What Does Base Erosion and Profit Shifting (BEPS) Mean For Digital Entrepreneurs? 

The OECD refers to Base erosion and profit shifting (BEPS) as  “tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations.” 

To help showcase an example of BEPS in action, using an easy to understand example, imagine a company located in a high tax jurisdiction licencing Intellectual Property (IP), or offering intra-company services from a controlled subsidiary in a offshore lower tax jurisdiction. Essentially, there is a deliberate funneling of money out of the high tax jurisdiction, into the lower tax jurisdiction resulting in a lower overall tax rate for the Multinational Enterprise (MNE). 

To combat against this, the OECD has stated on their website that “under the OECD/G20 Inclusive Framework on BEPS, over 125 countries and jurisdictions are collaborating to implement the BEPS measures and tackle BEPS.” 

However, BEPS is Hard to “Tackle” in the Digital Economy

Many online entrepreneurs have designed companies that allow them to work and live from anywhere. The OECD is currently focused on trying to define physical presence (often by analyzing the location of central management), or by looking at the jurisdiction of value creation.

However, neither of these methods do a particularly good job of encompassing the range of possibilities that are currently at the disposal of entrepreneurs working within the digital economy. Online entrepreneurs can add value to their companies in ways that defy (or at least confuse) most legal definitions of physical presence. For example, many entrepreneurs operate using fully distributed teams, often freelancers from around the world, to help create value for their companies. To complicate matters more, this workforce often shifts to meet the needs of the company in any particular month.

Similarly, the digital economy allows people to work from virtually anywhere in the world. Central management could could be adding value to their company from Spain this month, Peru next month and then Canada the month after. We see this type of corporate mobility time and time again in our FREE offshore tax mini-course for online entrepreneurs and current definitions of physical presence simply don’t apply to many of the students we meet in our online course. 

Essentially, this new class of digital nomads, who’s emergence has surprised many, has left governments and tax authorities scrambling to better define the tax rules around these types of entrepreneurs and the businesses they run.

However, the OECD states that “the digital economy does not create unique BEPS issues” but they continue by saying that “some of its features exacerbate existing ones”. The OECD believe that if they focus on a better definition of permanent establishment as well as CFC (Controlled Foreign Corporate) and transfer pricing (TP) rules, that they could better address BEPS issues within the digital economy. 

Digital Economy Tax Where Value is Created and Where Economic Activity Occurs

So what does this all mean for online entrepreneurs? Well, online entrepreneurs need to be aware that there is a growing trend for tax authorities to deeply analyze where value is created within a company and they try to align that with where economic activity occurs. 

However, the truth is, that today there is simply not sufficient consensus on how to deal with new challenges arising from the increased popularization of the digital economy. New opportunities have been provided to entrepreneurs, both in terms of business structuring possibilities, as well as lifestyle design choices that require a more fluid definition of physical presence.

Regardless, cash strapped governments are aggressively looking at ways to substantiate economic presence. Once such way they are doing this is by analyzing where a company generates substantial revenue from. They are also increasingly looking at in what jurisdictiosn companies actively target customers. The logic is, that if a company is targeting a jurisdiction’s residents, then that company might be considered to have a taxable presence there. But unless new tax infrastructure is built, it would be virtually impossible for SME’s to register as tax residents in the 80 – 100 countries their online businesses sell to. Logistically, it just wouldn’t be possible.

Similarly, countries are negotiating the need to charge VAT at the source of the purchase. This would require very complex reporting, introduction of new tax technology and logistical and infrastructural changes that would allow companies to pay taxes to the countries where they sell. Currently, no such mainstream option exists for small to medium sized enterprises (SME’s). 

What Does This Mean For Online Entrepreneurs Working In The Digital Economy?

There is currently not a strong consensus on how to deal with BEPS issues as they relate to entrepreneurs working within the digital economy. Currently, the best thing that entrepreneurs can do is to study jurisdictions that have a favorable business climate and tax incentives that are compatible with their lifestyle design choices and corporate structure.

If you want to learn more about how to properly structure your online company to minimize your global tax obligation, then please browse through our blog, or consider enrolling in our FREE offshore tax mini-course for online entrepreneurs


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(*Learn how to dramatically reduce your corporate taxes by using the various restructuring blueprints that we’ll provide you in our FREE offshore tax planning and training mini-course.)

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