Public Consultations on OECD Two-Pillar Approach for Taxation of Digitalising Economy

In November, the OECD held a public consultation in Paris on its proposals for taxation of the digitalising economy on the basis of the ‘unified approach’ under Pillar One. Under the proposed approach, new taxation rights for market jurisdictions are recognised as a matter of novelty. The new rules are intended to apply to companies that derive value from consumer-interaction with users in market jurisdictions. Under the new profit allocation rules, a share of the deemed residual profits of the ‘consumer-facing’ multinational companies will be reallocated to market jurisdictions, through formulary apportionment and use of proxies such as sales.

Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration confirmed that the work at government representative level is ongoing, with the Secretariat proposal serving as a blueprint for further negotiations. The next Inclusive Framework meeting is scheduled for January 2020.

Representatives from the OECD, the BEPS Inclusive Framework, academics, tax practitioners and advisers and representatives of businesses addressed substantive issues arising from the Unified Approach proposal, in particular scope and nexus, computation of Amount A, elimination of double taxation in relation to Amount A, fixed remunerations under Amount B as well as dispute prevention and resolution. There was an emerging consensus that the new challenges arising from digitalisation were conducive to a shift toward formulary apportionment, however, discussions could not agree on the precise principles underpinning such a shift. In addition, there was some criticism from the floor on the lack of clear principles justifying the departure from the arm’s length principle; that the absence of a coherent rationale might potentially undermine the goal to achieve fairness with the new profit allocation rules.

Generally, participants sought clarity on definitions such as residual profits, businesses within scope of the proposal, the viability of the proposed coexistence of the two systems (existing tax rules under Amount B and C vs. new nexus and taxing rights under Amount A), as well as guarantees for robust and effective dispute prevention and resolution mechanisms. Representatives of business models which traditionally do not derive meaningful value from user interaction (‘consumer-facing’) sought to be carved out of the new rules. On the administration-side, opportunities for simplification of the rules were also discussed, with suggestions for a central coordinating jurisdiction or one-stop-shop to audit Amount A, such that the parent entity would file a return on behalf of the group entities, informing other jurisdictions of about the portion they would be entitled under Amount A, with a possibility for a single jurisdiction to collect and remit the tax due for the other jurisdictions involved.

CFE issued an Opinion Statement responding to the consultation highlighting a number of key elements that should be embedded as part of this process, calling for more clarity and early consensus at political level, and emphasised the significance of departing from well-established principles of international tax law.

The OECD on 8 November published a further public consultation document concerning Pillar Two of its two-pillar approach to addressing the taxation challenges of the digitalising economy, the so-called “Global Anti-Base Erosion Proposal”, or “GloBE” proposal, which seeks to address outstanding BEPS issues by introducing a global minimum tax and providing “jurisdictions with a right to “tax back” where other jurisdictions have not exercised their primary taxing rights or the payment is otherwise subject to low levels of effective taxation”. The approach would seek to apply an income inclusion rule and deduction denial in tandem to achieve the intended aim of global anti-base erosion.

Interested parties will be able to submit comments until 2 December 2019 by e-mail to taxpublicconsultation@oecd.org via Word format. Following the written consultation process, a further public consultation meeting will be held on 9 December in Paris.

Ref. CFE’s Global Tax Top 10 – November 2019

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