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Global Tax Policy and GovernanceWeek 6: Tax Challenges and Opportunites oo Digitalisaton
CASE
Suppose that in the 1950s a company would open up a store in the Netherlands that specialises in selling vinyl
records of European folk music. If a UK collector would be interested in buying a record we would have to take a
boat or fy to the Netherlands tthe Channel tunnel stll had to be built) and go there to actually buy his record.
As the number of customers increased and compact cassetes came on the market in the 1960s, the Dutch
company started to send out catalogues so that people could have a frst look before actually coming to the store
and buy their medium of choice.
In the 1970s, the store makes it possible to place a phone order and to send the records and cassetes by regular
mail.
As demand from the UK increases, the owners of the store decide to open up a warehouse in the UK in the 1980’s
from where the records and cassetes can be sent directly.
In 1985, a second store is opened in the UK to beter serve customers, which now ofered CD’s too.
From the 1990’s onwards, the Dutch store pioneers by setng up a webpage at a Dutch server ofering a digital
catalogue, next to the possibility to order CD’s and, occasionally, records and cassetes by e-mail. Because its UK
customers enjoy this new way of up-to-date ordering and the ease of scanning the inventory, the UK store is
closed. By the end of the 1990’s, the ordering system gets fully automated so that orders can be handled via a fully
computerized ordering process that also handles the sending and delivery. Given its excellent reputaton, the
company now has customers from all over the world.
In 2010, the Dutch company starts ofering MP3’s via download, and it decides to close its remaining physical store
in the Netherlands as demand for CD’s plummeted.
In 2014, the company starts ofering audio-streams and cloud storage of MP3’s tand other digital formats) as well.
In that year, it is decided to move the servers from the Netherlands to Germany. The company’s managing director
will move to Kenya, although the company’s registered seat will remain in the Netherlands.
For tax purposes, there would not be a so-called ‘permanent establishment’ in the UK up to 1985, which means
that business profts would be taxable in the Netherlands up to then.
The situaton as of 1990 is a bit difuse.
QUESTIONS
a) What trouble would we run into when trying to tax this business? Please consider both the
transactons/deliveries by this business as well as any proft that they gain from it.
The problem for the Tax Authorites probably began afer 1985 in this case.
Second store in the UK in 1985 PE, problems probably arising by reason of Art.
7t2) due to the atributon of profts
1990 Beginning of online digital catalogue and closing of UK PE Where do the
profts arise now?
2010 no more physical presence
, 2014 servers move to Germany where is the place of efectve management
now? where is the Dutch company actually a “resident” of?
Challenges oor Tax Authorites
Identfcaton of source state of income w where did the income actually arise in?
Identfcaton and valuaton of assets w how to value without many physical assets?
Identfcaton and valuaton of intangible assets for the purpose of Art. 7, Art. 10, Art.
13, and Art. 21. how can you value the audio streams and cloud storage?
Difcultes determining the amount of tax
Possibly misunderstandings as to the taxaton of VAT
Difficulty to defne tax jurisdicton tNt or UK?)
Identfcaton of taxable income arising from the difficultes in the identfcaton of
jurisdicton w do we tax them as dividends, interests, royaltes, or business profts?
The dilemma on whether or not e-commerce transactons fall under the category of
royaltes.
Identfcaton and characterizaton of the paymentK As there is no intermediary
involved, it is difficult to decide whether a company received payments while
carrying on business.
The OECD categorises tax challenges arising from the digital sector as followsK
Nexus: The possibility to conduct business without physical presence thanks to
technological advancements.
Data: The difficulty to atribute value to data generated by using personal
informaton of end-users.
Characterisatio: The creaton of new products and new ways of delivery, which
make the characterisaton of payments uncertain in new digital business models,
such as cloud computng, which facilitates storage of data and programmes at
external services, and thus saves space on the consumer’s own computer
b) Existng rules dealing with the allocaton of taxing rights efectvely date from the early 1960’s.
How would you prefer to deal with taxing business profts of companies like these in this digital
age, if you would have to draw up these rules from scratch?
There should defnitely be an overall revision of the concept of PE
Not necessarily a change of the legislaton as it stands, but probably the
interpretaton of such legislaton in such a way as to capture many business
transacton that fall out of the scope.
Modifcatons to the Commentary of the OECD are must w partcularly on Art. 5, Art.
7, and Art. 21.
PE’sK At the moment, the concept is largely based on physical presence tfor example,
offices, factories, warehouses etc.)
o Virtual PE = ‘signifcant digital presence’ based on a test for the presence of a
virtual permanent establishment ta website characterizaton could be goodK
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