OECD Pillar One proposal to address digital economy tax issues

The Organisation for Economic Cooperation and Development (OECD) has released a proposal to advance international negotiations in an effort to determine that certain “large and highly profitable” multinational enterprises (MNEs)—including digital companies—pay tax wherever they have significant consumer-facing activities and generate their profits.

As noted in the OECD release, the new OECD proposal—Secretariat Proposal for a “Unified Approach” under Pillar One brings together common elements of three competing proposals from OECD member countries, and is based on the work of the OECD/G20 Inclusive Framework on base erosion and profit shifting (BEPS), which aligns 134 countries and jurisdictions for multilateral negotiation of international tax rules.

The consultation document describes the “unified approach” to Pillar One as proposed by the OECD Secretariat, and seeks comments from the public on a number of policy issues and technical aspects. The comments provided will assist members of the Inclusive Framework on BEPS in the development of a solution for its final report to the G20 in 2020.

The proposal would:

  • Re-allocate some profits and corresponding taxing rights to countries and jurisdictions where MNEs have their markets
  • Provide that MNEs conducting significant business in places where they do not have a physical presence would be taxed in those jurisdictions, through the creation of new rules providing: (1) where tax is to be paid (nexus rules); and (2) on what portion of profits the MNEs are to be taxed (profit allocation rules).

The Inclusive Framework’s tax work on the digitalisation of the economy is part of broader efforts to restore stability and certainty in the international tax system; to address possible overlaps with existing rules; and to mitigate the risks of double taxation.

CTG submitted a short consultation response (link below). It noted that there were not many UK charities that have a substantial primary purpose trade that is carried on overseas. Of those charities to which this applies the number that conduct their international business through the charity rather than one or more subsidiaries is probably limited, particularly if the foreign countries where the charity is operating do not grant it any tax privileges based on its charitable status. However, it noted that some charities with global operations could be impacted. As a result, the response makes a number of specific comments, rather than attempting to respond to each question.

OECD Secretariat Proposal for a “Unified Approach” under Pillar One – feedback from the UK Charity Tax Group.

Beyond the specific elements on reallocating taxing rights, a second pillar of the work aims to resolve remaining BEPS issues, so that there would be a minimum corporate income tax on MNE profits (to be discussed in a public consultation expected to take place in December 2019).

Comments were sought on the following questions

Commentators’ views are requested on the policy, technical and administrability issues raised by the proposal described above. In particular, comments are specifically requested on the following questions:

1. Scope. Under the proposed “Unified Approach”, Amount A would focus on, broadly, large consumer (including user) facing businesses. What challenges and opportunities do you see in defining and identifying the businesses in scope, in particular with respect to:

  • their interaction with consumers/users
  • defining the MNE group
  • covering different business models (including multi-sided business models) and sales to intermediaries
  • the size of the MNE group, taking account of fairness, administration and compliance cost
  • carve outs that might be formulated (e.g. for commodities)?

2. New nexus. Under the proposed “Unified Approach”, a new nexus would be developed not dependent on physical presence but largely based on sales. What challenges and opportunities do you see in defining and applying a new nexus, in particular with respect to:

  • defining and applying country specific sales thresholds
  • calibration to ensure that jurisdictions with smaller economies can also benefit?

3. Calculation of group profits for Amount A. The starting point for the determination of Amount A would be the identification of the MNE group’s profits. The relevant measure could be derived from the consolidated financial statements. In your view, what challenges and opportunities arise from this approach? Please consider in particular:

  • what would be an appropriate metric for group profit
  • what, if any, standardised adjustments would need to be made to adjust for different accounting standards
  • how can an approach to calculating group profits on the basis of operating segments based on business line best be designed? Should regional profitability also be considered?

4. Determination of Amount A. In determining Amount A, the second step would exclude deemed routine profits to identify deemed residual profits. The final step would allocate a portion of the deemed residual profits (Amount A) to market jurisdictions based on an agreed allocation key (such as sales). In your view, what challenges and opportunities arise from this approach?

5. Elimination of double taxation in relation to Amount A. What possible approaches do you see for eliminating double taxation in relation to Amount A, considering that the existing domestic and treaty provisions relieving double taxation apply to multinational enterprises on an individual-entity and individual country basis? In particular, which challenges and opportunities do you see in:

  • identifying relevant taxpayer(s) entitled to relief
  • building on existing mechanisms of double tax relief, such as tax base corrections, tax exemptions or tax credits
  • ensuring that existing mechanisms for eliminating double taxation continue to operate effectively and as intended.

6. Amount B. Given the large number of tax disputes related to distribution functions, Amount B of the “Unified Approach” seeks to explore the possibility of using fixed remunerations, reflecting an assumed baseline activity. What challenges and opportunities does this approach offer in terms of simplification and prevention of dispute resolution? In particular, please consider any design aspects and existing country practices that could inform the design of Amount B, including: a. the need for a clear definition of the activities that qualify for the fixed return; and b. a determination of the quantum of the return (e.g., single fixed percentage; a fixed percentage that varied by industry and/or region; or some other agreed method).

7. Amount C/dispute prevention and resolution. In the context of Amount C of the “Unified Approach”, what opportunities do existing and possible new approaches to dispute prevention offer to reduce disputes and resolve double taxation? In particular, what are your experiences with existing prevention and resolution mechanisms such as:

  • (unilateral or multilateral) APAs
  • ICAP
  • mandatory binding MAP arbitration?