Multinationals face global digital tax rules to collect missing $240bn

The OECD has set a timetable to develop a global framework for the digital taxation of multinationals with 2020 set as a deadline to finalise the rules, which are likely to include a wider remit than just digital tax to capture intangibles and IP

The decision was taken at a plenary meeting of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) this week, and follows in-depth field work and research into the current taxation of multinationals who operate cross-border and increasingly shift profits between tax jurisdictions. The decision was approved by delegates from 99 member countries and jurisdictions.

The OECD is keen to avoid fragmentation of the tax rules and is now pressing ahead with plans to introduce a global digital tax framework for taxing multinationals. It has now issued a programme of work setting out how it will achieve a new global agreement.

Fierce criticism of the failure of countries to tax the digital giants on their national sales has resulted in the decision to introduce a global digital tax framework, to avoid more countries taking a unilateral approach. This has been the case in the UK which is planning a digital services tax, and the earlier introduction of the diverted profits tax which applies to diverted profits arising on or after 1 April 2015, again targeting large transnational companies.

The European Commission is also considering an EU-wide digital tax, while Austria and Poland have had preliminary discussions about changes to their domestic tax systems, again taking a unilateral approach.

In 2015 the OECD estimated revenue losses from BEPS of up to $240bn, equivalent to 10% of global corporate tax revenues, and created the Inclusive Forum to co-ordinate international measures to fight BEPS and improve the international tax rules.

It will be presented by OECD secretary-general Angel Gurría to G20 Finance Ministers for endorsement during their 8-9 June ministerial meeting in Fukuoka, Japan.

The document calls for intensifying international discussions around the two main pillars of nexus and profit allocation, which would form the basis of the digital tax approach.

The first pillar will explore potential solutions for determining where tax should be paid and on what basis (nexus), as well as what portion of profits could or should be taxed in the jurisdictions where clients or users are located (profit allocation).

The second pillar will explore the design of a system to ensure that multinationals – in the digital economy and beyond – pay a minimum level of tax. This pillar would provide countries with a new tool to protect their tax base from profit shifting to low/no-tax jurisdictions, and is intended to address remaining issues identified by the OECD/G20 BEPS initiative.

Alison Lobb, tax partner at Deloitte said: ‘The latest release from the OECD Inclusive Framework makes it clear how much technical work there is to be done, and also how, importantly, there is a need for broad political agreement on the outcome.

‘The concern for businesses (across all sectors, not just technology or those that might be considered highly digitalised) is that, without governmental consensus and detailed technical work, the international tax system will continue to fragment.

‘The consequences of fragmentation are double or multiple taxation, combined with complexity and uncertainty, and have adverse implications for the growth of international trade and investment.’

The Inclusive Framework agreed that the technical work must be complemented by an impact assessment of how the proposals will affect government revenue, growth and investment.

A number of countries have organised a series of working groups to address the technical issues, but OECD accepts that political agreement on a comprehensive and unified solution should be reached as soon as possible, ideally before year-end 2019, to ensure adequate time for completion of the work during 2020.

Gurría said: ‘Important progress has been made through the adoption of this new Programme of Work, but there is still a tremendous amount of work to do as we seek to reach, by the end of 2020, a unified long-term solution to the tax challenges posed by digitalisation of the economy.

‘The broad agreement on the technical roadmap must be followed by a strong political support toward a solution that maintains, reinforces and improves the international tax system.’

Sara White

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