Ahead of this week’s meeting of the G20 finance ministers in Argentina, the OECD has published an interim report on the implications of digitalisation for taxation, and says its inclusive framework on base erosion and profit shifting (BEPS) is working to achieve a consensus approach by 2020

The interim report builds on the 2015 BEPS action 1 report. It includes an in-depth analysis of the changes to business models and value creation arising from digitalisation, and identifies characteristics that are frequently observed in certain highly digitalised business models.
The report identifies the positions that different countries hold, and includes an analysis of the UK’s move to introduce a diverted profits tax.  It looks at the factors which drive their approach to possible solutions, and describes the potential implications for the international tax rules.
The OECD points out in the report that these approaches range from those countries that consider no action is needed, to those that consider there is a need for action that would take into account user contributions, through to others who consider that any changes should apply to the economy more broadly.
While agreeing to work towards a long-term solution by 2020, some countries believe that there is a strong imperative to act quickly and are in favour of the introduction of interim measures, while other countries are opposed to them and consider that such measures will give rise to risks and adverse consequences. Those countries in favour have identified a number of considerations that they believe need to be taken into account to limit the possible adverse side-effects.
The OECD says the interim report lays the ground to move forward towards a long-term multilateral solution in the next phase of work.
Specifically, inclusive framework members have agreed to undertake a coherent and concurrent review of the ‘nexus’ and ‘profit allocation’ rules, which the OECD says are fundamental concepts relating to the allocation of taxing rights between jurisdictions and the determination of the relevant share of the multinational enterprise’s profits that will be subject to taxation in a given jurisdiction.
The OECD says members will consider the impacts of digitalisation on the economy, relating to the principles of aligning profits with underlying economic activities and value creation, and that the aim is to maintain a single, relevant set of international tax rules.
OECD secretary-general Angel Gurría said:  ‘We have underlined the complexity of the issues, and highlighted the importance of reaching international agreement, both for our economies and the future of the rules-based system. The OECD stands ready to accompany countries as they seek to build a common understanding of the issues related to the digital economy and taxation, as well as the long-term solutions.’
The interim report also looks at how digitalisation is affecting other areas of the tax system, including the opportunities that new technologies offer for enhancing taxpayer services and improving compliance, as well as the tax risks, including those relating to the block chain technology that underlies crypto-currencies.
Alenka Turnsek, UK head of digital tax at PwC, said the diversity of views reflected in the OECD’s report suggests that reaching an agreement will require ‘comprehensive international engagement between governments and businesses’, in order to ensure a degree of certainty, avoid double taxation and prevent an increase in cross-border disputes.
‘The OECD report does not make recommendations in respect of short term measures, citing a lack of consensus on either the merit or need for these measures. It does advocate a range of issues that ought to be considered before the introduction of revenue taxes or other rules.
‘While the absence of recommendations on interim measures is consistent with previous OECD thinking, it differs from the approach of the UK government, which confirmed this week it would explore a turnover tax until a permanent solution could be found. A co-ordinated, long-term approach will be crucial to prevent businesses facing the prospect of having to navigate a mish-mash of different tax rules,’ Turnsek said.