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good afternoon everyone and welcome to Deloitte debrief tax webcast series in asia-pacific our webcast today is from our transfer pricing series and entitled transfer pricing and permanent establishment insights on new guidance my name is cam Smith I'm a partner based in Deloitte's Melbourne office and I have the pleasure of hosting you all on today's webcast I have three speakers with me today I've got Mark Carlton Roy Hinton sidwa and Manu risk and the Raja mark is a tax director based in our Deloitte Sydney office Roy Hinton is a tax partner based in Delhi and menno is a tax partner based in Melbourne if you like you can access our BIOS at the top left-hand or a top left-hand corner of your screens before I introduce the agenda for today's webcast I just like to take a moment to highlight some of the features of our webcast console firstly all users are on listen-only mode so if you have any content related questions you could you can submit them at any time in the Q&A box at the bottom of the screen we'll certainly do our best to respond to your questions during the presentation or potentially at the end and if we don't get a chance to do that then we'll certainly come back to in the next couple of days secondly all PC owners users can maximize or minimize each box on your screen at your convenience during the webcast you may also explore the icons at the bottom of the screen if you wanted to download today's slides and related publications please go to the downloads and links box also I'm just noting mobile device users can view the slides and answer the surveys on screen and thirdly if you require an attendance record for this event you can download your CPA certificate immediately following the webcast by clicking the request CPA icon which will appear at the bottom of the webcast console please note that we only offer CPA CPD credits in certain jurisdictions and if you'd like more information on that and other matters please visit the apd briefs website alright let's get into it if we move to the agenda I just wanted to give you a brief overview of the topics that we'll be discussing today and so you can see on screen there's a couple of matters that we want to delve into in a bit of detail first the first topic we'll cover is the OECD's 2018 guidance on the attribution of profits to a permanent establishment and secondly we'll deal with the OECD's interim report on taxation of the digital economy in the context of digital PS and thirdly we'll look at European directives and certain individual countries proposals on the taxation of digital PS and digital services tax and as I indicated earlier if we've got time I will go into a Q&A session all right let's move to the our first slide and so if we're looking at the brief summary of the 2018 guidance on the 22nd of March 2018 they always say they released the key topic for today's discussion which focused on additional guidance on the attribution of profits to a PA some of our audience might be aware that this March guidance was preceded by two previous discussion drafts from the OECD one from July 2016 and the other in June 2017 so in some ways this has been quite a lengthy and some some might say laborious process from the OECD but hopefully the 2018 guidance does set out some pretty useful high-level general principles on p/es and profit attribution there - also hopefully the 2018 guidance includes four specific examples now those were included in the 2017 discussion draft but the OECD has revised those to provide a more robust analysis on how profits are or would be attributable to the P is concerned and the revised examples also now go step by step through the authorized OECD approach all right nano-thermite bring you into the conversation to kick things off and I asked you to take us through some of the technical aspects of the OECD's guidance starting with the concept of a PA and what the new OECD guidance has to say on that front sure cam thank you and as you say with the new guidance on the attribution of prophets to appear initially one needs to understand what precisely constitutes a PE and that concept currently is going through a bit of a state of flux at the moment so as many people on this session would be aware that the concept of a PE has been around for about a hundred years and traditionally we've understood that to be falling into two broad categories one is what we call a fixed place of business so where you're directly conducting business or a fixed place in the in the source country jurisdiction so an office or a warehouse or a factory or the like or alternatively what we call an agency PE where you're indirectly through a person habitually engaging in certain activities on a baton a dependent basis and so before the BEPS era that's how we traditionally understood what a PE will constitute but as part of bits and bits has been described to me once as essentially the revenge of the source countries and as part of that and part of the bits initiative is to lower the threshold of what constitutes a PE and effectively broadening the definition of what what can come within that scope and so if we move to the next slide we'll see how three key areas of how the the P definition is being expanded under the bits initiative now the bits action particularly action 7 has now manifested itself into the new 2017 OECD model and those recommendations are now also optional amendments to adhere to under the M Li the multilateral instrument so the three broad categories are first of all the tightening of the specific activity exemptions so the the exemptions that we currently have for preparatory auxilary activities and other exemptions that we have in terms of say the storage or display of goods at a particular warehouse there's an additional qualification to that which we'll go in a bit more detail and with examples later on the other categories is the expanded definition of an of the concept of an agency PE where the traditional concept of an agent habitually concluding contracts that threshold has now been lowered where the agent habitually place a principle low role in leading to the conclusion of contracts and finally another was called an anti avoidance measure is a measure around aggregation of closely held entities in determining whether all of the activities in aggregate would constitute a PE and that's what we call the anti contract splitting rule so a way of effectively piercing the corporate veil and looking to several entities within a group and aggregating the activities to determine whether a PE exists so now if we move to the next slide we can see how these measures forming part of the architecture of the MLA and the 2017 OECD model and then we have it as part of the Action 7 initiative a number of articles particularly article 5 is being modified to take into account these measures that is relevant in asia-pac we see in the next slide we see how member countries in our region here are planning to adopt the M Li now what this illustrates is although there is this initiative by the OECD to amend the definition of a PE different member states are adopting it in different fashions so on this slide we see on the left hand side all the signatory countries in the Asia Pact region to the M Li and then we see which particular aspects of the PE expansion definitions they are adopting for example you can see the China has elected to adopt none of those and India has adopted their selected adopt all of them and so as you may be aware for the MRI to amend an existing bilateral treaty or the operation of an existing bilateral treaty both member states of that bilateral treaty have to agree to a common amendment so if you for example look at Singapore and and they've elected to choose a particular option of the specific activity exemption and the specific activity exemption here actually there are two broad options one option is to ensure that the preparatory auxilary character qualification applies to each of the specific exceptions whereas the second option option B is an option whereby they only apply to specific to certain exceptions that are particularly specified now a Singapore selected option B whereas say Australia has elected option a now what that means for example is that that specific activity exemption modification is not activated and so the bilateral treaty between Singapore and Australia will continue to operate as is currently without the MLI having any impact so what this kind of illustrates is that we're not going to have a coherent system of what does constitute a pia going forward in our region and even how our member firms and member states in our region interacting their treaties with other groups around the world now just to dive a bit deeper from the next slide into the the tightening of the specific activity exemption so this this is all hinges around this concept of the perpetually auxilary exception and now that's not to be determined on a group wide waist basis through this specific what we call an anti fragmentation rules all right so what it does is that it prevents the exceptions from appear plying where there's already an existing PE or the overall activity resulting from the combination of the activities carried on by the enterprise or even the aggregation of closely related is not of a preparatory auxilary character and in both cases for this rule to apply the interiors must constitute complementary functions that are part of a cohesive business operation so if we look at that a little bit more closely and on the next slide we've got those specific instances of the of the exemptions that we currently understand to exist for example the use of facilities solely for the purposes of stories display a delivery of goods or the maintenance of stock of goods or merchandise solely for the purpose of storage or display or the maintenance of stock of goods belonging to an enterprise solely for the purpose of processing by the enterprise or for collecting information so those are the current examples of what we particularly rely on as an exemption to the P definition however now all of those are qualified to apply only where that activity is pivot or e auxilary in connection with the enterprise so let's think about that by virtue of an illustrations on the next row on the next slide so if we think about an enterprise located in state R and state Q it's got a small warehouse and a few employees whereas in status it's got a substantial warehouse with many employees conducting activities now in state q one could still continue to argue given that the size of the activity is not substantial and relative to the overall enterprise that the activities in connection with that warehouse are still potentially tangential the enterprise activities and still probably preparatory auxilary now however if we look at what happening in state s where there is a large warehouse and there's a lot of activity and a number of employees that activity could now be considered more a part of the core business of of the activity so you think about say an e-commerce business that doesn't have physical bricks and mortar retail outlets however their core businesses around online retailing and so the warehouse function and the activity around the warehouse could actually constitute part of the core business and not not be considered preparatory auxilary nature and that could now what give rise what we call a warehouse PE thanks again okay thanks minute all right Rohinton car please now bring you into the conversation to discuss the agency payroll and the impact of the new OECD guidance on that front thanks cam so I'm basically going to be talking about two subjects one is the lowering of the threshold of the overall agency Peru and the second is how the definition of the independent agent has been narrowed in the commentary firstly let's talk about the agency PE now as everybody knows in the existing model Convention the agency PE arose when there was an agent was not of independent status and who habitually exercised in the source state authority to conclude contracts that's the classic model convention now in the commentary to that model convention in the purpose of authority to conclude contracts was clarified and said don't take that definition literally what we want to also mean is where there was a lack of active involvement of principle there it would be deemed that there was an authority to conclude contracts with the agent now as for the new changes that have been proposed an agent who basically habit surely played the principal role leading to the conclusion of the contracts would be considered to be a an agent agency PE especially where the principal did not interfere and make material modification to any of those contracts entered into and led by the agent so this is typically a so she ated with a situation where the agent led and convinced the customer in the source country to enter into a contract with the enterprise now there's a very fine line of demarcation between providing support to a foreign enterprise in marketing in the source country versus playing the principal role in concluding a contract now typically plane the principal role would mean essentially actively pursuing customers to solicit orders now especially in a multinational scenario where a multinational company has a agent in the country who only role is to market the multinationals products in the country essentially the question that would come about is that would he end up playing the principal role if he ended up just convincing customers to provide orders so that's where the subjectivity comes in and many times in our experience tax authorities usually probe into these type of arrangements to see whether there is a direct nexus between the marketing agent and the orders that he obtains for the enterprise if there is a nexus back and in some cases there could be a nexus like the agent being compensated based on the orders that he obtains there could be a situation where he could be regarded as playing a principal role especially where those contracts are not modified by the principal typically any kind of oral contracts that an agent potentially enters in in the source country and the customer presumes that that oral contract results in a final contract with the principal could also be the ones that have risk now coming back to the marketing agent example this certainly seems to put at risk a often agency P into those sort of arrangements where the agent was ostensibly providing just marketing services but essential the contract was being entered into by the principal without any significant intervention or modification let's now move on to the next slide where we talk about how the independent agent definition has been narrowed the commentary talks about a situation that the agent will no longer be independent if he acts exclusively or almost exclusively for one or more enterprises to which it is closely related again putting it into a typical MNC scenario you have a situation where a subsidiary acts as an agent a marketing agent of the principal's products and if that subsidiary is providing services only to the principal clearly the independent agent threshold will not be passed in those cases now this typically applies only in the case of agency scenarios where the buy/sell relationship is not there between the agent and the principal where the buy/sell relationship is there and the agent is actually acting as a distributor there in that situation typically this definition narrowing will not have an impact because the agent in that case is fully represented of the risk of buying and selling the goods in the source country and therefore while these changes are being dealt with under the TP changes or to the commentary or over here they would still be regarded as independent agents let's now move on to a simple example of how we could illustrate or the change in article 5 5 on the agency PE over here in our diagram we have a situation where a principal which is headquartered in state are as a representative in state s that solicits orders from customers in state s once the order is solicited the principal and state are directly enters into a contract with the customer and the customer directly pays the principal who ships the goods from the warehouse situated in state are now in this case since the sales agent actively solicits and receives order from customers in this case the principal role regarding reading to the contract inclusion is being conducted by the representative and this would lead to a agency PE back to you cam right thanks very much for our hinton all right I think I think we're now ready for our first polling question for today so if we can move to that all right so to take a bit of a temperature check on what stage our audience is at in relation to the OECD's guidance we just wanted to ask you a quick question which is how familiar are you with the OECD's 22nd of March 2018 release on additional guidance on the attribution of profits to permanent establishments so options there are firstly I have read it and can apply it to my company's facts secondly I have read it but have some difficulty applying it to my organization facts thirdly I have not read it yet and lastly don't know or not applicable so if I could ask you to submit your answers now that would be great well we're waiting for our audience to respond to the question man oh I might bring you back in to ask you a question so if we think about the OECD's changes to the preparatory and auxilary exemption and to the agency PE rule what are we seeing in terms of things happening in practice in relation to those changes influencing taxpayer behavior and necessitating or leading to changes to their global business models yeah another thing that's a good question Cameron and obviously we've these changes have been in trained for a while and in many groups have been anticipating them and as you say this twofold there's obviously the changes to to the OECD model that's already found its way to a number of bilateral treaties for example here in Australia with our treaty with Germany and obviously going to be implemented as part of the MLI but also on top of that as we'll find out later in this session the number of countries also move to to adopting their own newly lateral measures again back in Australia key example of that is our multinational anti-avoidance law now given all the uncertainty that that brings particularly as well as we will learn if you do trip now trip into the concept of a PE or a taxable presence and the nfinity about attribute profits what we're seeing groups do now is reorganizing their affairs and actually have some legal flows through local subsidiaries for example by cell through local subsidiaries and have a have a transfer pricing conversation in relation to legal flows rather than have the debate around an attribution of profit to a PE or be caught within the realms of something like the multinational anti-avoidance law we have in Australia so we are seeing quite quite significant change in kind of supply chain and business models in two source countries great all right thanks very much Mary all right so we've got our results back from our audience thank you very much for responding and you'll be pleased to know that our asia-pacific audience is much more widely all will better read and informed than our us colleagues because when our when we ran a similar sort of debrief in the US I think the the number of or the percentage of the audience which hadn't read it yet was around 84% so good on you those those of you who've taken the opportunity to read the lacs paper although I'm not surprised to see that that a number of you or almost 20% have some difficulty applying it to your organisation's facts because the guidance is relatively high level and I think the OECD has purposely done that but it's not necessarily helpful for taxpayers all right um we might move on so Marc you've been waiting patiently in the wings thank you for that let's bring you into the discussion to discuss what's required in respective profit attribution once once it's actually been established that a PAE exists things can as you point out once the pair has been recognized this is where the fun starts as we need to apply some sort of methodology to start attributing the profits to that PE however there's always been controversy around attribution as different approaches have been adopted by different countries and whilst the OECD will treat appease a separate entry Enterprise the attribution of profits analysis can differ from country to country as determined under either local principles or the specific treaty under which the analysis is being performed and the OECD has the authorized though we see the approach or the AOA which relies on the concept of significant people functions to determine the activity tributed to the PA and during this process the OECD transfer pricing guidelines are applied by analogy to hypothesize dealing between the PE and other parts of the enterprise taking into account the functions performed as it's used and risks assumed by the PE that said not many countries have adopted the authorized OECD approach which has this concept of significant people function however the authorized OECD approach is relied on in the OECD's interim report and in whilst this report has four examples as can point out earlier we have shown too in the following slides which which do have a bit more relevance to the digital economy context so with that let's move into the first example and what we have here is an example of how complementary functions of a cohesive business operation can lead to the situation of two PS under the broader PE definition so specifically the facts we have we've got a company that has an office in the warehouse in country s and this company sells goods through an online platform directly the customers in country the purpose of the warehouse is for the storage of goods and has 25 employees maintaining it this includes the handling of receipts of shipments from suppliers stocking goods and execute deliveries meanwhile the purpose of the office is for merchandising activities and the collection of information in relation to the customers and this has 15 employees maintain iam so the result of death under the broader P definition is that we do have two PS on the basis they are a cohesive business operation and the activities are not considered auxiliary or preparatory nature that as a result of this both will need to be separately analyzed to determine the profits attributable to each PE perhaps one thing to note in this example is the concept of few or many employees in determining whether there is significant presence which many raised earlier so in this particular example and if we take the warehousing situation it does seem to imply that 25 employees would not be considered preparatory auxilary in nature however with that let's move on to the warehousing PE and and the steps considered to attribute profit to it so starting with step one of the authorized OECD approach we would normally perform a functional analysis of the warehousing activity in the sales to country s customers so such an analysis per the internal report had shown that country are deals with purchasing of goods from suppliers and the sales good to third party customers the the analysis also shows that the PE is responsible for the leasing in the running of the warehouse and with managing the third party delivery services to the customers as such the significant people function relevant to managing the warehouse is performed by the warehousing PE and it is the economic owner of the warehouse further to this step one of the authorized OECD approach also requires the recognition of a dealing between head office and PE in this example it is hypothesized that it is the provision of storage and delivery services by the warehouse to enterprise moving on to step two of the authorized OECD approach we would typically apply the tree instead of pricing guidelines by analogy to determine the arms link pricing of the hypothesize dealing in other words we would apply a process that would determine an on think price of a service fee that head-office would have paid under comparable third party conditions or have had requested from third party service providers similar storage and delivery services in practice was not mentioned in the interim report by the OECD this would typically involve a process of hypothesizing a service fee having regard to a cost price methodology building up an appropriate cost base and benchmarking and appropriate arms link marco of particular note however is that the warehouse PE is not determined in the interim report to have a function asset and risk profile or the distribution company is very specifically focused on the storage and delivery activities so with that let's move on to the office PE similar to the warehouse example we have to consider the first step of the authorized osne approach and the functional analysis in the interim report identified the office PE as having the significant people functions relevant to the management of the office and the merchandising and the collection of information as such the PE is identified as the economic owner of the office further under step one of the authorized OECD approach we'll recognize an internal dealing between the PE and head office akin to the provision of merchandising and information collection services moving on to step two of the authorized ONC D approach we apply the transfer pricing guidelines by analogy and the arm selling price is analogous to that paid to a third party which performs similar service functions bears similar risks and use similar assets as the PE in relation to the merchandising activities so very similar to the warehousing example whilst the interim report does not go into detail in practice this process could involve the application of a cost Buster methodology and the benchmarking companies performing comparable services to the PE so that concludes the first example however we have one more to show you so with that let's just move on to the next slide this is this additional example is actually example 3 from the interim report and focuses on the sale of advertising space and the website the facts are enterprise and country are owns rights in website related intermedia in country s performs marketing activities on behalf of the enterprise and receives a fee equal to the percentage of sales revenue this revenue is based on sales of advertising space to customers in country S importantly related intermedia habitually plays the principal role leading to the routine conclusions of sale without material modifications terms and conditions in which the customers offer to purchase the advertising space and also importantly related intermediaries business consists solely of activities for enterprise so as a result of this the enterprise does have a pair in country s however then we need to consider two additional steps firstly we will need to consider the on ffense nature of the existing service fee under article 9 and the transfer pricing guidelines and then secondly we will need to consider the correct attribution of profits to the PE these two sets will consider in the next slide so firstly considering the existing service fee which is a percentage of sales revenue the interim report says there is no analysis required as it is arm's length the interim report summarily states the remuneration is arm's length Minh moves on to the attribution of profits analysis using the significant people function framework of the OE thought arises OECD approach under article 7 to determine the profits attributable to the country PE so going and going back to step one of the earlier eyes OECD approach the significant people functions relevant to the assumption of the risk associated with the advertising was found in the interim report to be performed by the personnel country yes and therefore the PE is assumed to be bearing this risk further the hypothesize dealing is deemed to be the enterprise selling advertising space to the PE which as you will know is very different the current payment to the related party however with that let's move on to the attribution steps so the second step of the authorize though is said the approach requires the OECD transfer pricing guidelines to be applied by analogy just determined profits attributable to the PA and pricing is determined to be the amount enterprise would have received if it had sold the right to advertising space to unrelated party so in practice whilst the interim report does not mention it we'll go through it in detail this may be determined through applying a comparable uncontrolled price methodology for example where enterprises sold advertising space to third parties directly once the attribution of profit is taking place another practical element of this is which the interim report considers is the pease tax computation we have firstly the hypothetical cost of advertising but we also have the amount already paid to the local entity both of which should be deductible expenses in other words if the existing payment of the percentage of sales fear were hypothesized to have been paid by the payee then this should also be deductible so with this this concludes the examples we were considering from the interim report but let's move on to some observations regarding the OECD guidance in general so firstly it should be said that this is a step forward and it can pointed out the examples are helpful however there are still some unanswered questions the OECD report makes no recommendations specific to profit attribution to digital pays unlike perhaps you know from what we've seen the position has been taken in Europe for example and while cos it is reviewing next to some profit allocation rules and working towards a consensus based solution for its final report during 2020 alternately what this guidance is arguably lacking is clarity of on how transfer pricing rules applied on to article 9 and an analysis of significant people functions under the authorized OECD approach would work particularly for circumstance we're both principals should be applied such as in the last example we looked at in relation to the sale of advertising space the intern reported this example brushed aside the unlinked nature of the existing fee under article 9 by assuming it isn't linked which begs the question whether the attribution of profit would have changed anything in the first place but with this I'll leave you all to think about it and I think it's actually now time for another polling question again yeah thanks very much thanks very much mark certainly a lot to digest and a lot to think about from that OECD paper well before we move on to our next topic on our agenda today we wanted to ask the ask our audience another polling question so we want to ask what is the extent of the impact of the OECD's guidance on the attribution of profits on your organization so for those of you that are impacted would you answer either a lot somewhat not much too soon to tell or don't know not applicable all right now mark while we wait for the audience to respond to this question let me ask one of you and the question relates to profit attribution and what the March 2018 guidance suggests in relation to attribution so do you think that the OECD guidance is sufficiently clear on what taxpayers need to do in attributing profits to their pease well camera I think you know the fact that there have been several papers on this area ready and it's arguably being a moveable feast for the past few decades it does show that the issue of P definitions and P attribution is not a simple one and getting consensus is going to be critical in this area however there is is a bit of controversy particular on attribution of PS and and this has historically seen many different approaches taken up by countries as to how to do it particularly as there are that many countries that have adopted the authorized OECD approach which this interim report primarily focuses on so in practice going forward this may mean it isn't quite as straightforward to apply and may mean more controversy and double tax issues arising in relation to the topic but overall I would say the recent guidance has at least moved the dial that is it's not all bad and they've at least concerned that the function and acid and risk framework should be applied for PE attribution so I think that that's certainly in the right step but arguably there is still a lot unsaid by the OECD and as such there will be a number of situations where taxpayers will not have a clear path as to how to apply the guidance and but not only that as I mentioned earlier even if the attribution of profits is clear I guess maybe another question is what differences are made and example three of the interim report which we considered is a case in point in relation to whether there would be any difference to the tax outcome under article 9 or article 7 so in the end here can there are some areas of improvement but is moving forward yeah absolutely and I guess we need to recognize that it is a really difficult topic and one on which it is difficult to get consensus from the different OECD members so I think I agree with you it certainly is a step in the right direction but there's a lot more water to pass under the bridge in terms of you know how this is all going to end up in practice all right so we've got our results of our second polling question so thanks very much to the audience for applying replying to that I think too soon to tell is is perhaps the the biggest response not much some water about the same don't know not applicable and a lot at the bottom end so I guess that represents a good you know an interesting but probably expected outcome in terms of what tax payers are saying from this issue all right if we move on to the next topic for today's discussion and we're going to move now to the OECD's interim report on the taxation of the digital economy in the context of digital please which is obviously a an interesting but also difficult topic so man who can I please ask you to kick off this part of today's conversation by talking our audience through the background to this OECD report and then taking us through its key components in light of today's topic of digital PS sure no problem can and so as we're discussing the concept of a PE and attribution of profits as relevant in the background the OECD has been doing a fair bit of work in relation to the digital economy and it can mentioned earlier this year the OECD delivered an interim report and what they've titled tax challenges arising from digitization what the OECD has done in their report in no less than 213 pages is that all of this stuff is really hard and there's a lack of clear consensus on where we should be heading and so they have a committee to do some further work and we're expecting a further progress update in 2019 with a view with the final report and potential recommendations by 2020 and so there's still a fair bit of work for the OECD to do now what this slide shows is a summary of their report in the areas that they considered and the key challenges that that they're facing now it's interesting to note underpinning all of their analysis they've identified three key areas that underpinned players in the digital economy one is that they're they're pervasive to the cross-jurisdictional but without much of the mass and scale that we've seen with traditional enterprises and the second element is that there's this significant reliance on on intangible assets and in particular protected intellectual property and underpinning all of that is the third third factor that a lot of that IP or a lot of that intangible value is dependent on data and user participation and the synergies of how that enhances the value of the IP and so it gives rises the rise to this perplexing question of where the real value creation of the activities of the players and the digital economy are is that for example the creation of the platform or is it more where the data is located and the users underpinning that data so if you think about an online platform for example where there's peer-to-peer trading or activity you know is the value really more attributable to the creation of the platform and the technical know-how behind it or is it really behind uni when we interact on the platform and where we're located and generating that value so you can see that there's a large economy around where the value is to be created now there is a spectrum of views of how the international tax system should should operate to address this on one hand where there's a group of member member states that say look the best initiative is doing finance there's plenty of initiatives as part of that that's addressing part of these challenges but on the other hand there's a number of member states saying look the traditional system is doesn't work in terms of the digital economy and we can we need to devise a new system to understand and how to apply our rules to the digital economy and as we can see there in the Royal interval going a bit to detail in the meantime we haven't we're seeing a lot of member states already implementing various means and an ad hoc almost fashion in a non cohesive fashion of implementing their own rules to target these kinds of challenges if we go to the next slide and just articulate where some of the member states are saying look beps is doing a lot to address a lot of these challenges and as I said the digital economy a lot of that is underpinned by use of intangibles allocating value to that and and the challenge that part of the best challenge was to particularly address the taxation of intangible assets in low textures removing the profits allocable to that to low-tax jurisdictions but what we've learned particularly for example the amendments of the pierre definition that we've discussed today where players in the digital economy such as e-commerce or sellers of online advertising the broadening of the P definition now potentially brings them into source country taxation the revamping of the transfer pricing guidelines and actions 8 to 10 and the enhancement of these principles around NP further guidance around the CFC rules to ensure that IP that's been moved into low tax jurisdiction are still taxable in parent company country jurisdictions and the suite of new standards around truly abuse and harmful tax practices so there's a school of thought that bits is doing plenty in addressing this however as I see on the next slide it generally there is still this tend for unilateral action to occur and as we seeing various states around around the world are reconsidering the way they're applying their domestic threshold of taxable presence whether it's PA your source and lowering that threshold to instances where you may not even require physical presence and we're starting to see this new language of a digital presence so that's essentially this new world regime where there's a taxable presence in a country even though there are not people on the ground or no tangible assets on the ground so we're moving into this realm where unilaterally countries are potentially deeming peers to exist other by changing the domestic rules or introducing new concepts like the mao-a concept of significant economic presence where the source country taxation we're ordinarily or traditionally we would not see thanks camp over tonight all right yeah thanks thanks man all right Reddington if we move on to the next slide can you just take us through some of the specific unilateral measures that we're saying in practice that attempt to address the digital economy thanks cam so at the end of action item 1 the OECD left it open to countries to take unilateral measures provided those measures were in alignment with existing tax treaties various countries have gone around doing different types of unilateral measures some which were spoken off in action item 1 and some which were not spoken off in action item 1 oh we've got four categories on a slide today the first one is the expansion in the definition of permanent establishment in context to digital teens and over there action item 1 actually discussed this they called it the significant economic presence and we have India and Israel having walked the route on this particular expansion then we have the increase in withholding taxes to both broaden the scope of royalties to tax digital services and also our withholding tax on technical services also the UK has proposed a broadening of definition of source of priorities and that's another interesting concept that some countries have come up with don't know what taxes seem to be very popular in the context of digital services with a wide variety of turnover tax is applicable on both digital advertising and audio and video contents India France Hungary and Italy looking at different measures to actually tax these sort of digital services and in the last category which we speak about which is the specific regimes aim to target tax avoidance so we have mall which is the multinational anti-avoidance law that Australia proposed the diverted profits tax from the UK and the base erosion and anti-abuse tax in the US which are all measures to actually counter and and try and tax the digital Konami Tam yeah thanks for Hinton so you're potentially we're seeing a number of new weapons being created for tax authorities to using this space and I think despite the OECD's was report on this topic some regions and countries most noticeably almost notably the European Commission and the UK have moved unilaterally on the topic of the taxation of the digital economy so with that in mind perhaps right hinton within we can ask you to talk us through the european commission's paper on this issue sure I guess all these unilateral measures gam are a barometer of what I would call patience for some of these countries with their need to react to erosion of tax base in their countries by digital business so actually the u.s. come out with two measures one which they call the long-term measure and the second is the more interim targeted solution so the long-term measure is actually going down the significant economic presence type of arrangement that I just talked about earlier off and essentially this would be our measure in which it would apply to certain intra new situations and also with third countries where there is no double tax treaty and basically it would replicate the concept of the digital PE which the OECD has originally suggested and it is recommended in the directive that the member states implement this rules also into their double tax treaties the interim targeted solution is a turnover tax solution where three percent turnover tax has been proposed on payments for certain types of digital services and now the way the directives work so first of all this is a proposed directive and has not yet entered into force but before it enters into force all the countries of the EU must vote on it and must approve it unanimously before it can be brought into force and once it does come into force each EU state is quite to incorporate the requirements of the directive into their own domestic law and as the US directed they will also push to push move it into the double tax treaties now clearly the OECD guidance is scheduled only at the end of 2020 which is the guidance on the timeline that's been provided on the digital economy so we'll have to wait and see how these unilateral measures actually evolve once the final guidance comes out from the OECD moving on to the next slide an explanation of how the EU proposes to target the digital permanent establishment and how they're going to be implementing what they call the longer term solution and over there they've defined the digital permanent establishment as a significant digital presence and basically any EU company or foreign company that is based in a third country where there is no applicable tax treaty would trigger the digital be enough from member state and therefore would be subject to taxation on its digital activities if it needs certain criteria and the criteria which are suggested are of three types the first one is a revenue criteria and over there if the member state in member state revenue exceeds 7 million euros then it triggers the criteria there is a user criteria which is based on a hundred thousand user limit and lastly there is a number of contracts criteria which again is a where it exceeds three thousand contracts so fairly very low criteria kam over here and it's it's certainly something which is when implemented is going to change the way digital services are taxed in bu yeah absolutely and potentially taxed in a way that it's not necessarily consistent with what we might typically or historically have thought of as the arms-length principle alright so thanks for huntin so so mark let's bring you back in once a digital PA is found to exist how because then the European Commission's paper suggests that profits are attributed to a thanks cam sorry so the EU commissioners approach is understandably very focused on aspects specific to the digital economy and as such the focuses on activities undertaken through digital interface related to data or users and these shall be considered economically significant functions which atribute risks and the economic ownership of assets now this is not uncommon particularly given the UK in March had released an update to their November 2017 position paper which also recognizes that use participation is an important value driver for the digital business however lenders you know arguably you cave may be taking this a bit further than the OECD's business activity approach by placing so much emphasis on the end-user so interestingly with the UK taking such an approach to capture the value add elements of the digital economy it is questionable whether they are in fact moving away from the answering principle by making this this move and they seemed adamant that it leads to the right taxable outcome however they also acknowledge and I quote the government recognizes that it's not likely to be possible to use the arm's length approach for measuring that share or determining how that share then breaks down between specific user jurisdictions so overall this interaction the capturing value in digital economy while staying within the bounds of the arms link principle has its challenges however coming back to the EU Commission and capturing the value in the attribution of profits to Pease they specifically say that accounts should be taken of the economically significant activities performed relevant to the development the enhancement maintenance protection and exploitation of their enterprises and tangible assets the key here is they are trying to align the use of two critical elements of the digital economy data and uses the general transfer pricing approach of analyzing functions assets and risks attributed to a presence and this goes to the trend of trying to tie it into the trance pricing rules by using features akin to Dampier functions in the attribution of risk to a jurisdiction of such recognizing significant activities such as those outlined on this slide including the collection and the storage of data or the sale of online advertising space etc is is probably likely caught up in a typical transfer pricing analysis of functions assets and risks anyway one other interesting point raised by the Commission was that the profit split is required to be used unless it can be shown another method is more appropriate similarly the UK stated their preferred use of the profit split methodology so there are really two key things to note about this firstly will be used for the profit split be consistent with the ongoing guidance being formulated by the OECD summer which is coming out shortly and secondly what are the practical implications of applying this method now when you think about and having regard to the EU Commission you can papers it is difficult enough to be collecting the global P&L data to start assigning routine of residual profit as it is however is another thing altogether collecting information around allocation keys which links to users of website or the viewing habits of said users you know the viewing habits in particular is going to be very difficult as these in the cape position paper are what attributes different levels of value as such whilst we can you know we can empathize with the approach taken by the EU and then the UK and you know we understand why I rightly or wrongly in the profits Blizz been raised but there is a level of complexity attached to such a methodology and some practical you know experience this is something that we shouldn't really be forgetting and with that I'll pass it back to you cam yeah thanks mark thanks for taking us through that and I think this is definitely a space which we need to watch with interest because in some ways you know these regions these these countries are the first movers and so no doubt other countries will follow alright I think we might have time for one question so we've got a number of questions from our audience I'm just going to pick one at random which is I think one so the question is if you have an agent PE or agency PE but the activity is performed in a subsidiary to which you already pay an arm's-length payment would you now need to submit two tax returns even though under an attribution approach so the PE there is no additional tax to pay I'm sorry hint and I might throw that one to you in an Indian context oh right so come in India we've had a Supreme Court case law in the case of Morgan Stanley which has been publicly reported and discussed many times over and and it actually addressed exactly this question so in that case what happened is that moment Stanley had a center in India that was providing our services back to the parent and the question that was raised was that as long as that Center was being paid an arm's-length compensation for the functions that it performed would there be a tea in India on account of employees that actually traveled to India or work that was being performed in in India and the Supreme Court answered in the negative and they said that an arm's-length compensation would extinguish any liability of the defendant agent p in this particular case now the question is surely a is a little more complex or the question also is of whether the functions that arise on account of the PE are fully captured by the local subsidiary or not and that is actually a question of fact and then comes the attribution and the fact whether the attribution has been done on an arm's-length basis or not so in many cases there have been disputes that the functions have been incorrectly captured and therefore an arm's-length fee for functions that are incorrectly captured does not necessarily extinguish the liability of the foreign enterprise so a little bit of you know quality to be attributed to the functional analysis force before the attribution study can be determined to be adequate hi Greg thanks for Hinton all right unfortunately we better leave it there unfortunately that's all we have time for today so mark Rossington and mannery thank you very much and the special thanks to all of you who are able to join us on today's debrief we would like to encourage you to fill out the short survey that will pop up on your screen 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