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OECD publishes work programme for digital economy taxation

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The OECD has published its programme of work for arriving at an international approach to taxing activities of multinational enterprises by the end of 2020. The plan states that agreement on an outline will need to be reached by January 2020 in order to meet this deadline.

As set out in its policy note in January, discussions will focus on two main ‘pillars’:

  • pillar one covers new nexus rules and profit allocation rules to determine how taxing rights should be allocated among countries, particularly ‘market’ countries where value is created; and
  • pillar two is a global anti-base erosion system (GloBE), enabling countries to tax profits shifted to jurisdictions with low effective rates of tax, building on BEPS principles.

Within pillar one, three proposals have been put forward for determining the taxing rights of the market or user countries where value is created, based on:

  • user participation (mainly social media platforms and online businesses);
  • marketing intangibles (all businesses); and
  • significant economic presence (all businesses).

Key to these potential approaches is that all three contemplate the existence of a nexus even without physical presence.

The work under pillar one is grouped into three main blocks:

  • new profit allocation rules, examining approaches to determine the amount of profits subject to the new taxing right and their allocation among the jurisdictions;
  • new nexus rule, developing the concept of taxable business presence in a ‘market’ jurisdiction, not constrained by physical presence requirements; and
  • implementation and efficient administration, covering different instruments to implement any new taxing right, including the effective elimination of double taxation and resolution of tax disputes.

Discussions on the new profit allocation rules will examine three alternative approaches:

  • a modified residual profit split method (allocating non-routine profit);
  • a fractional apportionment method (including factors such as employees, assets, sales, and users); and
  • distribution-based approaches (based on marketing, distribution, and user-related activities).

The new nexus rule will explore the concepts of:

  • remote taxable presence; and
  • taxable income ‘sourced in’ (or derived from) a jurisdiction.

Pillar two, now referred to as a global anti-base erosion system (GloBE), seeks to plug some of the gaps left when the BEPS reports were finalised at the end of 2015, to ensure all multinational businesses pay a minimum effective rate of tax. The aim is to develop two inter-related rules:

  • an ‘income inclusion rule’, to tax the income of a foreign branch or a controlled entity if that income was taxed below a minimum effective rate, supplementing existing controlled foreign company rules; and
  • a ‘tax on base eroding payments’, involving an ‘undertaxed payments rule’ to deny a deduction for payments made to related parties unless taxed at a minimum effective rate, together with a ‘subject to tax rule’ incorporated into double tax treaties to deny treaty reliefs otherwise available to undertaxed payments, and possibly a withholding tax.

The OECD will present its programme of work to G20 finance ministers at their meeting in Japan on 8 and 9 June. A progress report is expected in December 2019. See

The number of countries involved in the discussions has increased from 42 at the launch of the BEPS action plan in 2013, to the current total of 129 countries in the inclusive framework. The OECD acknowledges the challenge it will face in reaching agreement on such fundamental and extensive changes to existing rules underpinning the international tax system.

Eloise Walker, tax partner at Pinsent Masons, believes it will be ‘a tall order’ for the OECD to make real progress on this by January 2020. However, similar things were said of the BEPS action plan and the multilateral instrument, so if the OECD ‘can get the major political players to engage constructively, they may yet pull this off too’, Walker said.

‘Quite what the “GloBE” would mean for the UK is unclear’, Walker added. ‘The UK already leads the way worldwide in the breadth and depth of its anti-avoidance rules, from its controlled foreign company regime to increasingly draconian stance on transfer pricing, the diverted profits tax to taxing offshore intangibles’, she said, expressing concern about how the new rules might fit into the UK’s ‘over-stuffed code’.

Issue: 1446
Categories: News