As part of the ongoing work of the Inclusive Framework and the Task Force on the Digital Economy, the OECD organised a public consultation on 13-14 March on the tax challenges arising from the digitalisation of the economy, with 400 invited stakeholders from business, professional and trade associations, practice, NGOs and academics. The discussions focussed on the key questions identified in the OECD consultation document and the issues raised in the written submissions received as part of the consultation process. Over the two days, experts and four panels of speakers debated the design and administration considerations of the proposals for revised profit allocation and nexus rules presented under the first pillar (i.e., user participation, marketing intangibles and significant economic presence), as well as the policy rationale and objectives of the second pillar proposals on the global anti-base erosion proposal.
Perhaps not surprisingly, digital businesses expressed reservations about the scope of the user participation proposal and the ‘arbitrary’ distinction in ring-fencing particular business models. Conversely, non-digital companies articulated concerns about the scope of the marketing intangibles proposal by modifying the application of the arm’s length principle. The common ground in discussions concerning the revised profit allocation rules was the importance of simplicity, certainty, the absence of double taxation or unilateral measures and presence of mandatory dispute resolution mechanisms in any future solution. Considering that proposals one and two (user contribution and marketing intangibles) bear similar features, it was suggested these proposals could be implemented through adjustingthe present framework without the need to dismantle the whole international tax system. Some participants suggested alternative proposals, and even formulary apportionment, to the extent an agreement on the formulary elements was possible.
More concerns were raised regarding the global anti-base erosion proposals, with some participants highlighting that the residual BEPS issues have little to do with income allocation. Once the profit allocation issues have been resolved, a business representative said, the pressure on pillar two will be reduced considerably. The tax on base eroding payments was assessed as very complex, with double tax treaty issues, lack of dispute resolution, double taxation and, significantly, possible EU law challenges. A Big Four speaker said that tax advisers are agnostic to any outcome of this process, maintaining that there was a need for global consensus, and fast, and a need for analysis of potential unintended consequences, double taxation and administrative burden. Another business representative queried whether the minimum tax rates proposal is actually consistent with the OECD’s longstanding position that tax rates are a matter of national government’s tax policy and parliamentary process, not international law.
From a developing country perspective, NGO representatives questioned the appropriateness of the OECD as a forum to hold these discussions, calling for a more inclusive international tax policy body to take over. NGOs criticised the tax on base eroding payments, whilst expressing more support for the income inclusion rule. The key role of transparency was stressed, followed by a call to make the current CbCR rules public, in order to allow developing countries access to data to make appropriate adjustments. A World Bank representative welcomed the discussion, raising the policy issue of inversions as a tax strategy that undermines the effectiveness of CFC rules in the context of the income inclusion rule discussion. In concluding the two-day discussions, Pascal Saint- Amans, the Director of the OECD Centre for Tax Policy and Administration, praised the constructive contributions and the positive engagement. The Co-Chairs of the Task Force also stated they were pleased with the engagement of the stakeholders, who presented original ideas to address the significant challenges ahead. Overwhelmingly, the participants agreed on the flaws of the existing fragmented approach to taxation of the digital economy. There was a general acceptance on the need to redouble efforts to reach a global governmental agreement. Considering the ambitious timeline, the OECD announced more frequent meetings of the Task Force on the Digital Economy would be held, and another consultation where more detailed technical contributions are expected by the end of 2019.
Ref.: CFE’s EU Tax Top 5 – 18 March 2019