An Analysis of Actions of the OECD Action Plan on BEPS in the Digital Economy

Bachelor Thesis, 2016

57 Pages


Table of Contents

List of Abbreviations

1. Introduction
1.1. Problem Definition
1.2. Aims and Non-Aims
1.3. Methodology and Structure
1.4. Definitions of Technical Terms
1.4.1. Direct and Indirect Taxes
1.4.2. Permanent Establishment

2. Attributes and Growth of the Digital Economy
2.1. Development and Impact on the Business Environment
2.2. Different Business and Revenue Models in the Digital Economy
2.2.1. E-Commerce
2.2.2. Application Stores
2.2.3. Cloud Computing
2.2.4. Online Advertising
2.3. Overview on the Principal Characteristics of the Digital Economy

3. Concepts of the International Taxation System
3.1. The Role of the OECD in International Taxation
3.2. Principles of International Taxation
3.3. Double Tax Treaties and Taxation of Cross-Border Transactions

4. Challenges of Taxing the Digital Economy
4.1. The Role of PEs in the Digital Economy
4.2. BEPS in Terms of Direct Taxation
4.3. BEPS Relating to Indirect Taxation

5. Evaluation of Countermeasures
5.1. Methods Against Artificial PE Avoidance
5.2. Amendments to Transfer Pricing Rules
5.3. Measures Against Artificially Positioning Income in Low-Tax Jurisdictions
5.4. Actions for the Prevention of BEPS with Regard to Indirect Taxation

6. Discussion

7. Conclusion and Future Outlook

8. References

List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1. Introduction

During the last years the level of globalisation has increased substantially and companies conduct business on a worldwide level with a growing number of business activities performed within the digital economy by means of the internet and thus geo- graphically distant from the customers (OECD, 2013a, p. 7). With the continuous de- velopment of the digital economy, trading opportunities have considerably grown to- wards a more interregional and global market which goes along with a reduction of cross-country trade barriers (Johansson, Karlsson, & Stough, 2006, p. 5). This devel- opment is fostered by the occurrence of various technologies and new applications, particularly driven by the emergence and continuous improvement of the internet as well as an ever-increasing number of business models (Nellen, 2015, p. 17). New busi- ness models and economic activities are mainly facilitated by the utilisation of infor- mation and communication technologies (ICT) which leads to a significant reduction of costs on the one hand and on the other hand simultaneously encourages a faster in- teraction with customers and therefore an improved performance (OECD, 2015a, p. 52). The adoption of ICT within the digital economy conduces to the availability of new products and services as well as an alteration of offerings that are already existent in the market, which gives rise to the establishment of new companies, different competi- tive situations and thus new structures of the markets (Johansson et al., 2006, p. 4).

As per estimations by the Organisation for Economic Co-operation and Development (OECD), 2.9 billion people are currently connected to the internet on a global level with an upward tendency (OECD, 2015b, p. 17). Likewise, 95% of the companies with at least 10 employees as well as approximately 82% of the adult population within the OECD area make use of the internet (OECD, 2015b, p. 18). This causes facilitated interactions between companies and their customers, leading to significantly improved responsiveness to consumer needs and preferences. According to the OECD (2015a), ICT are spread over a still rising variety of industries and sectors including, for exam- ple, retail, logistics, and manufacturing (p. 53). Simultaneously, with the increasing in- terconnectedness that is associated with the internet, the significance of time and loca- tion is declining (Klassen, Laplante, & Carnaghan, 2014, p. 39; Nellen, 2015, p. 21; OECD, 2015a, p. 55). Therefore, companies can engage in business activities on a global level across country borders and without time constraints. The digital economy involves, for instance, sales of digital goods and services by means of e-commerce, transactions with virtual currencies, or other value-adding activities, such as marketing and advertising campaigns, which are conducted via the internet (Nellen, 2015, p. 19). Companies nowadays prefer to do business through e-commerce in order to accelerate their market entries in different countries and to reduce expenditures on marketing, communication or administrative tasks while simultaneously obtaining expertise about consumer preferences and focusing on building sustainable and fruitful customer relations (Nguyen, DeCenzo, & Drucker, 2012, p. 862). The most important revenue streams in sales via e-commerce are the business-to-business (B2B) transactions which account for approximately 90% of the total e-commerce (Klassen, Laplante, & Carnaghan, 2014, p. 39; OECD, 2015b, p. 18).

However, the digital economy does not only present advantages for the global society but also leads to difficulties for governments and tax authorities across different na- tions. Due to the usage of ICT, it is possible to conduct business across borders and thus engage in the economy of other countries without having an actual physical pres- ence therein (OECD, 2013, p. 7). Without a physical presence it becomes increasingly complex to monitor the location where a certain economic activity is undertaken and thus define the origin or source of income (Choudhary, 2011, p. 34). Hence, determin- ing the responsible tax jurisdiction, that is, the extent of a country’s right to tax a corpo- ration or an individual, is more difficult (Miller & Oats, 2012, p. 23; Nguyen, DeCenzo, & Drucker, 2012, p. 861). As a consequence, a failure to appropriately determine the cor- rect tax jurisdiction may cause significant tax losses for governments.

In the last years, questions have been raised on whether the currently existing rules for taxation, which were set up during a less globalised period of time, have kept up with a highly interdependent and integrated economy, which decreasingly relies on physical assets (Ernick, 2013, p. 453). One major influence has been the OECD with their work on international taxation, cross-border trade, and profit shifting, setting international standards for OECD member states as well as non-member states (Ernick, 2013, pp. 451-452).

1.1. Problem Definition

Concomitant with the ability to conduct business in several countries and thus different jurisdictions, multinational enterprises (MNEs) are trying to circumvent high taxation on income by taking advantage of the gaps that arise out of the interaction of different, independently designed, domestic tax systems (OECD, 2013b, p. 5). This may, for in- stance, be accomplished by means of adopting different tax planning strategies, such as profit-shifting techniques between affiliates by using internal loans (Buettner & Wamser, 2013, p. 63). The international tax regime, which was established in the 1920s in order to align the various domestic tax systems and to prevent MNEs from exposure to double taxation has revealed several weaknesses over the last years and might encourage companies to seize opportunities for base erosion and profit shifting (BEPS) (Choudhary, 2011, p. 35; OECD, 2013a, p. 10). One of the reasons for the difficulty in taxing MNEs properly lies in the fact that the current tax laws are primarily focusing on bricks and mortar businesses and are therefore not fully compatible with the digital world (Cockfield, Hellerstein, Millar, & Waerzeggers, 2013, p. 5; OECD, 2013b, p. 7).

Thus, especially in the field of e-commerce, MNEs are able to circumvent high taxation in various ways, for example, by easily shifting sales between affiliates in different for- eign countries; on the one hand because there are no tangible assets that have to be relocated (Klassen, Laplante, & Carnaghan, 2014, pp. 28-29) and on the other hand due to the usage of data, multi-sided business models, and uncertainty concerning the jurisdiction in which the profits are generated (OECD, 2013a, p. 10). As a result of shift- ing sales and profits to different low-tax jurisdictions, more and more states might lose a substantial amount of corporate tax income (Ernick, 2013, p. 452). However, gov- ernments not only forfeit significant amounts of tax income in terms of corporate in- come tax (i.e., direct taxes) but also through companies avoiding to pay sales tax (OECD, 2015a, pp. 31-32). The enforcement of sales tax on cross-border purchases is particularly difficult for business-to-consumer (B2C) transactions, since it is highly intri- cate to assess the sales tax liability of individual customers and moreover conveys substantial expenses for tax authorities and taxpayers alike (Bruce, Fox, & Luna, 2015, p. 736; OECD, 2015a, p. 32).

As part of their extensive work on BEPS and the resulting report “Addressing Base Erosion and Profit Shifting”, the OECD created the “Action Plan on Base Erosion and Profit Shifting” including 15 actions in order to prevent globally operating companies from undertaking activities that result in tax evasion and simultaneously to effectively reduce the risk of double taxation (OECD, 2013a, p. 13). The OECD furthermore specifically deals with the idiosyncratic challenges of taxing e-businesses in the digital economy. This paper thus aims at answering the following research question: Which of the activities outlined in the OECD Action Plan are suitable for preventing tax evasion opportunities for companies operating in the digital economy?

1.2. Aims and Non-Aims

This thesis investigates the various actions presented in the “Action Plan on Base Ero- sion and Profit Shifting” and their applicability to companies operating in the digital economy. Besides the actions stated in the OECD Action Plan other measures against BEPS that can be found in recent literature are analysed and compared. Furthermore, it is examined whether these actions are suitable for preventing tax evasion of e- businesses acting on a cross-border level. Both, indirect and direct taxation, as well as the concept of permanent establishment (PE) in the context of the digital economy are considered and analysed in this paper. The paper focuses mainly on the taxation of cross-border business transactions in the context of e-business.

However, the thesis does not examine the situations of specific countries but primarily utilises a general view on the actions without regional limitations. Taxation of bricks and mortar businesses are not specifically considered, though, parallels to the digital economy may be drawn throughout the thesis.

1.3. Methodology and Structure

So as to comprehensively answer the above-stated research question and to comply with the stated objectives, a profound literature review is conducted. A suitable litera- ture review does not only recite existing knowledge but rather delivers a structured and interrelated storyline, substantiated by a “clear take-home message” as well as enlarg- es the current understanding of the topic (Bem, 1995, p. 172; Jesson & Lacey, 2006, p. 139; Whetten, 1989, p. 491).

To achieve the above stated aim, relevant recent journal articles and literature contain- ing diverse perspectives and points of view are included to ensure a broad and com- plete literature review (Webster & Watson, 2002, p. xv). Not only does the thesis en- compass the original documents of the OECD Base Erosion and Profit Shifting project, but furthermore comprises different sources that deliver highly qualitative and profound information on the latest international tax situation and particularly in connection with the digital economy, including articles of renowned journals, papers of experts, books, and other references.

The following paper first examines the development and characteristics of the digital economy alongside with an elaboration on a range of business models in order to pro- vide a comprehensive overview on the possibilities of doing business in the new econ- omy. However, the examples presented are not intended to be exhaustive, considering the fast changes and quick introductions of new digital business models. Hereinafter, the principles of the international taxation system as well as its application to the digital economy, in particular to cross-border transactions, are investigated and explained. In order to be able to fully elaborate on the various actions presented by the “Action Plan on Base Erosion and Profit Shifting”, the subsequent chapter deals with the potential challenges of taxation within the digital economy and which measures companies may apply to avoid taxation. The following chapter then deals with the analysis of countermeasures to tax avoidance of e-businesses, as presented by the OECD, as well as further corrective actions found in recent literature. The last chapters finally discusses and summarises the primary findings, outlines potential limitations of the conducted research as well as presents an outlook for further research.

1.4. Definitions of Technical Terms

The rise of the digital economy leads to substantial new tax challenges for govern- ments and tax authorities in the field of both indirect and direct taxation (OECD, 2015a, p. 13). Additionally, due to the nature of e-businesses operating on a global level, it is increasingly complex to define whether a digital business possesses a PE in another country and whether this country is entitled to tax the company on its business profits (OECD, 2015a, pp. 13-16). Since both aspects represent fundamental concepts in the analysis of BEPS and the challenges of the digital economy, the following section provides a general definition of direct and indirect taxes as well as elaborates on the concept of a PE in the context of cross-border trade.

1.4.1. Direct and Indirect Taxes

In general, the various taxes can be divided into two main tax types, direct and indirect taxes (Miller & Oats, 2012, p. 5). According to the OECD (2010a), direct taxes are referred to as taxation on income, which involve taxes on capital, profits gained from transfers of ownership of property, or taxes on salaries and wages (i.e., payroll taxes) (p. 75). Companies, which are separate legal entities (i.e., independent from their shareholders) are taxed by the respective government directly on all types of corporate income by means of the corporate income tax (Miller & Oats, 2012, p. 11). Companies are mainly taxed on their net profits either through the profit and loss method or the net-worth comparison method (OECD, 2015a, p. 22).

Indirect taxes are often simultaneously referred to as consumption taxes and are main- ly imposed on the consumers’ purchases of goods and services (Miller & Oats, 2012, p. 7). Indirect taxes are “collected from the suppliers of these goods and services rather than directly from the consumers” (OECD, 2015a, p. 41). However, the consumption tax expense is eventually calculated into the purchasing price and thus is paid by the end consumer (Miller & Oats, 2012, p. 7). The OECD commonly differentiates between general taxes on purchases of goods and services, such as sales taxes or value added taxes (VAT) and taxes on specific goods, such as import duties or customs (OECD, 2015a, p. 41).

1.4.2. Permanent Establishment

The concept of PE is used for companies, which operate across borders and is vital to decide whether the host state is entitled to tax income of non-resident companies, which are engaging in business activities by means of a physical presence in that state (Miller & Oats, 2012, p. 179; OECD, 2013b, p. 35). In accordance to the OECD (2010a), a PE can be considered as a “fixed place … through which the business of an enterprise is wholly or partly carried on” (p. 92). According to the “Model Tax Conven- tion on Income and on Capital” (MC) a PE is primarily defined as (a) a place of man- agement, (b) a branch, (c) an office, (d) a factory, (e) a workshop, and (f) any place for extraction of natural resources (OECD, 2010a, p. 24). In line with the above stated def- inition, computer equipment including software and data utilised with that equipment as well as a server, constitute a PE if they remain fixed at a certain place for a sufficient amount of time, whereas a mere website as an intangible property cannot be defined as a PE (OECD, 2010a, p. 110-111).

2. Attributes and Growth of the Digital Economy

Political agendas and national strategies of various countries are nowadays focused on the digitisation in order to exploit its benefits for societies and economies (OECD, 2015b, p. 16). Key activities to foster the digital economy are, among others, the provi- sion of a suitable telecommunications infrastructure for comprehensive internet access, the introduction of e-government services and thus easy access to information for citi- zens, security and privacy regulations, or encouragement of companies to adopt digital technologies (OECD, 2015b, p. 22). Hence, about one-third of public and private re- search and development (R&D) budgets in developed nations is spent on the ad- vancement of ICT (Tarutė & Gatautis, 2014, p. 1219). Likewise, access to digital tech- nologies is increasingly spread across developing countries (Doong & Ho, 2012, p. 518), enhancing their share of global exports of ICT goods and services (OECD, 2015b, pp. 90-92) and therefore improving the economic situations of underdeveloped countries more effectively since digital technologies have proven to be a suitable means for optimising economic growth and competitiveness (Apăvăloaie, 2014, pp. 952-953). Thus, the development of the digital economy is advanced further on a global level and companies can increasingly engage in business activities by making use of the benefits of the digital economy.

In order to understand the different revenue-generating activities of companies and hence to successfully tax businesses, it is indispensable to be acquainted with the characteristics of the digital economy and its various business models. This chapter first provides information about the development of the digital economy and its technol- ogies, then defines business models in general and e-business models in particular. An overview of some of the most common business models prevalent in the digital econ- omy is presented. The overview encompasses the widespread business models of e- commerce, app stores, cloud computing, and online advertising. The chapter then con- cludes with an overall view on the principal characteristics of the digital economy.

2.1. Development and Impact on the Business Environment

According to the OECD (2013a), the digital economy is based on the usage of (per- sonal) data, intangible goods and products that are available free of charge, and busi- ness models that generate value out of these products (p. 10). The digital economy evolved out of a transition of the computing industry into the telecommunication indus- try as well as through the provision of less expensive and personal computers and thus the “computerization of the society” (Malecki & Moriset, 2008, p. 3; Steinbock, 2003, p. 225). Moreover, the proliferation of the internet and the world wide web and the emer- gence of corresponding “internet-enabled systems” were major contributors to the de- velopment of the digital economy (Malecki & Moriset, 2008, p. 3; Steinbock, 2003, p. 225). According to Ng (2014), digitisation is also defined as the “conversion of analogue information in any form such as text, images or sound to a digital form so that the information can be processed, stored and transmitted through digital circuits, devices and networks” (p. 92). Especially through the mobilisation of internet-enabled appliances, the global economy developed into a digitalised economy with inter- connected companies, individuals, and governments (OECD, 2015b, p. 16; Steinbock, 2003, p. 225). Digital technology enables the linkage between physical products and digital features, in this way being increasingly ingrained in the organisation’s business activities and production processes (Yoo, Boland, Lyytinen, & Majchrzak, 2012, p. 1398).

The digital economy and the various existent business models connected to it were especially fostered by the development and widespread usage of ICT (Nellen, 2015, p. 21). ICT are defined as “technologies used by people and organizations for their infor- mation processing and communication purposes” (Zhang, Aikman, & Sun, 2008, p. 628). According to ITIL® (as cited in Zuppo, 2012, p. 16), ICT encompass technologies that are associated with communications and information, including data networks. ICT furthermore play a major role in generating and applying new knowledge, which repre- sents an important basis for increased competitiveness of companies as well as in transforming the economy (Ollo-López & Aramendía-Muneta, 2012, p. 204). One as- pect of the digital economy certainly is the development of the internet, affecting not only personal lives but also posing significant alterations to the business environment (Apăvăloaie, 2014, p. 957). According to Apăvăloaie (2014), e-businesses can be re- garded as the integration of information technology (IT) and the internet, improving relationships with customers and the supply chain as well as the market penetration, which leads to reduction of expenses and thus an increased competitiveness (p. 957). The development and diffusion of ICT is mainly facilitated by the internet, representing the core of the new technologies and providing companies, individuals, and govern- ments with the possibility to make use of a wide range of knowledge and information, which in turn is empowered by efficient exchange and communication (Kowalkowski, Kindström, & Gebauer, 2013, p. 506; Vu, 2011, p. 359). As Carlsson (2004) states, the internet facilitates the interaction and connection of people, information, knowledge, and ideas, thereby fostering the occurrence of new capabilities and a consequent rest- ructuring in activities that become more integrated and connected (p. 248). As already mentioned, this results in the instant availability of certain products or services around the clock, regardless of the consumer’s location and time zone, which is fostered by the digital era and the ICT connected with it.

Additionally to an improved connectedness with their customers, ICT allow companies to significantly lower their costs of communication and production while at the same time providing improved access to suppliers (Vu, 2011, p. 361). Direct customer con- tact is facilitated by a reduction of intermediaries and by providing customers with the ability to evaluate price differences (Carlsson, 2004, pp. 259-260). As a consequence, competition between companies is fostered, in turn leading to more innovative and new product offerings. New markets can be entered with the help of the internet and its as- sociated creation of new products and services (Carlsson, 2004, p. 260). Furthermore, MNEs are able to react faster to changing market conditions, to advance their market performance by improving the communication flows internally and externally (i.e., on a global level) and by implementing a centralized decision-making model (Tang & Trevino, 2010, p. 54).

2.2. Different Business and Revenue Models in the Digital Econ- omy

Due to constant changes in the business environment and the increasing utilisation of technology, businesses need to partly or completely adapt their business models in order to ensure their success and competitive advantage (Alt & Zimmermann, 2014a, pp. 244-245; Wirtz, Schilke, & Ullrich, 2010, p. 273). Especially the evolution of the internet has led to substantial changes in the way companies develop and adopt busi- ness models and how business activities in general are conducted (Wirtz et al., 2010, p. 274). The existing literature offers various definitions of business models; this paper utilises the following definition: A business model combines a company’s processes and operations for producing value-creating offerings with its network of suppliers and customers, and the value chain used to generate and distribute the quality created as well as defines the core capabilities of a company to establish its competitive ad- vantage (Chesbrough & Rosenbloom, 2002, pp. 533-534; Tikkanen, Lamberg, Parvinen, & Kallunki, 2005, pp. 790-792). As Timmers already examined in 1998, ICT on the one hand can facilitate a diverse and huge amount of business models; on the other hand, further implications for technological developments are only initiated by defining new business models (p. 4). This means in other words - as Alt and Zimmermann (2014) reported after an interview with Timmers about his article “Busi- ness Models for Electronic Markets” from 1998 - that business models and the sur- rounding environment do indeed interact with and mutually influence each other in terms of technology, social behaviour, and policies and regulations (p. 237). This im- plies that with future technological developments, business models are likely to change and simultaneously trigger transitions in policies and regulations (e.g., tax regulations), which necessitates continuous adaptation and enhancement of the current tax envi- ronment.

According to Wirtz et al. (2010), internet-based business models can be categorized into four types: content-oriented (i.e., the provision of relevant online content), commerce-oriented (i.e., the execution of trade transactions by means of electronic web-based processes), context-oriented (i.e., structuring of already existing information), and connection-oriented (i.e., the supply of infrastructure for user online interactions) business models (pp. 274-275). Timmers was one of the first researchers to categorize and define business models in the electronic markets and had a significant impact on subsequent research on this topic. He identified eleven internetrelated business models, which are still prevalent today even though they have undergone continuous change and advancements. The business models of Timmer’s research being most relevant for this paper are e-shop and e-procurement (i.e., online marketing and advertising of a company’s products and services combined with the possibility to order and purchase via its website), e-auction as well as virtual communities, that is, an environment for interaction between individuals and a revenue model based on advertising (Timmers, 1998, pp. 5-6).

2.2.1. E-Commerce

One of the most prevalent and earliest business models that occurred with the internet is e-commerce, dating back to the year 1991 (Mohapatra, 2013, p. 3). E-commerce can be defined as transactions of purchasing or selling products or services via electronic systems (e.g., computer networks or the internet) in order to create and change value creation between public or private institutions such as companies, individuals, govern- ments, or others (Mohapatra, 2013, pp. 8 & 73; OECD, 2011, p. 72). Dubosson-Torbay, Osterwalder, and Pigneur (2002) defined e-commerce as “the use of inter-networked computers to create and transform business relationships, in particular, the transac- tions and interaction between the company and its consumers” (p. 14). Products and services ordered via electronic systems are delivered either through conventional (i.e., offline) means or are directly available for download (OECD, 2011, p. 72). These prod- ucts include either tangible goods that can also be purchased in conventional bricks and mortar stores or digital goods such as books, music, online games, or software programs (Miller & Oats, 2012, p. 514; Nellen, 2015, p. 22).

As Timmers noted already in 1998, B2B transactions were supposed to represent the major part of total e-commerce business (p. 3), which is verified in a study conducted by Frost and Sullivan in 2014 (as cited in Singh, 2014), according to which the global B2B e-commerce market is forecasted to grow to a merchandise value of $6.7 trillion by 2020; outperforming the B2C ($3.2 trillion) market twice. According to the OECD (2015b), the biggest share of e-commerce sales is accounted to B2B sales via elec- tronic data interchange (EDI) applications with more than 90% (p. 134). Thus, due to increasing online cooperation in the B2B business, companies could significantly re- duce costs for searching suitable products and suppliers, for transactions like order or payment processing, or inventory management and logistics (Mohapatra, 2013, p. 78).

B2B models encompass, for instance, marketplaces, one-to-one seller-buyer interactions with EDI, or collaborations between two or more suppliers and intermediaries (Taylor & Cullen, 2007, pp. 213-217).

B2C transactions are the earliest and second largest version of e-commerce, simplify- ing the search for adequate offers and enabling consumers to access information nec- essary to evaluate suppliers and products (Mohapatra, 2013, p. 79). Nguyen et al. (2012) identified online retail and services, bartering as well as gambling and gaming as examples for business activities in the field of B2C e-commerce (p. 862).

Online auctions on platforms such as eBay are distinctive examples for e-business transactions between individual customers (i.e., C2C) in which businesses are primarily facilitators by providing the necessary infrastructure (e.g., platforms) to consumers for real-time bidding on products that are sold (Mohapatra, 2013, p. 80; OECD, 2015a, p. 56). Another and more recent form of C2C commerce via the internet is the so-called sharing economy where customers can lease or rent certain services or products instead of buying and owning them (Matzler, Veider, & Kathan, 2015, pp. 71-72). Airbnb Inc. is one famous example for the C2C sharing economy, allowing individuals to generate revenue by offering their houses or rooms to other people for a short-term period (Fang, Ye, & Law, 2015, p. 264). Airbnb Inc. generates revenues by receiving a certain percentage of the rental fee, which is paid by the tenants (Belk, 2014, p. 1597).

In all of the above stated versions of e-commerce, transactions can easily be undertak- en on a global level and are not constrained by national boundaries (Nellen, 2015, p. 24). The internet, in general, facilitates direct interaction between suppliers and cus- tomers by eliminating or reducing the number of intermediaries, for instance, distribu- tors or retailers (Mohapatra, 2013, p. 78; OECD, 2015a, p. 55). In this form of e- commerce, revenue is directly achieved by the sales of products and services (Dubosson-Torbay et al., 2002, p. 11). However, for certain business models such as e-auctions, third party marketplaces, or payment service suppliers, these forms of in- termediaries (i.e., the platforms) constitute the core of the business model by connect- ing vendors and buyers (Lumpkin & Dess, 2004, p. 167; Mohapatra, 2013, p. 78, OECD, 2015a, p. 57). Thus, revenue is generated by means of a commission that is mainly charged based on the transaction volume (Lumpkin & Dess, 2004, p. 167).

2.2.2. Application Stores

Application stores emerged with the increasing utilisation of mobile devices such as smartphones or tablet PCs, providing software and applications to individual consum- ers and thus allowing customers to adapt their devices according to their specific needs (Kim, Park, Kim, & Lee, 2013, p. 4; OECD, 2015a, p. 58). The information technology research and advisory firm Gartner, Inc., forecasted a sales revenue of more than US$ 77 billion by 2017 with over 268 billion downloads (Rivera & van der Meulen, 2014). Such applications are defined as “installable pieces of software, developed using the platform application programming interfaces (…) and guidelines, and provisioned through the market” (Cuadrado & Dueñas, 2012, p. 161). A common form is the two- sided market model whereby app developers make their apps accessible to consumers via the application store, which acts as the intermediary between these two parties (Holzer & Ondrus, 2011, pp. 24-25). The applications are either purchased for a certain price or are available for free (OECD, 2015a, p. 58). Mobile applications that can be downloaded on a free basis nevertheless produce revenue through in-app purchases, advertisements by third parties, or subscriptions by customers to access further content or improved functionalities, so-called freemium models (Cortimiglia, Ghezzi, & Renga, 2011, p. 52; Cuadrado & Dueñas, 2012, p. 162). A subscription model requires the payment of a fee on a regular basis (e.g., monthly or weekly) in order to be able to use the downloaded product or service (Jurisic et al., 2011, p. 1416). Mobile apps can ei- ther be categorized into B2C or B2B business; with the former being primarily used to meet individuals’ needs for entertainment and information or interaction with compa- nies, whereas the latter supports internal business activities such as inventory man- agement or customer relationship management (Cortimiglia et al., 2011, p. 52).

2.2.3. Cloud Computing

Another more recent development in the digital economy is the concept of cloud com- puting. The National Institute of Standards and Technology in the United States defines cloud computing as “a model for enabling (…) on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applica- tions, and services) that can be rapidly provisioned and released with minimal man- agement effort or service provider interaction” (Mell & Grance, 2011, p. 2). Computing services are offered in a “self-service fashion”, resources are shared “with minimal ser- vice provider interaction”, and customers purchase the services as “operating ex- pense[s]” (Marston, Li, Bandyopadhyay, Zhang, & Ghalsasi, 2011, p. 177). Cloud com- puting enhances collaboration and provides permanent access to electronic services and data independent from the user’s location (Bojanova, Zhang, & Voas, 2013, p. 12; Nellen, 2015, p. 23). This is possible because the services and data are located on a network of computers, providing access to anyone who has an internet connection and is granted access to the respective cloud (OECD, 2015a, p. 59).

Several researchers (Frantsvog, Seymour, & John, 2012, p. 319; Mell & Grance, 2011, pp. 2-3; OECD, 2015a, p. 60) identified three main examples of cloud computing: Soft- ware as a Service (SaaS), Infrastructure as a Service (IaaS), and Platform as a Service (PaaS). The SaaS model enables users to have access to the newest version of a pro- gram or application, provided on a cloud infrastructure without having control over the cloud infrastructure itself (Mell & Grance, 2011, pp. 2-3; OECD, 2015a, p. 60). With the IaaS model, fundamental computing resources, such as storage, networks, firewalls, or internet protocol addresses are supplied to the customer as an infrastructure to control the operating system and utilise software (Mell & Grance, 2011, pp. 2-3). The PaaS model aims to provide software developers with a cloud infrastructure and program- ming tools to deploy customer-created applications (OECD, 2015a, p. 60).

In the B2C business, the services often are either provided for free, while simultane- ously generating revenue by means of advertising or by selling user-specific data, or - similar to the pricing model of application stores - through the freemium pricing model by which the consumer pays for an extension of services (OECD, 2015a, p. 60). In oth- er words, the consumer has access to services that go beyond the scope of services provided for free. This could be, for instance, more storage space, a customised inter- net protocol address or extended network access (Leavitt, 2009, p. 17). Revenues can also be achieved by pricing the user (e.g., in B2B business relationships) on-demand, that is, the customer pays a certain fee to the service provider only if the service is ac- tually used (Frantsvog et al., 2012, p. 321). In other words, the user is invoiced based on the amount of time spent on the cloud infrastructure or alternatively based on the amount of resources or storage space used, also called spot-pricing method (Huang, Kauffman, & Ma, 2015, p. 80; Leavitt, 2009, p. 16). An alternative pricing method, in- troduced by Amazon in 2009, is the purchase of a reserved-service contract where the customer pays a direct fee and in turn is able to use the reserved service for the re- quired time (Huang et al., 2015, p. 80).


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An Analysis of Actions of the OECD Action Plan on BEPS in the Digital Economy
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