handbook-tb

Hugh J. Ault and Brian J. Arnolda number of related problems with respect to base erosion and profitshifting. First, through technological advances, it has become possible tohave significant market penetration in a country without creating a taxablepresence in the form of a PE. As a result, countries are deprived ofrevenues from the traditional sale of goods that they would historicallyhave been entitled to tax under existing rules regarding jurisdiction totax. Second, new forms of income have been created from the businessmodels using ICT. For example, it is possible to collect data about consumerpreferences and other information from the market jurisdictionthrough the monitoring of digital traffic, which can then be sold to thirdparties to aid them in their marketing strategies. In addition, the abilityto deliver goods and services using ICT raises questions concerning thenature of income resulting from the provision of the goods/services. Forexample, payments might be considered to be royalties subject to tax ona withholding basis or might be treated as business profits taxable onlyin the presence of a PE. Finally, the flexibility provided by ICT allowsmultinational enterprises to centralize their functions in certain jurisdictions,often tax havens, which then provide a vehicle for base-erodingpayments from the market jurisdiction. Action 1 in the OECD ActionPlan on BEPS undertakes to identify the issues involved in the taxationof the digital economy, including the application of indirect taxes tosuch activities. These issues are of particular importance to developingcountries, where there has been a significant expansion of access to digitalservices and the attendant possibility of the use of ICT to exploit thelocal market. The possible erosion of the corporate tax base is importantfor developing countries because that tax is typically a major sourceof revenue.5.2 Avoiding taxable presenceICT makes it possible to avoid a traditional taxable presence in thejurisdiction. In the simplest case, a distribution structure using a localsales office can be replaced by a website selling the product for directdelivery, thus eliminating all the sales income from the domestic taxbase. Similarly, a local presence, such as an office, might be maintainedbut through ICT many of the functions formerly performed by thelocal presence can be transformed into functions performed offshore.This development might be referred to as “base cyberization”: part ofthe tax base that was previously captured by traditional jurisdictional20