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47 Intertax 998 (2019)
Transfer Pricing in the Digital Economy

handle is hein.kluwer/intrtax0047 and id is 1028 raw text is: Transfer Pricing in the Digital Economy Publication of this special issue that is dedicated to trans- fer pricing' coincides in time with the publication of the OECD/G20 conclusions on the allocation of taxing rights and the future of the international tax system in the digital economy. Transfer pricing is at the core of the aforementioned OECD/G20 discussions and conclusions (Pillar I). Therefore, it is hardly possible to discuss transfer pricing without also debating the digital economy, the future of the international tax system, and the role of the market state. Three options for connecting elements, all of them target- ing allocation of taxing rights to the market state, were proposed by the OECD in February and May 20192 under its Pillar I: international taxation on the basis of a significant market presence; taxation according to the value of user contributions; and profit allocation to market intangibles. 'User participation' implies selecting those digital busi- ness (also called highly digitalized business) for which users allegedly create value and, therefore, ring fencing, unless a pre-determined formula based on non-routine or residual profits back to the user country would apply.3 The 'significant economic presenceI proposal combines a revenue threshold in the market country with a user based factor, a digital factor, or other market related factors and could rely on a fractional apportionment method that is more or less favourable to the market country.4 The ,marketing intangibles' approach claims that a non-resi- dent entity can actively intervene in the market country and develop market intangibles therein.5 Allocation of taxing rights to the market country could rely on a residual profit split analysis or a modified residual profit split method based on a predetermined formula.6 All three options mentioned above potentially rely on transfer pricing, even if they reconsider the latter, go beyond the arm's length standard and develop into some form of aggregate taxation. The articles below illustrate this interconnection. Wolfgang Sch6n (One Answer to Why and How to Tax in Digitalized Economy) assesses the merits of the OECD proposals considering revenue, fairness, and effi- ciency as well as the issue on the relevant connection to territory. Sch6n claims that corporate income tax is a tax on return on country- specific investment, and the profit share should include the riskless rate of return, the risk premium, and the rent.8 Vikram Chand analyses the OECD 2019 public discussion and the subsequent pro- gram of work documents, reflecting on the 'marketing intangible' and a new nexus rule attached to the source. He further elaborates on a rebuttable safe harbour that is constructed on a return on sales or operating profit margin. Isabel Verlinden et al focus on the 'development, enhancement, maintenance, protection and exploitation' (DEMPE) concept in the context of transfer pricing and a value chain analysis and its merits in capturing value related to the technological advances and new business 1 I would like to thank Vikram Chand for coordinating this special issue with me. 2 OECD, Addruj ng the Tax Challenge of the Digitalization of the Economy Publc Consultation Document (OECD/G20 Base Erosion and Profit Shifting Project, 2019); OECD, Programme of Work to De. lop a Consensus Solut onto the Tax Challenge Aringfrom the Digitalization of the Economy (OECD/G20 Base Erosion and Profit Shifting Project 2019). 3 OECD, Addrajjg th; Ta Cha/ngi of the Dg ta/ aton ofthe Economy Public Conuultation Document, at 18 21, 24, 27; See in this issue: V. Chand, Allocation of Taxing Rights in the Digitalized Economy Assessment of Potential Policy Solutions and Recommendation foi a Simplified Residual Profit Split Method, at 1023 et seq. 4 OECD, Adru ng tlc Ta Challenges of the Dg ta/zation of the Economy Publhc Conultation Document, at 50; V. Chand, Allocation of Taxing Rights in the Digitalized Economy, cit, n. 3 at 12 02 5 OECD, Addrusing the Tax Challeng of the Digitalization of the Economy tPublic Consultation Document, at 31 32. 6 OECD, Programme of Work to Develop a Conensus Solution ... , at 28. 7 See W. Schon, One Answer to Why and How to Tax the Digitalized Economy, in this issue, at 1018 et seq. a Ibid. 998 INTERTAX, Volume 47, Issue 12 Oc 2019 Kluwer ILaw International WV The Netheprlands

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