I’ve just been reading a paper from 2006 entitled “The Rise of the OECD as Informal World Tax Organisation“. I’m not going to comment on its analysis of the OECD itself; what is interesting is its analysis of the case study of the OECD’s project on e-Commerce, which took place over a decade ago.
Its main conclusion has a a familiar-sounding ring to it:
Beginning with a 1996 U.S. Treasury Department discussion paper, national tax authorities issued reports that queried whether international e- commerce developments would lead to revenue losses or other adverse outcomes such as an increased use of tax havens for tax evasion or tax avoidance purposes. Tax observers similarly scrutinized whether traditional tax laws and principles would need to be reformed to take into account the new commercial environment. All of the sound and fury, however, has led to very little action at the national level.
It’s interesting, I think, to study this process at a time where once again there is a lot of “sound and fury”.
Professor Cockfield, the paper’s author, describes what happened next. It was a watershed moment for a number of reasons, not least being the first time that a problem was addressed multilaterally through the OECD, rather than beginning as a unilateral innovation by one or more of its members (again, sounds a bit like BEPS).
This is an interesting process because the usual balance between source and residence countries is different. Only a few countries – and primarily the US – are ‘residence’ countries in this instance, while quite a few OECD members that would more usually be residence countries are, in this case, source. Perhaps the biggest decision in the outcome was the decision to treat servers – but not websites – as taxable entities (PEs). Cockfield isn’t quite sure why the US, which as the main exporter of e-commerce had most to lose from this, agreed to it.
This was very much a compromise position: the UK and a few others refused to agree, and so servers in the UK aren’t treated as taxable entities.* Conversely, Spain and Portugal wanted to treat websites as taxable entities in some circumstances, a suggestion that was treated with derision from stone quarters when it came from Margaret Hodge and her colleagues on the Public Accounts Committee.
Cockfield notes that very little actually changed in national law, with most countries deciding that they could get by on the basis of their existing tax rules and the amended OECD model treaty. He chalks this one up as a success, on the grounds of, “the lack of evidence surrounding source state base erosion resulting from e-commerce sales.” Not a case that would be so easily made now, I think.
This leads to a question: is what we’re looking at now a lot of “sound and fury” that will once again lead to an international process that drags on beyond the media’s attention span and then barely changes national laws, or have the failures of previous initiatives been sufficiently exposed that more ambitious change is needed?
[*Maybe the US didn’t actually have much to lose nor the UK much to gain – I did a quick check and the servers on which amazon.co.uk etc run seem to be based in the US]