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Global Media and Communications Watch The International Legal Blog for the Tech, Media and Telecoms Industry
Posted in Intellectual Property, Technology

Tech Tax – Looking Forward to 2020

Following-up from our previous blogs on Tech Tax, we thought it would be useful to take a whirlwind tour of what to expect in tax and transfer pricing related topics in 2020. But for those that are curious, why are such seemingly dry topics so relevant to tech companies? It’s because their dynamism and continual state of change almost inevitably have tax consequences, or attract attention from tax authorities. It is also relevant because of the importance of IP to their business models and value creation, the inexorable growth of the digital economy, and simply, because it’s where the money is.

Digital Services Tax (DST)
Reform of International Tax (OECD’s Pillar 1 & 2)
Transfer Pricing (General/Non-Financial Transactions)
State Aid
Transfer Pricing and Financial Transactions
Disclosure – DAC 6
Anti-Avoidance – EU Anti-Tax Avoidance Directive II

The key messages are that in this area, tech companies need to stay vigilant, keep up-to-speed with what is happening, and strategise accordingly. They also need to get used to a world which is steadily becoming more transparent, and where the old ways of doing things often no longer work. It’s a time of change.

Digital Services Taxes (DST)

Despite U.S. threats to impose punitive tariffs on $2.4 billion worth of French goods in response to the country’s introduction of a digital services tax effective 1 January 2019, a number of other countries introduced their own versions of the tax on 1 January this year. These include Italy and Austria, whilst the UK (see here for an article on legal issues  concerning the UK’s measure) and Turkey are to follow suit on 1 April. A host of other countries have either done the same, are in the process of doing so (e.g. Spain and the Czech Republic), or are considering it. Norway, for instance, has indicated that it will be prepared to introduce a similar unilateral measure if an international consensus is not reached at the OECD on global reforms to the international tax system. It’s also not inconceivable that the EU may try again in such circumstances. U.S. retaliation against France using tariffs is still possible (which is ironic given that the U.S. State of Maryland has proposed its own DST), even though the two appear for the time being to have stepped-back from a full-blown dispute (noting nonetheless that the new EU Commissioner for Trade has stated that the EU will stand firmly behind France in any dispute over its DST and retaliatory tariffs). The UK appears to be standing firm, at least for now, but given all the political maneuvering, a lot can be expected to happen on this topic within the next 12 months.

Reform of International Tax – (OECD’s Pillar 1 & 2)

As we detailed late last year, how much tax tech firms pay, and where, continues to be the subject of intense debate. Last week, the 135+ countries that make-up the G20/OECD’s Inclusive Framework reaffirmed their commitment to reach agreement on consensus-based reforms to the system of international taxation. On the table are proposals to grant new taxing rights to the countries where sales are made for consumer oriented businesses (so-called “Pillar 1”), and for a new global minimum tax (part of “Pillar 2”). Recently, the U.S. has questioned whether Pillar 1 should in fact be a safe-harbour that multinationals can choose to opt into. This suggestion was rejected by France, whilst Germany has indicated it would be willing to compromise as long as proposals on Pillar 2 are agreed at the same time. Intense debate also continues about what industries should be in scope for Pillar 1 (or expressly excluded), what size of businesses should be caught, and how it should all work. A major point to watch in the timeline will be the Inclusive Framework meeting 1-2 July. The pressure will be on, since if agreement is not reached by the end of the year, then the roll-call of countries taking unilateral action will lengthen.

Transfer Pricing (General/Non-Financial Transactions)

It’s now two-and-a-half years since the OECD published far reaching revisions to its Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, the de facto if not actual rule-book for transfer pricing in a very large part of the world (though strictly speaking not the U.S., even if it does follow the arm’s length principle and very similar methods). For the most part we are therefore well into the period where the new principles apply, including ones which allow tax authorities to look beyond written contracts and focus on where people on the ground are doing the things that, according to the OECD Guidelines, determine where taxable profit is booked. This includes controlling and managing risks, and carrying out so-called DEMPE functions in respect of intangibles (i.e. development, enhancement, maintenance, protection and exploitation). They also allow tax authorities to impute contingent pricing for what are called “hard-to-value-intangibles”.

What does this mean? Most importantly, it has allowed tax authorities to challenge old-style transfer pricing models used by a great number of multinationals, even ones that for years had been widely accepted. Although not exclusively, these challenges have been made to models adopted by many tech firms. Many of the very largest firms have now been through the mill, so what we can now expect in 2020 and beyond is for attention to focus instead on everyone else. That’s firms slightly smaller in size than the giants, down to mid-sized firms and start-ups that have navigated the earliest phases of their development. That looks set to be the case with HMRC’s Profit Diversion Compliance Facility or PDCF (see here and here), for instance.  As another example, Germany has just passed legislation aligning its transfer pricing more clearly with the new guidelines. And industry speakers almost across the board are noting a rise in the number of disputes.

State Aid

In September 2019, EU Commissioner for Competition, Margrethe Vestager (a person familiar to most people with an interest in the tech sector) announced that the Commission would continue to scrutinize “aggressive tax planning measures” to assess whether they were illegal under State aid rules. This followed judgements which confirmed that whilst Member States have exclusive competence in determining their laws in direct taxation, they must also respect EU law, including State aid rules. The General Court also confirmed the use by the Commission of the arm’s length principle as the basis for assessing whether a multinational group member is treated more favourably than a standalone enterprise (but not necessarily in quite the same way as set-out in the OECD Guidelines). Although judgements have clearly not all gone the EU Commission’s way, its use of State aid rules to investigate and potentially challenge cases where it suspects companies have gained an unfair tax advantage seems set to continue in 2020. This feeling is reinforced by the unprecedented appointment of Ms. Vestager for a second term as EU Competition Commissioner, and by her new role as Executive Vice President of the European Commission responsible for a Europe fit for a Digital Age.

Transfer Pricing  and Financial Transactions

Expected within the next 12 months (having already been delayed) are further revisions to the OECD’s Transfer Pricing Guidelines, only this time focusing on intercompany finance. Unsurprisingly, these are expected to mirror the revisions made in 2017 for “widgets” when it comes to risk. Controversially, if the changes are introduced as expected, this will mean that a lender providing intercompany debt may only be able, for transfer pricing purposes, to charge a risk-free rate of interest on loans to related parties if it does not have the capacity to control and manage the risk associated with the loan. What that means has not been thoroughly tested (although the initial presumption may be that this means employing people to do this, rather than relying on boards – a presumption that arguably might be questioned), but it certainly will lead to enhanced scrutiny of intercompany financing arrangements, including in the tech sector. Captive insurance is likely to be another area of focus in this area, and one that seems likely to be relevant to the sector given the substantial growth in the number of mid-sized multinationals entering into such arrangements.


The era of disclosure and greater transparency in the tax affairs of businesses is well and truly upon us. Multinational groups with global turnover in excess of €750m (or the local currency equivalent) are now widely required to file County-by-County (CbCR) reports that detail the number of employees, revenue, profits earned and tax paid in each jurisdiction, and to identify all entities resident in each country and the nature of their business activities. These reports are held by tax authorities, and shared between them. Currently, there is no requirement to make them public, although this has been proposed within the EU. So far, these proposals have not been agreed, but this could change. And one multinational – Shell – has taken the step of publishing CbCR reporting data.

This trend towards greater transparency is likely to continue in 2020 and beyond. Implementation of DAC6 in the EU and UK is one example (see below). And we can expect greater use by tax authorities of taxpayer data in identifying potential outliers and targets. In September 2019, the OECD revealed that out of 58 tax authorities it had surveyed, 40 were already using Artificial Intelligence, or were planning to do so. The use of sophisticated and often automated data analytics by tax authorities therefore seems inevitable. The IRS Large Business and International Division in the U.S. provides one example. HMRC in the UK is another, not least in regard to its Profit Diversion Compliance Facility (see above). But there are plenty of others.

Disclosure – DAC6

July 2020 will see the coming into effect of EU mandatory disclosure rules widely known as DAC6. Under these rules, intermediaries such as advisers and banks may be required to file with a specified tax authority, information about certain cross-border arrangements involving the UK or another EU Member State. To be disclosable, the arrangements must contain at least one of a list of 15 prescribed “hallmarks”. Although some of these will likely only catch aggressive tax planning, others will apply to much more benign transactions, such as many intra-group cross-border transfers of functions, risks or assets. Where there is no intermediary required to report the information, the taxpayer may have to do so instead. Managing the potential for reporting obligations in multiple jurisdictions and the interaction with legal privilege and professional secrecy rules will be complex.

Anti-Avoidance – EU Anti-Tax Avoidance Directive II

From 1 January 2020, EU Member States are required to apply the detailed rules aimed at preventing complex tax planning advantages involving so-called hybrid entities and instruments, as set-out in the second EU Anti-Tax Avoidance Directive (ATAD II). Although an earlier Directive also included some anti-hybrid rules, the ATAD II provisions are much more detailed and, crucially, apply to transactions with third countries as well as intra-EU arrangements. This is significant as many hybrid structures involve the U.S. The UK has also had comprehensive hybrid mismatch rules since 1 January 2017. An example of how the rules have been implemented in one country (Luxembourg) is given here.


So, what can we make of all this? The unavoidable conclusion is that in the world of tax and transfer pricing, tech companies in the year ahead are facing an unprecedented period of upheaval, uncertainly and change. Tech companies – and that includes ones that up to now might not have attracted attention – need to be vigilant, keep up-to-speed with what is going on, strategise, and adjust to a world with greater transparency rules. Many of the old ways of doing things probably work less well than before. And it will probably be several years before things settle down. But this will happen…eventually.