Governments around the world are retrofitting their tax policies for the fast-evolving digital economy. Many are seeking a delicate balance between policy goals of catalyzing and taxing their digital economies. Pivotal to policymakers’ analysis is the movement and alignment of economic substance among countries, which includes agreeing on the definition of “substance” in the first place. Such cross-border activity bring into focus matters such as the calculation of transfer pricing for services and intangibles among related companies, the definition of permanent establishment (PE) as a taxable presence in any given country and the location of IP development and licensing.
out ahead of the process with new policies of their own. The hope is that national and multilateral initiatives will coalesce in time, but countries such as Australia, France, the UK and the US seemingly are forging ahead with their own specific policies, which creates uncertainty about the likelihood of a multilateral outcome.
Risks abound
The technology sector has been the catalyst of the global digital economy, propagating new digital business models while providing the products and services driving transformation throughout other industries, as well. Thus, technology companies have also found themselves on the front lines of global tax policy innovation — managing new risks that companies in other industries are now coming to face.
Shifting tax landscape
When is an international business entity or transaction structured more for tax avoidance than commercial objectives? National governments are grappling with this question in an increasingly globalized, digitized business world — both on their own and within the Organisation for Economic Co-operation and
Development’s (OECD’s) far-reaching project on base erosion and profit shifting (BEPS).
Policymakers’ attempts to revise tax rules to “assure that transfer pricing outcomes are in line with value creation,” as the OECD puts it, have generated extensive and sometimes heated discussion among businesses and governments alike. But transfer pricing is not the only topic up for global debate over the movement and alignment of economic substance. Underscoring the possible extent of change under consideration, an influential report in France has challenged the very nature, as well as location, of value in the digital economy, advocating international negotiations to redefine permanent establishment and raising issues surrounding the ownership, compensation and taxation of personal data.
Also causing tensions among some countries are the revision of
R&D incentives (for creating IP) and the evolution of “patent box” incentives (for the location of IP licenses). One country’s tax incentive can be another country’s cause for concern about losing out.
“2015 is shaping up to be a watershed year in global taxation,” says
Channing Flynn, EY’s Global Technology Industry Tax Leader. This is, in fact, the year that the OECD is promising to complete its BEPS work on new global tax guidelines — even as countries are moving
Uncertainty will continue to prevail in digital economy taxation.
Although the BEPS project for global tax policy development is characterized by a desire for consensus, for example, practical differences continue to arise on the ground, from country to country, as global guidelines remain “works in progress.”
Meanwhile, technology innovation is certainly not pausing to let tax rules catch up.
What are the business risks?
• Tax increases in weaker economies
• Double taxation between countries with different tax schemes
• Fines and reputational risk to any company declared non-compliant
• Burdensome administrative reporting
• A chilling effect on restructuring for operational efficiency
• The unpredictability of bottom-line business results
• Impact on revenue from indirect taxes such as VAT and the
Japanese consumption tax
De-risking the value chain — and finding reward
Multinationals need to plan ahead for tax changes coming at various speeds, with different nuances across numerous jurisdictions worldwide — a diversity well documented in EY’s 2014 Global transfer pricing tax authority survey .
1 For all that, however, internal considerations may be just as important in de-risking global value chains.
1 2014 Global transfer pricing tax authority survey , EY, http://www.ey.com/GL/en/Services/Tax/VAT--GST-and-other-sales-taxes/EY-global-transfer-pricing-tax-authority-survey

IP provides a case in point. Some national tax authorities have questioned whether a company doing business in their (higher-tax) jurisdiction was actually exercising control over IP that was on the books of a related entity in another (lower-tax) jurisdiction.
Companies need to understand where in their value chains people control the development, enhancement, maintenance, protection and exploitation functions of their IP. Some might consider recasting the internal transfer pricing of some of these functions or restructuring them. Whether or not such changes are necessary, many might find the answer is greater transparency and advance pricing agreements with tax authorities.
On the upside, an increasing number of countries are introducing or updating R&D and patent box incentives, providing opportunities for globalizing operations. To benefit, companies should make a thorough assessment of the changing landscape of available R&D incentives as part of a holistic analysis including such local factors as their overall IP regimes.
Considerations
Despite the odds, multinationals’ tax departments still need to function day to day, prepare for the various possible scenarios to come, steel themselves against potential business risks and maybe even find themselves in better shape, tax-wise, when the current surge of tax policy deliberation comes to a welcome end.
That is their mandate. Steps toward a tax-effective global value chain include:
External
• Maintain an ongoing survey of the global tax landscape and do scenario planning
• Contribute technical expertise in public consultations on the rules most important to your company’s future
• Plot the evolution of patent box incentives and R&D incentives around the world
• Proactively seek out advance pricing agreements with tax authorities
Internal
• Robustly document the allocation of income and profit to the key value driving activities
• Self-assess the ability to readily respond to changing transfer pricing rules and the increased likelihood of associated challenges
• Make sure the tax function is part of any internal discussion regarding business change. n

Technology sector leader
Pat Hyek
Global Technology Industry Leader
+1 408 947 5608 pat.hyek@ey.com
Technology service line leaders
Channing Flynn
Global Technology Industry
Tax Services Leader
+1 408 947 5435 channing.flynn@ey.com
Jeff Liu
Global Technology Industry
Transaction Advisory Services Leader
+1 415 894 8817 jeffrey.liu@ey.com
Dave Padmos
Global Technology Industry
Advisory Services Leader
+1 206 654 6314 dave.padmos@ey.com
Guy Wanger
Global Technology Industry
Assurance Services Leader
+1 650 802 4687 guy.wanger@ey.com
International Tax Services (ITS) contacts
Joe Bollard
+353 1 221 2457 joe.bollard@ie.ey.com
Ian Beer
+44 207 980 9060 ibeer@uk.ey.com
Technology Tax contacts
Jess Martin
Global Technology Tax Resident
+1 415 894 4450 jess.martin@ey.com
Olga Koshelkova
Global Cloud Computing and
Technology Tax Resident
+1 703 747 0453 olga.koshelkova@ey.com
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