OECD to spearhead changes to corporate tax for digitised economy

The OECD is to push for global agreement on a new approach to corporate taxation to meet the challenges arising from digitalisation of the economy, which would include revisions to the arm’s length principle and a focus on taxing profits where they are derived, with the aim of introducing new rules by 2020

Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration described the proposals as marking a ‘milestone’, as they aim to go further than simply introducing a ‘digital tax’ on multinationals within a specific sector.

‘Countries have agreed to explore potential solutions that would update fundamental tax principles for a twenty-first century economy, when firms can be heavily involved in the economic life of different jurisdictions without any significant physical presence and where new and often intangible drivers of value become more and more important.

‘In addition, the features of the digitalised economy exacerbate risks, enabling structures that shift profits to entities that escape taxation or are taxed at only very low rates. We are now exploring this issue and possible solutions,’ he said.

Work on this will be carried by the OECD/G20 inclusive framework on base erosion and profit shifting (BEPS) project, which has released a policy paper agreed by 95 member jurisdictions and 12 observer organisations.

This focus on two pillars. The first pillar will consider how the existing rules that divide up the right to tax the income of multinational enterprises 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.

Amans said a key change will be the focus on ‘active user contribution’, covering instances where companies are securing data from users and then monetising this data. 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, user contribution, significant economic presence and also marketing intangibles.

The policy note states: ‘The inclusive framework recognises that the implications of these proposals may reach into fundamental aspects of the current international tax architecture. Some of the proposals would require reconsidering the current transfer pricing rules as they relate to non-routine returns, and other proposals would entail modifications potentially going beyond non-routine returns.

‘In all cases, these proposals would lead to solutions that go beyond the arm’s length principle. They also go beyond the limitations on taxing rights determined by reference to a physical presence generally accepted as another corner stone of the current rules.’

Amans said: ‘The arm’s length principle will not be trashed, but we have a number of proposals to explore new methods of taxing residual profits. This is a difficult project, which is looking at fundamental changes, but it is feasible within the timeframe we have set.’

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.  This will involve looking at both an income inclusion rule and a tax on base eroding payments. One option under consideration is to follow the US reform of introducing a minimum tax rate.

The overarching aim is to provide residence and source countries with a right to ‘tax back’ profits subject to no or very low rates of taxation in jurisdictions where those profits are derived.

The inclusive framework will launch a consultation on its policy paper in the next two weeks and a public consultation will be held on 13 and 14 March 2019 in Paris. Work on the proposals will begin in May, on a ‘without prejudice’ basis, with the aim of achieving a global consensus on the way forward by 2020.

David Murray, international tax policy director at PwC, said: ’Rapid advances in technology and constantly evolving ways of doing business have contributed to an increased focus on the impact of digitalisation and globalisation on the corporate income tax system and the broader economy.

‘The OECD’s announcement today illustrates the commitment of 127 countries towards achieving international consensus on how to address these important and complex challenges.

‘Any such agreement will result in significant changes to the way that all international businesses are taxed. It is right that the OECD and all countries involved consult widely to avoid fragmentation, and ensure that a coherent and forward looking solution is reached.’

Addressing the Tax Challenges of the Digitalisation of the Economy – Policy Note is here.

Report by Pat Sweet

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