OECD and G20 confirm commitment to long-term solutions to digital economy tax challenges
Published on 14th Oct 2020
International tax community seeks to keep up the pace of reform for taxing highly digitalised multinational enterprises with detailed blueprints published for further consultation
The OECD and the G20 Inclusive Framework on BEPS (base erosion and profit shifting) has released a statement (12 October 2020) on their progress towards reaching a consensus-based and long-term solution to address the tax challenges of the digital economy by mid-2021.
The statement confirms the OECD's and G20's commitment to take forward the two-pillar approach they have been developing since 2019:
- Pillar One of the proposal looks at the allocation of taxing rights for multinational enterprises (MNEs) to ensure that they pay taxes where they conduct sustained and significant business, even when they do not have a physical presence (the "nexus" rules). This is particularly aimed at digitally intensive or consumer-facing MNEs, although the proposal does not only cover such businesses. The proposal is to reallocate profits and corresponding taxing rights to jurisdictions where MNEs have their customers. It applies where MNEs are conducting significant business in jurisdictions where they do not have a physical presence. The proposal does this through a new nexus rule to determine where tax should be paid and a "profit allocation" rule on the proportion of profits to be taxed there. The OECD previously published proposals in October 2019 for MNEs to pay tax where they have significant consumer-facing activities.
- Pillar Two would introduce a global minimum tax to address remaining issues linked to base erosion and profit shifting by MNEs, allowing a jurisdiction to "tax back" the MNE where the home jurisdiction has not levied the agreed minimum level of taxation.
The OECD has also published the blueprints for both Pillar One and Pillar Two, which identify the next steps for the project. The blueprints reflect convergent views on key policy features, principles and parameters for a future agreement, and identify remaining political and technical issues where differences of views remain to be bridged. The OECD has also published the highlights alongside the blueprints and its top 10 frequently asked questions on the tax challenges arising from digitalisation. These confirm that:
- The blueprint on Pillar One expands the taxing rights of market jurisdictions under conditions of active and sustained participation in that market (amount A); and also identifies a fixed return for certain baseline marketing and distribution activities taking place in a market jurisdiction (amount B). It also aims to significantly improve tax certainty by introducing effective dispute prevention and resolution mechanisms..
- The blueprint on Pillar Two lays down the features of a systemic solution – known as the global anti-base erosion (GloBe) proposal – to address remaining BEPS challenges. It seeks to ensure that all large and internationally operating businesses pay at least a minimum level of tax. It includes the design of four rules: (a) the income-inclusion rule; (b) the switch-over rule (c) the undertaxed payment rule; and (d) the subject-to-tax rule.
A public consultation document was released alongside the statement to help focus the input of the stakeholders which sets out a series of questions on both of the pillars. Interested parties are invited to send their written comments no later than 14 December 2020. The OECD will hold public consultation meetings on them in January 2021.
Osborne Clarke comment
The blueprints will require further debate and political agreement still seems a long way off. The OECD had been working to a consensus position by the end of 2020 and, as such, it is disappointing that this is drifting into 2021 but not wholly unexpected given the Covid-19 crisis. With more and more countries implementing unilateral measures - such as the UK's introduction of a digital services tax on 1 April 2020 – any measures to reach a consensus based unified approach must be welcome for taxpayers.