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The OECD’s public consultation on digital tax reform

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As part of the ongoing work of the OECD/G20 Inclusive Framework on BEPS and its Task Force on the Digital Economy, the OECD held a public consultation in Paris on 13 and 14 March on possible solutions to the tax challenges arising from the digitalisation of the economy. 

What’s proposed?

The current OECD proposals, as outlined in the consultation document issued on 13 February 2019, has two main pillars. 

Pillar 1 contains three proposals
  • a ‘user participation’ proposal, i.e. a tax on the profits of certain ringfenced businesses, including social media platforms, online marketplaces and search engines, closely modelled on the UK’s digital services tax (albeit the latter is applied to revenues, not profits);
  • a ‘marketing intangibles’ proposal, possibly incorporating some recognition of user value creation, which provides a more generalised approach and is not restricted to highly digital businesses but potentially applies to all data, relationships or promotional activity; and 
  • a high level proposal for a digitalised permanent establishment. (This proposal was, by all accounts, a last minute addition, which might restrict its status as an equal contender at this stage.)

Pillar 2 is a combination of two further proposals
  • a minimum taxation of targeted businesses; and 
  • a restriction on base eroding payments.

What was the consensus of opinion at the public consultation?

Whilst a range of views was expressed, some high level conclusions are possible:

  • Most of those present agreed that, to have the breadth and depth of consensus required to ensure durability, any solution must have a clear purpose and be built on a foundation of agreed principles. The principles most consistently advocated were those of certainty, consistency and simplicity.
  • The ‘user participation’ model seemed to hold the least appeal. It was widely considered to be conceptually flawed, i.e. too narrowly targeted on certain revenue streams that may be impossible to ringfence in practice. There were also practical concerns: the inherent difficulties of identifying ‘users’ and allocating ‘value’ to such users could render the tax unworkable.
  • There was a preference for a modified variation of the ‘market intangibles’ model, whether implemented via a formulaic method or by building out from the existing transfer pricing rules.
  • Pillar 2 raised existential questions that seemed to put into doubt its inclusion in any immediate solution. Opinions ranged from whether it should be incorporated into a pillar 1 solution, whether it would be best left for now and whether there was any need for it at all.
  • A robust and mandatory dispute prevention and dispute resolution framework is a necessity for any final solution.
  • Any global solution should replace unilateral measures.

Ultimately, there was an acceptance in Paris that pragmatism would be required to reach a broad political consensus and develop any solution capable of implementation. The suggestion that ‘a theory is not a theory unless it works in practice’ received strong support. 

Given that there will inevitably be winners and losers on any alteration of taxing rights and profit allocation, a practical impact assessment seems necessary as a matter of urgency as a pre-step to any political agreement. The OECD was clear that it would be grateful for information to feed into this from any businesses willing to share the impacts of the different proposals on their particular tax position.

What happens next?

The OECD will reflect on the responses it has received to its consultation. A timetable of meetings is scheduled for the ensuing months, which will culminate in the G20 meeting in May. The OECD aims to present an agreed solution by 2020. 

The tenor and direction of the international debate should alert UK policymakers to a need to reconsider their current path. The UK’s proposals seem increasingly out of kilter with the deliberations of international academic, businesses and policymakers, who (with a few notable exceptions) appear to be moving away from a pure ‘user participation’ tax. 

Ceri Stoner, partner, Wiggin (

Issue: 1436
Categories: In brief