resident digital corporations in India, the Indian Government has made its stance clear on these issues in line with the BEPS project. Most non-resident companies still operate within the shield of existing tax treaties, however, that seems to be short lived, as it is only until the Indian Government re-negotiates tax treaties with their counterparts.

However, as of now, non-routine profits are being attributed only for trade and marketing intangibles developed or created by inbound companies in India until a consensus is reached regarding the allocation of taxing rights with respect to value creation by data and users in India.

With regard to the isolation of digital activities in order to prepare segmental financial information, we have observed that it would be quite challenging as digitalization becomes a very integral part of many businesses and therefore, segregating digital activities from non-digital activities to determine separate profitability seems unfeasible. On the contrary, undertaking a detailed value creation analysis to understand the value contributed by digitalization would be a more apt measure to determine profits attributable to digital contributions.

The possible measures of undertaking value creation analysis and, in turn, determining the fair share of profits by applying economic models have been deliberated above.


Julien Monsenego is a Partner in Tax Law at Delsol Avocats; Margot Lasserre is an Associate in Tax Law at Delsol Avocats; and Guillaume Madelpuech is a Principal in the Paris Transfer Pricing Practice at NERA.

Based on our experience, MNEs are still taking a cautious stance toward the fast-paced evolution of the tax environment. They are especially sensitive to the impact that concepts developed or reactivated in the context of the digitalized economy (e.g. marketing intangibles) may have on other aspects of their activity.

Based on our experience, digital activity reporting is driven by business reasons and not by tax reasons. The ability of MNEs to identify, as an example, digital sales, may vary from one company to another, depending on the industry, internal organization, etc.

A number of B2B companies manage their e-commerce business separately. Yet, even in this case, in-depth analyses may be needed to create segmented P&L statements for digital and non-digital activities (if possible at all), insofar as – amongst many examples – (i) it is often the case that brick & mortar investments (flagship stores) directly fuel e-commerce sales or (ii) a non-digital sale to a third-party retailer may effectively be a digital sale from the retailer to the consumer, or vice versa.

United Kingdom

Andrew Cousins is a Director, and Daniel Othmann is a Vice President in Duff&Phelps’ London office.

The most pressing uncertainty currently facing MNEs in the UK stems from the UK’s long-drawn-out exit from the EU rather than from any of the various proposals tabled at the OECD concerning the taxation of the digitalised economy. The UK was originally scheduled to leave the EU on 29 March 2019; even so, many MNEs are still adopting a wait-and-see attitude before acting. The terms of the UK’s departure from the EU, now set back to 31 October 2019, remain undecided.

The failure of former Prime Minister Theresa May to negotiate terms of departure from the EU acceptable to Parliament and the success of the newly formed Brexit Party in the European elections have combined to see off the erstwhile Prime Minister. The appointment of Boris Johnson, who campaigned vigorously in favour of leaving the EU at the time of the 2016 referendum, as the new Prime Minister on 24 July 2019 may yet result in significant policy changes.

To the extent that MNEs in the UK are preparing for uncertainty, most of those that may be affected are presently more focused on preparing for the possible outcomes of Brexit. Even so, many have still not made any changes to their business models, owing to the level of uncertainty over what outcome to prepare for. As such, the evolution of a global approach to the taxation of the digitalised economy is still at far too theoretical a stage for MNEs to be adapting their operations or business models. It would be premature for most of them to undertake major changes now, without at least an indication of which, if any, of the various proposals will prevail.

That said, the proliferation of double taxation that would likely result from a potpourri of unilateral measures imposed by different countries is of concern to MNEs in the UK, with the result that many companies are active in the ongoing consultation process.

Nevertheless, Brexit planning has required some companies, particularly those operating in regulated industries at particular risk of business interruption in the event of a ‘‘no-deal Brexit’’, to adapt their business models in preparation for such an eventuality, so as to maintain access to the EU single market and to provide an uninterrupted service to their clients. Where this has involved some form of transfer of digital activities, it has allowed us to observe in practice some of the challenges that can be anticipated for the segmentation now being spoken of for digital taxation purposes.

Some MNEs have been required to segment certain digital activity from other business activities as they transfer discrete operations to member states of the reduced EU in preparation for the departure of the UK. What is clear is that such digital activity is often integrated with more conventional activities, both for reporting purposes and in terms of the functions of employees, whose roles may cross boundaries that are not to be defined in simple terms of digital and non-digital. It can be a very difficult and arbitrary task to isolate the one from the other, as the reality of the operation of the business may not fall neatly into the classifications for tax purposes. Where there has been no business need for segmentation, financial reporting systems are typically not set up for such purposes.

In the absence of specific requirements, it is not to be expected that MNEs currently assemble or report information in a way that segments digital activities in a form consistent with as yet unformed standards. Clearly, MNEs can, if required, take steps to segment their financial information in any way that is specified, but it is rare that the information will already be segmented in the exact way that tax requires and the necessary changes will usually not be achievable without very significant investment, both in time and in cost.

These responses are excerpted from the August 2019 issue of the Transfer Pricing Forum.

Download the full report here.

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