The OECD has published a consultation document seeking views on its proposed approach to reaching agreement on ‘pillar one’ of an international solution to taxation of multinational enterprises in the digital economy by 2020.
Pillar one covers nexus rules for determining where tax should be paid, and profit allocation rules on the portion to be taxed where customers are located. The document sets out a high-level summary of a ‘unified’ approach, bringing together the three competing proposals put forward so far, which based the nexus around user participation, marketing intangibles and significant economic presence.
The unified approach is focused on highly-digitised business models and broadly, but not exclusively, on consumer-facing businesses. The taxing right would be based on sales in a particular territory, not dependent on physical presence.
The new profit allocation rule aims to give a greater share of taxable profits to ‘market’ jurisdictions where sales take place, going beyond the arm’s-length principle and using a formula based on consolidated financial accounts. This profit allocation would be arrived at through a three-tier mechanism:
The consultation is based on a secretariat proposal which does not, at this stage, have consensus political support from the 130 or so governments participating in the BEPS inclusive framework. The deadline for comments on the proposals is 12 November, with a public consultation meeting to be held on 21 and 22 November in Paris. See bit.ly/2MQ4eca.
Consultation on ‘pillar two’ of the OECD’s work programme, aimed at establishing the global anti-base erosion (GloBE) system for ensuring minimum levels of taxation, is expected to take place in November/December.
The OECD has also set out its preliminary impact assessment of the proposals, which suggest the combined effect of pillars one and two would lead to a significant increase in global tax revenues and redistribution of taxing rights to market jurisdictions. The greatest effect would be felt by multinational businesses in the digitised and intangible-intensive sectors. Pillar one involves a significant change in the way taxing rights are allocated but would result in only a modest increase in tax revenues. Pillar two is expected to yield a significant increase in corporate income tax revenue globally. Low and middle-income economies would gain from pillar one, seeing their revenues increase at a higher rate, although larger market jurisdictions would gain more in absolute terms. Investment hubs would experience significant losses in taxable profits.
The CIOT has welcomed the OECD secretariat proposals, which ‘seem to form a basis around which consensus could be reached’. CIOT president, Glyn Fullelove, suggested that with signs of progress being made at international level, the UK government should consider delaying the planned April 2020 introduction of the digital services tax (DST) by at least a year. Nevertheless, he acknowledged the role of such national digital taxes in ‘focusing minds on reaching international agreement’ and expects the government to go ahead with legislation for the DST in the coming Finance Bill.
Eloise Walker, corporate tax partner at Pinsent Masons, is encouraged by the OECD’s approach, which suggests reform of the international tax system ‘could just be achievable’. Walker, too, hopes that ‘countries like the UK will think again about proceeding with their interim digital services taxes’.
One concern, however, is that the proposals assume that international groups have detailed breakdowns of things like revenue by jurisdiction or business line ‘at their fingertips’, which is not usually the case. ‘By proposing a tax which impacts all groups and sectors, apart from a minority to be carved out, not just the obvious digital giants, the OECD runs the risk of imposing a huge compliance burden on the majority of businesses’, Walker said.
Another crucial factor in achieving international agreement will be the introduction of a dispute resolution procedure ‘that has some bite’, Walker added.
Will Morris, chair of Business at OECD’s (BIAC) Committee on Taxation and Fiscal Policy, said that some of the proposed elements ‘are radically new concepts’, and he noted that ‘reaching agreement between countries will be challenging’.
‘Now that we know the details, the interactions between amounts A, B and C will come into clearer focus, and the definitional issues, whether around “routine marketing and distribution functions” or around “consumer facing” will need to be addressed’, he said. ‘Additionally, subsidiary but important questions around, for example, which accounts to use, who bears the burden of tax, and the recognition of losses will require work. Additionally, the welcome announcement that new dispute resolution rules will apply to amounts A, B and C still does not answer the question of what those procedures will be.’
Writing in Tax Journal, Professor Michael Devereux, director at Oxford University Centre for Business Taxation, said: ‘As someone who has long advocated a shift to a “destination”, or “market”, basis I see this proposal as a step in the right direction. But that support comes with two strong caveats. First, the proposal is overlaid on top of the existing system, without any detail as to how the allocation under the existing system will be modified, as it must be – so the proposal is only half of the story. Second, since the existing structure will remain, complexity will be even greater.’
Separately, Alex Cobham, chief executive of Tax Justice Network, called for the OECD to publish its own assessment of which countries are likely to benefit from new tax rules. ‘If the proposals exacerbate the existing global inequalities in taxing rights, the reform process may collapse into divergent, unilateral measures – but at least the principle of unitary taxation will have been established as legitimate, for individual governments or blocs to pursue.’
The OECD has published a consultation document seeking views on its proposed approach to reaching agreement on ‘pillar one’ of an international solution to taxation of multinational enterprises in the digital economy by 2020.
Pillar one covers nexus rules for determining where tax should be paid, and profit allocation rules on the portion to be taxed where customers are located. The document sets out a high-level summary of a ‘unified’ approach, bringing together the three competing proposals put forward so far, which based the nexus around user participation, marketing intangibles and significant economic presence.
The unified approach is focused on highly-digitised business models and broadly, but not exclusively, on consumer-facing businesses. The taxing right would be based on sales in a particular territory, not dependent on physical presence.
The new profit allocation rule aims to give a greater share of taxable profits to ‘market’ jurisdictions where sales take place, going beyond the arm’s-length principle and using a formula based on consolidated financial accounts. This profit allocation would be arrived at through a three-tier mechanism:
The consultation is based on a secretariat proposal which does not, at this stage, have consensus political support from the 130 or so governments participating in the BEPS inclusive framework. The deadline for comments on the proposals is 12 November, with a public consultation meeting to be held on 21 and 22 November in Paris. See bit.ly/2MQ4eca.
Consultation on ‘pillar two’ of the OECD’s work programme, aimed at establishing the global anti-base erosion (GloBE) system for ensuring minimum levels of taxation, is expected to take place in November/December.
The OECD has also set out its preliminary impact assessment of the proposals, which suggest the combined effect of pillars one and two would lead to a significant increase in global tax revenues and redistribution of taxing rights to market jurisdictions. The greatest effect would be felt by multinational businesses in the digitised and intangible-intensive sectors. Pillar one involves a significant change in the way taxing rights are allocated but would result in only a modest increase in tax revenues. Pillar two is expected to yield a significant increase in corporate income tax revenue globally. Low and middle-income economies would gain from pillar one, seeing their revenues increase at a higher rate, although larger market jurisdictions would gain more in absolute terms. Investment hubs would experience significant losses in taxable profits.
The CIOT has welcomed the OECD secretariat proposals, which ‘seem to form a basis around which consensus could be reached’. CIOT president, Glyn Fullelove, suggested that with signs of progress being made at international level, the UK government should consider delaying the planned April 2020 introduction of the digital services tax (DST) by at least a year. Nevertheless, he acknowledged the role of such national digital taxes in ‘focusing minds on reaching international agreement’ and expects the government to go ahead with legislation for the DST in the coming Finance Bill.
Eloise Walker, corporate tax partner at Pinsent Masons, is encouraged by the OECD’s approach, which suggests reform of the international tax system ‘could just be achievable’. Walker, too, hopes that ‘countries like the UK will think again about proceeding with their interim digital services taxes’.
One concern, however, is that the proposals assume that international groups have detailed breakdowns of things like revenue by jurisdiction or business line ‘at their fingertips’, which is not usually the case. ‘By proposing a tax which impacts all groups and sectors, apart from a minority to be carved out, not just the obvious digital giants, the OECD runs the risk of imposing a huge compliance burden on the majority of businesses’, Walker said.
Another crucial factor in achieving international agreement will be the introduction of a dispute resolution procedure ‘that has some bite’, Walker added.
Will Morris, chair of Business at OECD’s (BIAC) Committee on Taxation and Fiscal Policy, said that some of the proposed elements ‘are radically new concepts’, and he noted that ‘reaching agreement between countries will be challenging’.
‘Now that we know the details, the interactions between amounts A, B and C will come into clearer focus, and the definitional issues, whether around “routine marketing and distribution functions” or around “consumer facing” will need to be addressed’, he said. ‘Additionally, subsidiary but important questions around, for example, which accounts to use, who bears the burden of tax, and the recognition of losses will require work. Additionally, the welcome announcement that new dispute resolution rules will apply to amounts A, B and C still does not answer the question of what those procedures will be.’
Writing in Tax Journal, Professor Michael Devereux, director at Oxford University Centre for Business Taxation, said: ‘As someone who has long advocated a shift to a “destination”, or “market”, basis I see this proposal as a step in the right direction. But that support comes with two strong caveats. First, the proposal is overlaid on top of the existing system, without any detail as to how the allocation under the existing system will be modified, as it must be – so the proposal is only half of the story. Second, since the existing structure will remain, complexity will be even greater.’
Separately, Alex Cobham, chief executive of Tax Justice Network, called for the OECD to publish its own assessment of which countries are likely to benefit from new tax rules. ‘If the proposals exacerbate the existing global inequalities in taxing rights, the reform process may collapse into divergent, unilateral measures – but at least the principle of unitary taxation will have been established as legitimate, for individual governments or blocs to pursue.’
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