handbook-tb

Jinyan Lithe difficulty of determining the jurisdiction in which value-creationactivity occurs.The digital economy threatens the tax base of the corporateincome tax (CIT) and the value added tax (VAT) by facilitating baseerosion and profit shifting (BEPS) 3 and potentially causing the taxbase to disappear (base cyberization). BEPS is the result of tax planningdesigned to take advantage of gaps in the interaction of differenttax systems to artificially reduce taxable income or shift profits to lowtaxjurisdictions in which little or no economic activity is performed.The targeted BEPS structures are “artificial” in that they are undertakenprimarily for tax purposes, not for business reasons. Digitalenterprises, such as Amazon, Apple, Facebook and Google, whichare flagship digital companies, are among the top BEPS practitioners.More profoundly, digital enterprises and other multinational enterprises(MNEs) can “legitimately” separate profit and profit-generatingactivities through new business models made possible by technologicaladvances.Base cyberization occurs when MNEs can sell goods and servicesinto developing countries without the need for a local businesspresence or without falling within the jurisdictional threshold. It is theresult of the collision of new business models coupled with an increasingproportion of unconventional value added activities and the existingtax rules designed to carve out the sovereign territory for taxationon some form of physical presence. The collision creates substantialchallenges in taxing business transactions undertaken not only bymajor global technology conglomerates, but also other businesses that3See OECD, Public Discussion Draft, BEPS Action 1: Address the TaxChallenges of the Digital Economy (Paris: OECD, 2014) (OECD Public DiscussionDraft on BEPS Action 1), available at http://www.oecd.org/ctp/taxchallenges-digital-economy-discussion-draft-march-2014.pdf;and OECD,Addressing the Tax Challenges of the Digital Economy (Paris: OECD, 2014)(OECD Action 1 — 2014 Deliverable). These reports were prepared by theTask Force on the Digital Economy, a subsidiary body of the Committee onFiscal Affairs (CFA). Public comments on the OECD Public Discussion Drafton BEPS Action 1 were published on the OECD website. The voice of developingcountries was largely absent.408