The final reports issued on this month by the OECD on the Base Erosion Profit Shifting (BEPS) project, and now endorsed by the Finance Ministers of the G20 group of industrialised countries, will affect retailers with international operations.
With changing business models in the retail industry putting an increased reliance on the digitalisation of sales, Action 1 on the digital economy has identified that, while it is hard to ring fence and therefore levy specific taxes on the digital economy, the OECD and G20 believe that digital business models raise challenges such as "double non taxation", and "artificial segregation between taxable income and economic activities", which need to be addressed.
For the collection of VAT on B2C digital transactions, the OECD has recommended applying a destination principle, in line with previously issued international VAT/GST guidelines. This is already a growing global trend following the EU VAT changes effective from 1 January 1 2015.
Other countries around the world have also implemented similar rules including Norway, Iceland, Switzerland, Albania, South Africa, and most recently, Japan.
The OECD also recommends the introduction of simplified mechanisms for ensuring collection where the consumer lives, including the reverse charge.
Action 1 also discusses a "significant economic presence" test, which some countries will introduce to act as a threshold for the taxation of non-resident companies, which is based on locally-derived revenue, rather than physical presence, and takes into account factors such as size of user base.
Other measures that some countries may adopt include withholding taxes on digital transactions, including sales to individuals, but these are not expected to be adopted as international standards.
Another change is the definition of a permanent establishment (PE) in Article 5 of the OECD model tax treaty, which currently regards storage and delivery activities, such as warehousing, as preparatory and auxiliary activities, and hence not taxable in the destination country.
However the OECD believes these activities are now core components of certain business models, particularly in the retail sector.
In response, Action 7 has significantly changed the rules on sales activity and warehousing/storage, which is expected to make it harder to avoid a PE in the normal course of cross border business.
Action 7 also aims to tackle perceived abuse via commissionaire arrangements, where the activities that an intermediary exercises in a country are "intended to result in the regular conclusion of contracts to be performed by a foreign enterprise".
Because of revised the wording of the definition of agency PE, situations such as this are now likely to give rise to a taxable presence in the local market.
These structures do occur in the retail sector, where group companies perform a sales and marketing support function to negotiate sales contracts in local territories, which are then concluded and carried out by the foreign parent.
While more activities of groups with international operations (both large and small) are likely to fall within the new PE definition, guidance on the attribution of profits to PEs is still outstanding and follow-up work on this is expected in 2016.
Actions 8-10 on transfer pricing are also expected to have a major impact on all MNEs, with an emphasis on "delineation of the actual transaction", especially in relation to intangibles and hard-to-value intangibles, with conduct reviewed against contracts to determine accurate allocation of profits.
For the development of intangibles, the provision of funding alone, without the assumption of financial risk or development risk, will receive no more than a risk adjusted, or risk free, financial return.
From 2016 onwards, information to assist tax authorities with assessing whether a transaction has been accurately delineated will need to be gathered under the new format set out in Action 13 on transfer pricing documentation, using a central master file and separate local TP files underneath this.
Furthermore for the larger retailers, county-by-country reporting templates will need to be filed for groups with annual consolidated group revenue greater than €750million ($827 million).
Additionally, reforms have been made to controlled foreign company (CFC) rules under Action 3, to address the situation where income from digital goods and services provided remotely is frequently not subject to current taxation under CFC rules, despite the significant variation in CFC rules between jurisdictions.
Mobile income typically earned in the digital economy, such as IP income and income earned from the remote sale of digital goods and services, is now expected to be included in CFC regimes.
Overall, retail companies will be particularly affected by the OECD's initiative to stop situations where companies make substantial sales or collect and monetise data in a country without having a physical presence.
By Wendy Nicholls and Emily Healy of Grant Thornton UK