Some reflections on the General Assembly of Argentina

Brian McCauly from the CRA expressed in his presentation during the 47^th CIAT General Assembly, held in April of 2013 in Buenos Aires, without doubt the City of Tango, that the issue of transfer pricing looks like a tango: it is very complex, has a huge technical challenge, is very difficult to be performed correctly, it is spectacular when done well, but it is something that few, very few, can do well.

In terms of exchange of information, as Rajul Awasthi from the World Bank said, tango requires two to be danced. It needs two parties that trust each other. To dance the tango alone is, undoubtedly, a sad, incomplete and innocuous experience.

In times of Web 2.0, of tablets and Smartphones, of applications, social networks, Internet, platforms and services, and the electronic tango; we find ever more complex challenges for which, it seems, the existing rules are simply not enough.

In his presentation, Lionel Testeviude from the French DGFIP , raised the challenges on taxation in the digital economy, where a number of technology companies operate in global markets, in many cases with offices located in jurisdictions with favorable tax environments, under conditions in which it is difficult to apply the current criteria of permanent establishment, with operations difficult to understand, and worse of all, it is difficult to audit the chains created to add value. Operations carried out by companies that hardly share dividends. This digital economy in which much of the value comes from their data collection and methods to obtain it, data possession and their analysis, and which allows, for example, a person resident in country A, while visiting the country B, rent a movie from a store which main office is in country C, which is downloaded from a server that is physically located in the country D, using for payment a credit card issued by a bank in country E. The movie could finally be enjoyed on a flight, while crossing the airspace of country F.  Our traveler was interested in that movie thanks to the advertising offered by a search engine or a social network, managed by a company with main offices are in country G, paid (by clicking on the link) to another company resident in the country H. It is possible that the advertising has been effective because one or several companies, not necessarily one of the previously mentioned, knew, thanks to the analysis of prior activity that this movie would be of interest to our frequent flyer. This activity could have been detected, for example, navigating in various sites on the Internet, located in one or more countries, any: from “A” to “Z”.

Then the question is: In which jurisdiction do those transactions have taxation effects? In one, several, all or none? But it is not the only question. Someone might wonder whether or not it is easy or at least possible, that one or several involved parties change their place of residence fast and often, looking for a more favorable jurisdiction. Someone else might wonder if the described operations really matter. They are small amounts but when multiplying them by a couple of tens of millions of transactions, their number becomes relevant.

Coincidentally, that same day, the British press reported an interview to the Chief Executive of a large technology company, so important that its name became a verb, stating that this is the way that taxes are globally reported, and that the same applies regardless of the country of origin of the companies.

Questions and proposals contribute to the debate. Some are exposed in the  documents of the Assembly, others in the OECD BEPS initiative, but a very interesting document is the one on the “Mission d’expertise sur la fiscalité de l’économie numérique”, a report prepared by Pierre and Nicolas Colin upon request of two ministries of the French Government, and the article “Corporate Tax 2.0: Why France and the World Need a New Tax System for the Digital Age” of Nicolas Colin. Among other things, the article is about the need for an addition to the definition of permanent establishment, considering end users as co-creators of value. The article ends by making a call to the global discussion on the true value of the large volumes of data. But, of course, an approach like this cannot be achieved by dancing alone, and for this tango more than two partners would be required.

Greetings and good luck

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