The OECD/G20 Inclusive Framework on BEPS has published ‘blueprints’ for the two-pillar consensus-based approach to taxation of the digital economy. The blueprints reflect the ‘convergent views’ of the 137 jurisdictions signed up to the Inclusive Framework on many of the key policy features and principles of both pillars, and identify remaining political and technical issues where differing views need to be bridged.
Pillar one blueprint (profit allocation principles) retains much of the three-part ‘unified approach’:
1. Amount A: local market jurisdiction right to tax a proportion of residual profits associated with sustained and significant participation in that jurisdiction.
Various issues on the scope of amount A remain to be resolved including on quantum (threshold amount and percentage rate), although the blueprint confirms a number of broad principles on amount A:
it will apply to companies providing ‘automated digital services’ and ‘consumer-facing businesses’;
it will include a revenue threshold based on annual consolidated group revenue, along with a de minimis foreign in-scope revenue carve-out;
new nexus rules will determine which market jurisdictions receive amount A; and
provision will be made for the carry forward of losses.
2. Amount B: standardisation of the remuneration of related-party distributors that perform ‘base-line marketing and distribution activities’, aligned with the arm’s-length principle.
3. A dispute prevention/resolution mechanism, likely to require an ‘innovative solution’ to ensure agreement between tax administrations as to how Amount A applies to a group.
The blueprint also confirms the expectation that a consensus-based agreement will include a commitment to remove unilateral measures (such as digital services tax) and not to introduce any such measures in the future.
Pillar two blueprint (BEPS 2.0, ensuring a minimum level of taxation) sets out detail on:
the income inclusion rule (IIR) based around existing controlled foreign company rule principles; and
the undertaxed payments rule (UTPR) which acts as a backup to the IIR by making a top-up tax adjustment in relation to profits of a constituent entity that is not in scope of the IIR.
Together the IIR and UTPR are known as the global anti-base erosion (GloBE) rules. They would apply to MNE groups with €750m or more in annual revenues, and would by necessity rely on a common tax base. In essence, the GloBE rules would provide jurisdictions with the right to ‘tax back’ up to an agreed minimum rate of tax, where other jurisdictions have not fully exercised their primary taxing rights.
Alongside the GloBE rules, a subject to tax rule (STTR) will aim to restore taxing rights to the source jurisdiction where intragroup payments use tax treaty protection to shift profits to low-tax jurisdictions.
The OECD notes that the ‘absence of a consensus-based solution could lead to a proliferation of unilateral digital services taxes and an increase in damaging tax and trade disputes, which would undermine tax certainty and investment. Under a worst-case scenario – a global trade war triggered by unilateral digital services taxes worldwide – the failure to reach agreement could reduce global GDP by more than 1% annually.’
Charlotte Richardson, UK tax partner at PwC, noted: ‘This new framework has the potential to be a once in a lifetime change to the corporate tax system. If agreed, it would potentially remove the highly distortive, gross base taxes such as the recently introduced UK digital services tax (DST) and address the prospect of double taxation. In doing so, this could overcome a significant stumbling block in any UK/US trade negotiations.
‘Nonetheless, there is still a long way to go and the complexity and implementation challenges shouldn’t be underestimated. This is particularly important for UK businesses which not only have to adjust to a post-pandemic world but also to a post-Brexit environment.’
The Inclusive Framework is consulting on the blueprints until 14 December 2020 and public consultation meetings will be held in January 2021.
The Inclusive Framework countries had intended to move towards a consensus-based solution by the end of 2020, but the coronavirus pandemic has delayed the timings which are now likely to see no agreement before mid-2021 – calling into question whether existing unilateral DSTs will continue to be collected with the potential for retaliatory tariffs from the US.
The OECD/G20 Inclusive Framework on BEPS has published ‘blueprints’ for the two-pillar consensus-based approach to taxation of the digital economy. The blueprints reflect the ‘convergent views’ of the 137 jurisdictions signed up to the Inclusive Framework on many of the key policy features and principles of both pillars, and identify remaining political and technical issues where differing views need to be bridged.
Pillar one blueprint (profit allocation principles) retains much of the three-part ‘unified approach’:
1. Amount A: local market jurisdiction right to tax a proportion of residual profits associated with sustained and significant participation in that jurisdiction.
Various issues on the scope of amount A remain to be resolved including on quantum (threshold amount and percentage rate), although the blueprint confirms a number of broad principles on amount A:
it will apply to companies providing ‘automated digital services’ and ‘consumer-facing businesses’;
it will include a revenue threshold based on annual consolidated group revenue, along with a de minimis foreign in-scope revenue carve-out;
new nexus rules will determine which market jurisdictions receive amount A; and
provision will be made for the carry forward of losses.
2. Amount B: standardisation of the remuneration of related-party distributors that perform ‘base-line marketing and distribution activities’, aligned with the arm’s-length principle.
3. A dispute prevention/resolution mechanism, likely to require an ‘innovative solution’ to ensure agreement between tax administrations as to how Amount A applies to a group.
The blueprint also confirms the expectation that a consensus-based agreement will include a commitment to remove unilateral measures (such as digital services tax) and not to introduce any such measures in the future.
Pillar two blueprint (BEPS 2.0, ensuring a minimum level of taxation) sets out detail on:
the income inclusion rule (IIR) based around existing controlled foreign company rule principles; and
the undertaxed payments rule (UTPR) which acts as a backup to the IIR by making a top-up tax adjustment in relation to profits of a constituent entity that is not in scope of the IIR.
Together the IIR and UTPR are known as the global anti-base erosion (GloBE) rules. They would apply to MNE groups with €750m or more in annual revenues, and would by necessity rely on a common tax base. In essence, the GloBE rules would provide jurisdictions with the right to ‘tax back’ up to an agreed minimum rate of tax, where other jurisdictions have not fully exercised their primary taxing rights.
Alongside the GloBE rules, a subject to tax rule (STTR) will aim to restore taxing rights to the source jurisdiction where intragroup payments use tax treaty protection to shift profits to low-tax jurisdictions.
The OECD notes that the ‘absence of a consensus-based solution could lead to a proliferation of unilateral digital services taxes and an increase in damaging tax and trade disputes, which would undermine tax certainty and investment. Under a worst-case scenario – a global trade war triggered by unilateral digital services taxes worldwide – the failure to reach agreement could reduce global GDP by more than 1% annually.’
Charlotte Richardson, UK tax partner at PwC, noted: ‘This new framework has the potential to be a once in a lifetime change to the corporate tax system. If agreed, it would potentially remove the highly distortive, gross base taxes such as the recently introduced UK digital services tax (DST) and address the prospect of double taxation. In doing so, this could overcome a significant stumbling block in any UK/US trade negotiations.
‘Nonetheless, there is still a long way to go and the complexity and implementation challenges shouldn’t be underestimated. This is particularly important for UK businesses which not only have to adjust to a post-pandemic world but also to a post-Brexit environment.’
The Inclusive Framework is consulting on the blueprints until 14 December 2020 and public consultation meetings will be held in January 2021.
The Inclusive Framework countries had intended to move towards a consensus-based solution by the end of 2020, but the coronavirus pandemic has delayed the timings which are now likely to see no agreement before mid-2021 – calling into question whether existing unilateral DSTs will continue to be collected with the potential for retaliatory tariffs from the US.
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