The G20 finance ministers have signalled their support for the OECD’s ‘two pillars’ approach to tackling global tax issues, and pledged to agree on the introduction of a digital tax by 2020
The announcement was made in the final communique at the recent G20 meeting in Japan, stating: ‘We reaffirm the importance of the worldwide implementation of the G20/OECD Base Erosion And Profit Shifting (BEPS) package and enhanced tax certainty.
‘We welcome the recent progress on addressing the tax challenges arising from digitalisation and endorse the ambitious work programme that consists of a two-pillar approach, developed by the inclusive framework on BEPS.
‘We will redouble our efforts for a consensus-based solution with a final report by 2020.’
The communique said the G20 countries endorsed ‘cooperation for a globally fair, sustainable, and modern international tax system, and welcome international cooperation to advance pro-growth tax policies’.
The comments came against a background where individual countries – notably the UK and France – have signalled their impatience with the time it is taking to agree a global approach to digital services taxation, and have indicated they plan to go ahead with a new tax regime in their respective jurisdictions.
Earlier this year the 129 members of the OECD’s inclusive framework agreed concrete proposals in two pillars to explore and which could form the basis of a global, consensus-based approach. These pillars involve the re-allocation of taxing rights among jurisdictions and the need to address remaining BEPS issues, with the OECD saying these will be the basis for detailed analysis over the next 18 months as the inclusive framework works towards delivering a proposal to the G20 by the end of 2020.
The first pillar will focus on how the existing rules that divide up the right to tax the income of multinationals among jurisdictions, including traditional transfer-pricing rules and the arm’s length principle, could be modified to take into account the changes that digitalisation has brought to the world economy.
This will require a re-examination of the nexus rules and the rules that govern how much profit should be allocated to the business conducted there. The inclusive framework will look at proposals based on the concepts of marketing intangibles, user contribution and significant economic presence.
The second pillar aims to resolve remaining BEPS issues and will explore two sets of interlocking rules designed to give jurisdictions a remedy in cases where income is subject to no or only very low taxation.
In an update on this work provided to the G20 meeting in Japan, the OECD stated: ‘The aim is to overcome the obstacles that jurisdictions face in trying to tax the profits that multinational companies earn from users and consumers located in those jurisdictions, particularly where the companies are not physically present in those markets.
‘They have also agreed to work on mechanisms so that companies would see their profits taxed at some minimum levels.
‘In January, the 129 members of the Inclusive Framework agreed a policy note that identified the contours of a solution based on two pillars – one addressing the reallocation of taxing rights (Pillar 1) and the other based around a minimum tax to address the remaining BEPS issues (Pillar 2).
‘The programme of work to deliver a solution by the end of 2020 is submitted to you for endorsement. These are complex and difficult questions and in particular, the gaps to find a unified approach in Pillar 1 will have to be bridged. This will require political leadership of the G20 to forge the way to a global, consensus-based, long-term solution in 2020.’
Rob Mander, international tax leader, RSM, said: ‘Digital tax proposals have already been announced or implemented in many countries, so the pressure has been on the OECD to deliver a global outcome that is better than the “go it alone” approach. There also seems to be a recognition from the OECD that the new rules need to apply to all businesses. This is a positive approach. In today’s world, digital is part of most businesses not only those whose primary offering is digital in nature.
‘The digital tax measures introduced by countries such as the UK and France have turned up the volume. The G20 has accepted that single country solutions are not the end game that they are after, so ironically by going it alone those countries (and others) have likely accelerated the process. Both countries have stated that their digital taxes will be repealed when a OECD/G20 global solution is found.’
However, while Mander described the proposals as ‘sensible’, he warned the road to implementation will not be an easy one.
‘While 129 countries have agreed to the plan in principle, and the G20 have added their approval, it’s one thing to agree to the work plan and another to agree to the results that are produced. Strong political support is going to be needed for the challenging negotiations ahead, as the revenue requirements and economic drivers differ significantly between countries.
‘Foreign direct investment (FDI) will likely be the most publicised sticking point, as it has been in the past, as it will disproportionately impact those countries that have relied on tax driven investment incentives.
‘However, the alternative is “a race to the bottom”, to lower tax rates to attract investment. Economic growth is going to be critical if countries are going to meet their increasing expenditure requirements and it is encouraging to see this fact recognised in the OECD’s remarks.
‘Whilst their timeline is ambitious, it is driven by necessity, in an effort to stop any additional countries implementing their own digital tax strategies. We have long asked for a unified approach, that offers businesses clarity and minimises reporting requirements across different markets, and look forward to seeing the end result.’