Latest on Taxation of the Digital Economy - December 2019

There is a widespread - but not yet universal - view that the international tax system needs reform in order to address the digitalisation of the global economy. 2018 and 2019 have seen both the OECD and the EU publish papers on this subject and the OECD has now released its proposals on allocating profit to different countries in which an international company makes sales or derives value. The OECD are terming this their ‘Unified Approach’, as it seeks to unify common components of proposals previously put forward with a view to seeking consensus to develop the detail of the Unified Approach in more detail.

Pillar One: Taxation of the digital economy a ‘Unified Approach’

The Unified Approach would give countries the right to tax profits of international businesses (regardless of whether they have a base in the country or not) based on calculating up to three separate pots of profit. This moves away from the long established principle of “profit where the business has physical presence” which has been the cornerstone of the international framework, and represents arguably the most significant change in the international tax architecture in 100 years.

Pillar Two: Global Anti-Base Erosion (GloBE) Proposals

The Pillar Two proposals are designed to counter profit-shifting by multinationals who are subject to low or zero taxation. This is particularly an issue with intangibles but is also seen more broadly in entities that generate profits from intra-group financing.

BDO’s insights

Our direct interaction with the OECD during and since the formal consultation process, along with views gathered to date from global business through our ongoing survey continues to provide insights. Following BDO’s interview on 3 December with Stewart Brant, Head of Transfer Pricing at the OECD exploring key themes arising in particular from the Pillar 1 proposals, such as scope, threshold, avoiding double taxation, administration and timing – we consider the latest views: 

Pillar One: Taxation of the digital economy a ‘Unified Approach’

Scope and threshold definitions

The Unified Approach suggests the labelling of three buckets of taxing rights for jurisdictions, labelled Amount A, Amount B and Amount C.

Amount A represents an entirely new taxing right, providing market jurisdictions with the ability to tax part of the profits of a multinational enterprise by reference to the sales generated in that territory, irrespective of whether the multinational has physical presence in that territory.

Amount B is a taxing right that would only apply where a business has a taxable presence in a territory under existing rules, and aims to simplify transfer pricing of the appropriate profit to recognise in that jurisdiction through definition of a baseline level of sales and marketing activity, and a fixed return that should be attributable to that baseline activity.

Amount C would also only apply where a business has a taxable presence in a territory under existing rules, and provides a ‘top-up’ mechanism giving greater taxing rights to a jurisdiction (in line with existing transfer pricing principles) where the activity in that jurisdiction exceeds the assumed baseline under Amount B.

The Unified Approach proposes that Amount A would only be applicable to ‘large’ ‘consumer facing’ businesses (neither term is yet precisely defined). Amounts B and C however would be applicable to businesses of all sizes, and in all sectors.

The rationale for the focus on consumer facing businesses is not clearly articulated in the Unified Approach proposal. From our discussions, it appears that consumer-facing businesses were included in the proposal largely as a way to define digital businesses without “ring-fencing” them. It will be important for businesses to actively engage in discussions relating to the definition of consumer facing business to ensure that boundary issues can be identified and addressed.

The application of Amount A to ‘consumer facing’ businesses gives rise to potential boundary issues. Stewart Brant, Head of Transfer Pricing at the OECD, shared during our interview that segmentation of company financial data will almost certainly be necessary where the out-of-scope revenue of the company is material to ensure that Amount A operates effectively. The segmentation of financials into consumer-facing vs other business lines (by country) raises complexities and problems, especially the central issue of measuring profit by business line and country. There is no set approach to segmentation under most international accounting standards, such as IFRS. Care will be needed to design rules that can cope not only with the businesses of today but also those of tomorrow and will require careful consideration of boundary issues arising from scope definitions. It is yet to be determined how any segmentation would be undertaken in practice (for example, would segmentation follow group consolidated accounts, or would new rules be defined). The OECD may look to establish a new framework for segmentation that would have consistent global application to support the application of the regime. This framework, as explained by the OECD, must balance the need for simplicity and accuracy and take account of compliance burdens in its design.  The OECD shared that they are consulting experts including Competent Authority Teams with regards to the sector, industry and regional segmentation.

There is some discussion in the OECD document about potential exclusions (for example for the extractive industries and possibly financial services). The OECD has confirmed that any carve out would require strong policy rationale and therefore affected businesses should actively engage in the debate on scope.

Stewart Brant shared during our interview that the application of a de minimis threshold is seen to be very important and that the threshold for the application of Amount A this could, subject to negotiation and decision by the Inclusive Framework, likely be at least EUR 750 million.

The nature of Amount A is that it will create ‘winners and losers’. The focus to date seems to be on the application of Amount A as being a ‘negative’ – however that is from the perspective of increased compliance burden and not necessarily from the perspective of the global tax that a multinational enterprise would pay. The impact on global tax payable under Amount A does not appear to have been explored in detail.  We discussed with the OECD that a threshold that excluded SMEs could disadvantage them, if the result of the application of Amount A resulted in a lower global tax bill (which is theoretically possible for businesses established in higher tax jurisdictions such as the India, the US, France and Germany). The OECD stated proposals have not yet explored SMEs electing into the regime therefore this is an area which SMEs may need to give greater voice to.

The Amount A ‘Base’ and allocation mechanism

A key question surrounding Amount A is how to determine the amount of profit of a multinational which will be subject to reallocation to market jurisdictions. Stewart Brant shared that it is likely that this will be designed to be as close to Profit Before Tax as possible, not Operating Profit as some have suggested through the consultation process. Key questions to be resolved include the treatment of historic losses, and accounting for historic investment (e.g. research and development) that only yields profits in the years subsequent to the investment.

What proportion of the residual profit of a group would be subject to reallocation under Amount A is not yet determined, but our discussions have suggested a range of 10-20% is likely. There may also be a materiality threshold applied to the amount to be reallocated (so, for example, if the amount determined under the Amount A principles did not exceed a particular number, no reallocation would be made).

It is likely that Amount A will be allocated on a very simple metric, such as proportion of global sales. In addition to the global revenue threshold discussed above, there are likely to be local thresholds for triggering a nexus for allocation under Amount A in a market which would require sales in that market to be in excess of a certain amount (yet to be defined, but could vary by reference to the territory’s GDP) over a sustained period (for example looking at multi-year averaging). The OECD is focused on ensuring the rules only apply where a business has a ‘significant and sustained engagement’  in the economy of a territory. Any part of Amount A which would theoretically be allocated to a market jurisdiction would not be reallocated (either to that jurisdiction or any other jurisdiction) if the local threshold was not exceeded.

Another key question surrounding Amount A is where the ‘source’ of the profit to be reallocated to be i.e. how do you identify where the residual profit is sitting within any given organisation today.  In some cases that may be clear but for many modern businesses, particularly SMEs, it will not be. The thinking in relation to this is still in its very early stages. One option being explored is to provide for the reallocation to be the choice of the ultimate parent. Another option would be a more detailed approach to identification of the residual profit owner and reallocating from that entity (or those entities). The potential approaches will be explored in detail with a review of international tax treaties to ensure the risk of double taxation is mitigated.


With respect to dispute prevention for Amount A,the OECD is looking to design a form of centralised administration for the application of the Unified Approach. This could be referred to as the ‘One stop shop’ and couldsee, for example, a single return filed to the parent territory jurisdiction which identifies the Amount A quantum and how that is to be reallocated amongst jurisdictions. These calculations could then be ‘verified’ before any reallocation is made. The compliance approach would be carefully designed alongside dispute prevention and resolution mechanisms.

The OECD is also looking to avoid the need for registration or fiscal representation in a territory where there is (only) an Amount A nexus (i.e. sales with no physical presence).

Both will be very welcome to businesses who already struggle with the growing complexity of international tax compliance.

Amount B

It is looking increasingly likely that, rather than being a single profit indicator that is applicable to all business globally, the amount of profit attributable to a jurisdiction under Amount B will vary by industry, sector and region. Some have pushed for a ‘safe harbour’ rather than a fixed percentage, but recent consultation led by the OECD suggests that is now unlikely. Amount B is likely to be mandatory and fixed (subject to the variations noted above).

Unilateral vs unified measures

Many territories are moving forward with unilateral measures to address the challenges arising from digitalisation of the economy pending global reform led by the OECD. We recognise currently some 27 countries have proposals enacted, pending or proposed.

The inconsistency of unilateral measures increases the complexity for businesses who seek to comply with the rules and increases the risk of double taxation as most of these measures fall outside the scope of tax treaties. During our interview the OECD shared they seek commitment from countries to rescind all relevant unilateral measures – such as the French and UK Digital Services Tax - as part of the implementation process for the Pillar 1. The view of the OECD is that unilateral measures cannot co-exist with the Unified Approach. This has been championed by ourselves and others during the consultation process.  

BDO is undertaking worldwide research on unilateral measures being enacted at a local level and the impact on business and operating models. If you are interested in learning more, sign up for "Taxation of the Digital Economy" in the form here.


In our discussions the OECD confirmed that the most likely approach to implementation would be a new stand alone multi-lateral instrument (similar to the approach previously used in the BEPS action plan to amend treaties). The timeline for agreeing the unified approach is ambitious. Given the potential complexity embedded in proposals, we urge the OECD not to rush this exercise and to take time to consult deeply with business and stakeholders. The initial findings of our global survey show that a 2-3 year timeline is preferred by global businesses.

The OECD has confirmed that its guiding principle is to find the simplest possible approach to achieving the policy objective. However, it is acknowledged that there will be a careful balance to be struck between ensuring the regime is simple, whilst also ensuring that it operates as intended, and compromises will have to be made.

Pillar Two: Global Anti-Base Erosion (GloBE) Proposals

The Pillar Two proposals are designed to counter profit-shifting by multinationals who are subject to low or zero taxation. This is particularly an issue with intangibles but is also seen more broadly in entities that generate profits from intra-group financing.

BDO’s insights

The overriding concern seems to be in preventing a ‘race to the bottom’ on corporation tax rates: not something that is within the control of taxpayers, rather, it is in the control of taxing jurisdictions. We question whether this approach to achieving the policy aims of Pillar Two is the most effective, and if a better approach would be for the OECD to develop guidelines that directly influence the behaviour of the taxing jurisdiction. BDO is therefore proposing a ‘blacklist’ approach which would see the application of Pillar Two proposals to only companies in territories which do not comply with standards set and maintained by the OECD. The expectation is that territories on the blacklist would seek to amend their policies to enable their removal from the blacklist, which would protect inward investment. This blacklist approach has worked effectively in other areas. We consider this is a much more focused and dynamic way to address the apparent concern at the centre of Pillar Two without imposing undue administrative burden on taxpayers.

Next steps

Once feedback on the broader design and implementation aspects of the proposals has been obtained through the current consultation, a further consultation would be highly beneficial and should be supported by some form of modelling/impact assessment exercise to see how these proposals are likely to affect both digital and non-digital businesses. Businesses would need to be guided through the application of the rules by use of worked examples for them to fully understand how the rules are meant to work in practice, and what impact these will have on their effective tax rates.

You can view BDO’s submissions to the OECD here



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lnternational Tax Partner, United Kingdom


Tax Partner - Head of Transfer Pricing, United Kingdom

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