Withholding Taxes in the Service of BEPS Action 1: Address the Tax Challenges of the Digital Economy

Abstract

This position paper of the IBFD Academic Task Force (hereinafter IBFD Task Force) relates to the OECD’s work on BEPS Action 1 and is devoted to withholding tax aspects. This position paper provides possible solutions to the challenges presented to the international tax regime by the digital economy. The paper considers both the option of installing a withholding tax mechanism as the primary response to these challenges and the option of using withholding taxes in support of a nexus-based solution of the kind explored by a companion position paper authored by P. Hongler and P. Pistone (hereinafter Hongler & Pistone Paper).

The IBFD Task Force generally views the latter (nexus-based) solution as superior to a withholding-based solution explored in this paper, as explained here and in the Hongler & Pistone Paper. We nonetheless elaborate on the withholding option to permit a comprehensive discourse of the merits and challenges that the various options present and to allow flexibility in the process of building a political consensus around a collaborative effort to tackle the challenges presented to the international tax regime by the digital economy. As explained below, we think that the latter, alternative solution is superior to no action, since such omission to act would result in uncoordinated responses taken unilaterally by different countries. The experience of BEPS teaches us that this outcome is clearly undesirable.

Keywords: Tax, International Taxation, withholding tax, BEPS, digital economy, ecommerce taxation, nexus, base erosion, tax reform

JEL Classification: K34, K33