During a recent webcast, the OECD updated stakeholders on its progress towards reaching a consensus, among countries by the end of 2020, on new international tax rules to boost the revenues collected from businesses operating in the digital sphere.
Under current international tax rules adopted globally, a country may typically only tax a business if it has physical operations in its territory. With many consumer-facing businesses operating largely over the internet, digital businesses have been able to derive large revenues from digital supplies to consumers in a territory while avoiding tax there because they lack physical operations there. International tax rules have also failed to keep pace with the evolution of digital business models, in particular in failing to capture tax on revenues derived from the exploitation of users' data.
Typically, multinationals park their revenues in a single territory or territories to benefit from benign tax conditions there.
In the middle of 2019, the OECD proposed two sets of interlocking rules that would boost the ability of states to tax the digital activities of businesses if they derive revenue from transacting or interacting with consumers in their territory.
The OECD was asked to revisit its work on the digital economy in light of the proliferation of digital services taxes. These unilateral policies threaten to increase tax uncertainty for multinational groups and increase the risk of disputes and double taxation.
The OECD's Digital Tax Proposals
In May 2019, the BEPS Inclusive Framework agreed on a Program of Work for Addressing the Tax Challenges of the Digitalization of the Economy, as proposed by the OECD.
The Program of Work is divided into two pillars. In summary, Pillar One would introduce new rules to allocate taxing rights to this digital revenue between jurisdictions, and Pillar Two would ensure that multinationals captured by the new rules are subject to at least a minimum level of tax on their profits.
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The OECD's Tax Talks 14 Webcast
The OECD's webcast held at the end of January 2020 took stock of feedback from Inclusive Framework countries on the current direction of travel. In particular, there were concerns about the proposal from US Treasury Secretary Stephen Mnuchin that Pillar One could be introduced on a "safe harbour" basis, which would effectively make it optional for countries to adopt.
According to the OECD, the Inclusive Framework has agreed to proceed with the work, negotiating on a "without prejudice basis", and seek to bridge gaps where there are disagreements. A decision will be made on the "safe harbour" proposal only when all elements of the proposal are agreed, the OECD has said. It was said during the Tax Talks webcast, resolution of the "safe harbour" issue is seen as crucial to reaching a consensus, hinting that the US proposal could derail the adoption of a global approach.
The OECD said that developing countries have expressed concerns also about proposals for mandatory binding arbitration to resolve digital tax disputes. The OECD has said it will instead put forward alternative proposals.
Other issues being discussed are whether there should be different rules for highly digitalised activities as opposed to wider, consumer-facing activities. In addition to this, some countries have reportedly proposed that tax revenues should be divided up differently based on regions.
Before the next meeting on July 1-2, the OECD is seeking to achieve a political agreement among the 137-member Inclusive Framework on key policy features, after which the OECD will work on the granular details.
Some progress has been achieved on the scope of the new tax rules, with carve-outs being considered for extractive industries, commodities, financial services, and international transportation. According to the OECD, the plans will mainly target automated digital services providers – such as search engines, social media platforms, and computing services providers – and consumer-facing businesses, including online retailers. Certain predominantly business-to-business retail supplies will be out of scope, the OECD is proposing, including trade in intermediate products and components.
The OECD is proposing that only large businesses will be captured by the new rules but its proposals in this area are still in their infancy. It is looking at possible consolidated group turnover-based thresholds, or thresholds based on supplies in a certain territory, or profitability. Potentially there will be different thresholds for different digital activities.
Some of the most significant announcements made during the webcast are that tax liability will be determined based on group consolidated financial accounts and loss carryforward rules will be developed.