Secretariat
Committee on Fiscal Affairs
Organisation for Economic Co-operation and Development

Keidanren hereby submits its comments on the Public Discussion Draft "BEPS Action 1: Address the Tax Challenges of the Digital Economy" published by the OECD on March 24, 2014.

1. As pointed out by the OECD, it is true that some aspects of the current international taxation system are lagging behind the economic reality amid the progress of globalization and development of digital technologies, and clarification of rules on taxation, particularly taxation in the digital economy that is the subject of the Action Plan 1, is highly hoped for, whether there is base erosion and profit shifting (BEPS) or not. The initiative of the OECD in summarizing the background for the information and communication technologies and digital economy in relation to the Action Plan 1 is thus highly appreciated.

2. It is difficult to segment the digital economy from the rest of the economy (paragraph 59), and we support the conclusion that applying tax rules on the digital economy that are separate from conventional tax rules would be neither appropriate nor feasible (paragraph 205).

3. In the Public Discussion Draft are mentioned the five principles of the taxation framework presented at the 1998 Ottawa Conference: namely, neutrality, efficiency, certainty and simplicity, effectiveness and fairness, and flexibility. We believe that these are useful for evaluating options on a wide range of tax issues presented in Section VII, and we support the idea that options should be evaluated based on these principles (paragraph 204).

4. In consideration of our descriptions in paragraphs 2 and 3 above, we believe that the issue to be studied immediately is value-added tax (VAT) among the various tax issues related to electronic transactions.

   In particular, most of the options on tax issues presented in 3.1 through 3.4 in Section VII are not consistent with the ideas in paragraphs 2 and 3 above. Moreover, these options are questionable in terms of usefulness and could place excessive burdens on corporations. They may also affect the treatment of other transactions.

   A very cautious study should be required on the proposals for expansion of the concept of permanent establishment (PE) presented in 3.1 (Modifications to the Exemptions from Permanent Establishment Status), 3.2 (A New Nexus based on Significant Digital Presence), and 3.3 (Virtual Permanent Establishment), because we are concerned that it may cause the source country to strengthen the tax imposition and double taxation may arise between the residence country and the source country. Concerning the treatment of PEs in the digital economy, detailed studies were carried out actively from 1998 by the Business Profits Technical Advisory Group, and the Commentary on Article 5 of the OECD Model Tax Convention was revised as a result. In addition, PEs will be further studied in the BEPS Action Plan 7 (due September 2015). Under these circumstances, it is not appropriate to draw conclusions on the ideal Article 5 of the Model Tax Convention or new PE concepts within the framework of the Action Plan 1 on digital economy alone. Instead, the Action Plan 1 should focus on raising and clarifying issues.

   Concerning 3.4 (Creation of a Withholding Tax on Digital Transactions), because it is not appropriate to segment digital transactions from other transactions in the first place, it is not necessary to introduce a withholding tax on digital transactions alone. If anything, it may create distortions, such as double taxation.

   As seen above, we believe that the issue to be studied immediately is VAT among the various tax issues related to electronic transactions.

5. With regard VAT, it is necessary to introduce measures that fully take into consideration the compliance costs to be incurred by corporations. In addition, we request the following:

   1. (1) Concerning the business-to-consumer transactions, we support the proposals that a non-resident supplier be registered in the jurisdiction of its consumer, and that a simple registration be devised in order to ease the burden on such suppliers. At the same time, it is necessary to promote the establishment of an international structure for realizing appropriate taxation such as an appropriate tax declaration by a non-resident supplier and an improvement on the capture rate of tax payments from the viewpoint of fairness.

   2. (2) It is necessary to create internationally harmonized rules for the "place the service was supplied" and "simplified procedures and mechanisms."

6. We believe that measures in other BEPS Action Plans are also applicable to the digital economy. The issues of the consumption taxation (VAT) on cross-border service transactions are being discussed by Working Party 9, and the definition of a PE will be studied in the Action Plan 7 (due September 2015). We believe that Action Plans 2 (Neutralise the effects of hybrid mismatch arrangements), 3 (Strengthen controlled foreign company [CFC] rules), 8 (Assure that transfer pricing outcomes are in line with value creation: intangibles), and 12 (Require taxpayers to disclose their aggressive tax planning arrangements), in particular, are also applicable.

7. Changes to the international taxation rules involve complicated issues. Accordingly, it is not right to jump to hasty conclusions within the framework of the Action Plan 1 alone. Instead, it will be appropriate to see how studies in other fields are progressing, and to determine the direction that is consistent with the directions of these studies. Even in such a case, it is imperative to examine the issues carefully, taking into consideration the impacts and burden on corporations.

Sincerely,
Subcommittee on Taxation
KEIDANREN