Institute for Austrian and International Tax Law ◼ www.wu.ac.at/taxlaw
© WU Transfer Pricing Center
Dr. Raffaele Petruzzi, LL.M.
Managing Director, WU Transfer Pricing Center
CEO, L&P Global
Of Counsel, Ludovici Piccone & Partners
Digital economy and taxationA Possible Answer in the Proper Application of the Transfer Pricing Rules?
Institute for Austrian and International Tax Law ◼ www.wu.ac.at/taxlaw
© WU Transfer Pricing Center
Some preliminary concepts
▪ “all the traditional businesses are digital, at least to some extent, and
all the digital businesses are traditional, at least to some extent”*
▪ All business models are different
▪ Corporate income taxes should be levied where value is created and not
where value is consumed
▪ Corporate income taxes should be levied on profits, not on revenues
▪ Many highly digitalized businesses have top value per employee ratios**
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* P. Morton, Profit splits and value chain analysis key to addressing transfer pricing issues in the digital economy, TP Week (18 Aug. 2014)** https://www.forbes.com/sites/liyanchen/2015/08/11/the-most-valuable-employees-snapchat-doubles-facebook/#653626725f5b
Institute for Austrian and International Tax Law ◼ www.wu.ac.at/taxlaw
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The digitalization of the economy
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Diverted profit tax Virtual/digital PE
Equalization levy
Digital tax
VAT for digital services
Institute for Austrian and International Tax Law ◼ www.wu.ac.at/taxlaw
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▪ Highly digitalized business models are characterized by high mobility, reliance on Data, use of networks synergies, etc.
▪ The assets which generate the most value for these businesses are brand, platform, know-how, Data, etc.
▪ The functional focus of these businesses shifted to activities such as technological development and marketing activities, whereby outsourcing some secondary functions, which do not generate high value.
A possible answer from a proper application of transfer pricing rules?
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Nexus QuantumVCA
Institute for Austrian and International Tax Law ◼ www.wu.ac.at/taxlaw
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The role of Data
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“The world’s most valuable resource is no longer oil, but data”*
However, only active customers providing relevant Data should be considered as value generating factors, in
the context of a GVC that considers all other factors* https://www.economist.com/leaders/2017/05/06/the-worlds-most-valuable-resource-is-no-longer-oil-but-data?fsrc=scn/li/te/bl/ed/theworldsmostvaluableresourceisnolongeroilbutdataregulatingtheinternetgiants
Institute for Austrian and International Tax Law ◼ www.wu.ac.at/taxlaw
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Technology development
Inbound logistics
Manufacture/ Operations
Outbound logistics
Marketing/ Sales
Service
Value Chain Analysis
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Resid
ual
pro
fits
Routine
pro
fits
Resid
ual
pro
fits
Resid
ual
pro
fits
Routine
pro
fits
Routine
pro
fits
▪ Blockchain technology can improve the performance of VCA
▪ Functional analysis and identification of SPF should be based on a solid VCA to define how the specific transactions contribute to the value activities of a company
▪ Customers, who generate the valuable Data for the company, serve as “unconscious” contributors: they work for the company by generating high value that is then monetized, in exchange for free/cheaper services
▪ Functional analysis should consider the new functions of highly digitalized businesses (i.e. the active customers) and attribute to the digital PE the related assets (i.e. the valuable Data) and risks.
Institute for Austrian and International Tax Law ◼ www.wu.ac.at/taxlaw
© WU Transfer Pricing Center
Nexus
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Re-interpret (no re-draft!) the current PE definition, considering
the new role of customers/data in VCA
Develop a new definition of PE,
considering the new role of customers/data
in VCA
New digital PE, with specific wording and thresholds
A PE exists where the enterprise
“creates value”
Institute for Austrian and International Tax Law ◼ www.wu.ac.at/taxlaw
© WU Transfer Pricing Center
Quantum
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Formulary apportionment
Gross income taxation
Redefinition of functions and risks
relevant for determining the
appropriate transfer price
Modification of the existing PSM with an upfront allocation of a
partial profit to the market jurisdictions
Revenues from valuable Data collected from active
users in PE country-
Costs of collecting, elaborating, and exploiting
those Data=
PE profits
Institute for Austrian and International Tax Law ◼ www.wu.ac.at/taxlaw
© WU Transfer Pricing Center
ExampleThe Amazon case (Description)
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Institute for Austrian and International Tax Law ◼ www.wu.ac.at/taxlaw
© WU Transfer Pricing Center
ExampleThe Amazon case (VCA)
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Technology
developmentInbound logistics
Manufacture/
Operations
Outbound
logisticsMarketing/ Sales Service
Functions in
general
▪ R&D
▪ Production
engineering
▪ Product and
process design
etc.
▪ Quality control
▪ Receiving
▪ Storing goods in
warehouses etc.
▪ Payment system
24 hours
▪ Production
▪ Maintenance
▪ Control etc.
▪ Dispatch
▪ Delivery
▪ Invoicing
Marketing Admin-n of returns/
warranties
Value 1.
Individualized
production
Software for
analysing Data
demands to create
personalised
valuable offer
- - ▪ Standard
shipping/
▪ Prime delivery
▪ Personal
discounts
▪ Vouchers
▪ Analysing
personal demand
and making offers
-
Value 2.
Complementarit
ies
Software for
analysing Data on
purchases
- ▪ Integration of
many sellers
▪ Variety of
production
- Analysing of
demand for
complement-s
-
Value 3.
Lock-in
▪ One-click
payments
▪ Personal cabinet
▪ Data storing
- Production of own
goods and quality
control
- ▪ Discounts
▪ Recommendation
s
Admin-n of returns/
warranties
Value 4.
End-to-end
digital
integration
Development and
update of the
platform
- - - ▪ 24-hours access
▪ Social networks
coop-n
-
Institute for Austrian and International Tax Law ◼ www.wu.ac.at/taxlaw
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ExampleThe Amazon case (Nexus)
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Does Amazon create value in the countries where customers are located?
Who are the significant people functions in the countries where customers are located?
What assets and risks can be attributed to Amazon in the countries where customers are located?
How much profits can be attributed to Amazon in the countries where customers are located?
Institute for Austrian and International Tax Law ◼ www.wu.ac.at/taxlaw
© WU Transfer Pricing Center
▪ No ring-fencing solutions
▪ Taxation based on production factors and value creation
▪ VCA and understanding of specific business model necessary
▪ Data as important production factor, but
▪ Data has different value for different business models
▪ Data without other important production factors and value drivers
does not have value
▪ Taxation of profit (and deduction of losses) should follow the above
principles
Conclusions
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Institute for Austrian and International Tax Law ◼ www.wu.ac.at/taxlaw
© WU Transfer Pricing Center
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Dr. Raffaele Petruzzi, LL.M.
Department of Public Law and Tax LawInstitute for Austrian and International Tax LawWelthandelsplatz 1, Building D3, 1020 Vienna, Austria
T +43-1-313 [email protected]/taxlaw, www.wu.ac.at/dibt
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