The 137 members of the OECD inclusive framework on BEPS have agreed to get behind the proposed solution to the tax challenges of the digitalised economy, based on the two-pillar approach released for consultation in late 2019, with the aim of reaching a final agreement by the end of 2020.
In a 30-page statement issued at the end of their January meeting, the inclusive framework set out a revised programme of work for the proposed unified approach to establishing taxing rights with new nexus (taxable presence) and profit allocation rules in pillar one. The statement highlighted continuing concerns over the ‘safe harbour’ proposal mooted by the US Treasury secretary in December and a list of other contentious issues. It also gave a brief outline of the further work needed on pillar two, aimed at protecting minimum levels of effective taxation. See bit.ly/2GWVNZM.
The inclusive framework has given greater prominence to elimination of double taxation and mandatory dispute resolution mechanisms under pillar one. Simplified compliance processes, including a central filing option (one stop shop) are to be considered, and any new taxing right will be ring-fenced so as not to have implications for other taxes such as VAT or customs duties.
The scope of the new taxing right under pillar one (amount A) has been further clarified, to cover businesses falling into two categories:
automated digital services, including search engines, social media platforms and those providing online content and cloud computing services; and
consumer-facing businesses, selling products such as software, home appliances, mobile phones, clothes, toiletries, cosmetics, luxury goods, cars or branded foods and refreshments, and will also include franchise models (such as licensing arrangements involving the restaurant and hotel sector).
Extractive and other commodity businesses and regulated financial services businesses are likely to be excluded, alongside international air and shipping businesses. Amount B (baseline return for marketing and distribution activities) and amount C (additional marketing and distribution activities) will be based on the existing arm’s length principle and physical presence rules. The new formula-based approach will only apply to amount A.
Areas for further work on pillar one will include determining when selling tangible goods into a market jurisdiction amount to ‘significant and sustained’ engagement with that market. Eloise Walker, partner at Pinsent Masons, commented that ‘mere sales are not supposed to be caught, but how to judge what are mere sales and what are sales that amount to a significant and sustained engagement in a market jurisdiction is the tricky question the OECD has been dancing around since this process began’.
The inclusive framework intends to reach agreement on the key policy features of pillar one by early July 2020, with the final report to be published by the end of 2020.
The OECD says it expects any final agreement to include a commitment by individual countries to withdraw relevant unilateral actions, such as digital service taxes.
Speaking at the OECD webcast on 31 January, tax policy director, Pascal Saint-Amans, said there was no ‘plan B’ if agreement could not be reached on a multilateral solution.
The OECD is holding a further webcast on 13 February, at which it will present an economic analysis and impact assessment for the pillar one and pillar two proposals (see bit.ly/2RZn8kq).
The 137 members of the OECD inclusive framework on BEPS have agreed to get behind the proposed solution to the tax challenges of the digitalised economy, based on the two-pillar approach released for consultation in late 2019, with the aim of reaching a final agreement by the end of 2020.
In a 30-page statement issued at the end of their January meeting, the inclusive framework set out a revised programme of work for the proposed unified approach to establishing taxing rights with new nexus (taxable presence) and profit allocation rules in pillar one. The statement highlighted continuing concerns over the ‘safe harbour’ proposal mooted by the US Treasury secretary in December and a list of other contentious issues. It also gave a brief outline of the further work needed on pillar two, aimed at protecting minimum levels of effective taxation. See bit.ly/2GWVNZM.
The inclusive framework has given greater prominence to elimination of double taxation and mandatory dispute resolution mechanisms under pillar one. Simplified compliance processes, including a central filing option (one stop shop) are to be considered, and any new taxing right will be ring-fenced so as not to have implications for other taxes such as VAT or customs duties.
The scope of the new taxing right under pillar one (amount A) has been further clarified, to cover businesses falling into two categories:
automated digital services, including search engines, social media platforms and those providing online content and cloud computing services; and
consumer-facing businesses, selling products such as software, home appliances, mobile phones, clothes, toiletries, cosmetics, luxury goods, cars or branded foods and refreshments, and will also include franchise models (such as licensing arrangements involving the restaurant and hotel sector).
Extractive and other commodity businesses and regulated financial services businesses are likely to be excluded, alongside international air and shipping businesses. Amount B (baseline return for marketing and distribution activities) and amount C (additional marketing and distribution activities) will be based on the existing arm’s length principle and physical presence rules. The new formula-based approach will only apply to amount A.
Areas for further work on pillar one will include determining when selling tangible goods into a market jurisdiction amount to ‘significant and sustained’ engagement with that market. Eloise Walker, partner at Pinsent Masons, commented that ‘mere sales are not supposed to be caught, but how to judge what are mere sales and what are sales that amount to a significant and sustained engagement in a market jurisdiction is the tricky question the OECD has been dancing around since this process began’.
The inclusive framework intends to reach agreement on the key policy features of pillar one by early July 2020, with the final report to be published by the end of 2020.
The OECD says it expects any final agreement to include a commitment by individual countries to withdraw relevant unilateral actions, such as digital service taxes.
Speaking at the OECD webcast on 31 January, tax policy director, Pascal Saint-Amans, said there was no ‘plan B’ if agreement could not be reached on a multilateral solution.
The OECD is holding a further webcast on 13 February, at which it will present an economic analysis and impact assessment for the pillar one and pillar two proposals (see bit.ly/2RZn8kq).
