Background

The taxation of enterprises that use digital technology has been high on the international political agenda and is a key topic of focus in the broader context of the fight against base erosion and profit shifting.

Following a mandate issued by the Finance Ministers of the G20 in March 2017, the OECD Task Force on the Digital Economy (“TFDE”) published an Interim Report in March 2018 (“Tax Challenges Arising from Digitalisation”). The report was further presented to G20 leaders, with the objective of finding a long-term solution for the issue of the taxation of the digital economy.

In January 2019, the OECD TFDE issued a policy note that identified four proposals to explore on a “without prejudice” basis. These proposals were grouped into two pillars i) the first pillar concentrated on the allocation of taxing rights and a review of profit allocation and nexus rules (Pillar One) and ii) the second pillar focused on measures to achieve minimum effective rates of tax (Pillar Two). Subsequently, on 28 May 2019 a Programme of Work was adopted by the OECD, emphasizing the urgent need to agree the outline architecture of a unified approach to the taxation of the digital economy by January 2020.

The Public Consultation Paper

While there is some variation in how the three proposals of Pillar One address the challenges of the digital economy, the OECD paper highlights a number of commonalities between each approach. In particular, each of the proposals in Pillar One would grant greater taxing rights over the profits of businesses to the user/market jurisdiction in which they operate and would therefore require a new nexus rule. The OECD Proposal attempts to take all the commonalities of Pillar One proposals and use them to identify the key features of a possible long-term solution, which will include the following:

• Scope: seeks to cover highly digital business models. Possible carve-outs would also be considered, in particular for extractive industries or financial services. In addition, size limitation (e.g. a EUR 750 million revenues threshold) could be considered.
• New nexus rule for taxpayers in scope: The OECD Proposal seeks to create a new nexus for taxpayers that is largely based on sales (as opposed to physical presence). This new nexus could have country specific sales thresholds that are tailored so that smaller economies can also benefit.
• New profit allocation rule: extension beyond t¬¬he arm’s length principal and the physical presence limitations imposed on taxing rights. Amendments to the existing rules will need to be made to ensure that profits can be allocated appropriately between jurisdictions.

As next steps, a public consultation on the present paper is scheduled for 20 and 21 November 2019 to engage with business and other stakeholders. The OECD Proposal indicates that the goal is to advance towards a unified approach for approval by the next meeting of the OECD Inclusive Framework in January 2020.