Taxation of the Digital Economy - OECD/G20 Inclusive Framework on BEPS (IF) endorses OECD’s proposals

On 31 January 2020, the OECD/G20 Inclusive Framework on BEPS (IF) published a statement in which it affirmed its support for the OECD’s two-pillar approach to dealing with the challenges arising from the digitalisation of the economy. It endorsed the ‘Unified approach’ set out in Pillar One as the basis for the negotiations of a consensus-based solution to be agreed in 2020, and welcomed the progress made on Pillar Two.

A brief recap

The two-pillar approach, as summarised in our previous update, consists of:

  • A Unified Approach to give countries the right to tax profits of international businesses (regardless of whether they have a base in the country or not) (Pillar One); and
  • Proposals to counter profit-shifting by multinationals who are subject to low or zero taxation, by imposing a global minimum tax, applied at the level of the taxpayer rather than the level of the country (Pillar Two).

Pillar One - likely outcome

With the IF’s endorsement of the Unified Approach, the momentum and intent is clear. We can expect to see:

  • A new right for jurisdictions to tax part of the profits of a multinational enterprise (MNE) by reference to the sales generated in that territory, irrespective of whether the MNE has physical presence in that territory (Amount A)
  • A standardised return for certain baseline marketing and distribution activities (Amount B)
  • Additional Amount C taxing rights to a jurisdiction where the activity in that jurisdiction exceeds the assumed baseline under Amount B.

Amount A will likely have a restricted scope, however amounts B and C are expected to apply to all businesses, regardless of size or sector.

In scope businesses for Amount A will include:

  • Those that provide, remotely, using no or little local infrastructure, automated and standardised digital services to a large user base
  • Consumer-facing businesses selling goods and services online (e.g. on-line marketplaces/platforms etc.)

Out of scope activities for Amount A will include:

  • Business to business (largely)
  • Extractive industry
  • Financial services sector (further consideration to be given to whether peer-to-peer lending platforms are to be brought in)
  • Airline and shipping
  • Professional services.

Pillar One – our thoughts

The role of the arm’s length principle (ALP) has been reaffirmed, and Amount A has been clarified as being conceptually separate in terms of the identifying and quantum and allocation to markets, and not a replacement for the ALP reward for in-country activity (which may, or may not, be subject to the thinking under Amounts B and C). The overlay of the ALP allocated profits with a mechanism to identify and quantify ‘Amount A liability’ territories is also recognised. As we identified in our consultation response, we think this will be a key area for further debate, and as the ‘winners and losers’ appear, this will intensify.

The aligning of the entry threshold for Amount A, i.e. the ‘gross revenue threshold’, with the CbCR threshold appears to be firming up on the basis that it excludes smaller businesses, and there is an existing infrastructure for CbC reporting between territories – we can see this being a clear direction of travel for the reporting mechanisms of the ‘one stop shop’.

The US’s representation for an elective, safe harbour regime is the elephant in room for Amount A. An elective regime is less likely to stop the proliferation of unilateral measures, but we consider that where there was an option to elect into the regime for businesses otherwise under the thresholds, this would be a fair and welcome policy development. There is a working assumption that the application of Amount A is ‘a disadvantage’ – but for some groups it would result in a lower global tax bill, so smaller groups could be disadvantaged if excluded.

The OECD appears to be driving towards a single baseline return for marketing and distribution under Amount B, but with a further assessment as to whether industry and regional differences will need to be factored into such return. This appears to represent a simplification, but we consider it may shift the focus to the assessment as to whether in market activities meet the baseline criteria, and the characterisation become the crux of dispute (spilling over into what is an Amount C vs Amount B activity). On this, the OECD have gone only as far as to note that the IF members all recognise an effective dispute resolution mechanism is important and to return to the matter as part of the consensus based approach.

Pillar Two – more detail awaited

Whilst there is still little detail, the IF’s reference to substance-based carve outs (such as for regimes compliant with the standards of BEPS Action 5 on harmful tax practices) as an option under consideration may explain why the OECD is taking the broad approach of application to all entities rather than a narrower (and arguably more direct) whitelist/blacklist approach at the taxing jurisdiction level rather than an entity level (which we had set out in our response to the consultation as an approach with some considerable advantages).


This debate is not just about the taxation of digital services, but also about how international tax principles should be designed for a modern, digitised economy. All business, regardless of sector or size, should follow the debate as there will be an impact for them.

The current international tax framework is founded on a principle that the profits of an enterprise can be taxed in a country if, and only if, the enterprise carried on its activities in the country through some form of physical presence in the country – in other words – through a permanent establishment. However, we now have business models that were not envisaged in the days when the current international tax framework was established. These models enable businesses to derive profit in a territory without simply selling to persons in the territory – but by creating a product (in the form of consumer data), earning commission on the connection of consumers (via digital platforms), or simply enabling business and consumer to connect more easily with one another

That places stress on the current international tax framework. The OECD Inclusive Framework includes 137 countries who believe change, in some form, is needed. There is common international desire to find an international solution to this global challenge, but finding a solution is not easy.

Overall, whilst there are some attempts to simplify the administration of a new Unified Approach, the price of consensus appears to be a creation of an increasingly detailed set of rules and therefore increased complexity for businesses. There is now a delicate dance between how quickly the OECD can drive towards a consensus solution, and how much patience local governments will have.

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lnternational Tax Partner, United Kingdom


Tax Partner - Head of Transfer Pricing, United Kingdom

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