Taxation of the Digital Economy and pushing fiscal boundaries
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. Both the OECD and the EU publish papers on this subject and the OECD subsequently released its proposals on allocating profit to different countries in which an international company makes sales or derives value. This is the OECD’s two-pillar ‘Unified Approach’, and is supported by the OECD/G20 Inclusive Framework on BEPS (IF). On 12 October 2020 the OECD released draft blueprints of the technical aspects of the proposals under both pillars.
The latest blueprints represent a huge volume of technical work and discussion, but many key aspects remain subject to political agreement, and questions remain as to when, and indeed if, the OECD’s proposals will be implemented. The 137 members of the Inclusive Framework have not yet reached agreement on a specific, implementable plan. The extension of the OECD timeline for reaching agreement on the proposals from the end of 2020 to mid-2021 at the earliest is indicative of the challenges faced by the OECD in reaching political agreement on matters which would see a reallocation of global taxing rights between territories under Pillar 1, and a potential impact on jurisdictional tax sovereignty under Pillar 2.
Our latest Insight, ‘Rethinking the world tax system – the OECD and what a delay in global agreement may mean’, outlines how the delay to the OECD timeline for global agreement increases the likelihood of the proliferation of unilateral measures and of possible shifts in tax authority behaviours. This is expected to increase the vigour and pace with which territories look to explore and implement new unilateral tax measures for the taxation of remote activities (e.g. Digital Services Taxes or DSTs). We may also see more challenges for tax authorities with renewed arguments over the attribution of value in modern value chains. The Insight article is published in full by Bloomberg Tax as ‘The OECD and the ticking clock – what a delay in global agreement may mean’
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 a new pot of profit in combination with enhanced dispute prevention and resolution mechanisms. 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. This proposal represents a reattribution of value to market jurisdictions where users of a digital service or customers of a consumer facing business are based, coupled with an intended simplification of certain aspects of transfer pricing rules.
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. This proposal is seen as seeking to prevent a ‘race to the bottom’ on corporation tax rates by imposing an effective minimum rate of tax on corporate activities.
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. You can view BDO’s submissions to the OECD here.
The US Treasury has stated that it feels that countries should be dealing with the current pandemic and have called for the OECD to suspend its work temporarily. More recently, the US has also pulled out of talks with their EU counterparts and have threatened to apply retaliatory sanctions on those countries that have implemented unilateral measures to tax the profits of US headquartered digital companies.
The European Commission is focused on reform to the taxation of the digital economy. It is understood, from public statements made by EC leadership, that the EC will move ahead with a digital tax proposal in the first half of 2021 if work at the OECD level on an international corporate tax framework fails or stalls.
The question of taxation of the digital economy therefore remains politically sensitive. However, the OECD is under tremendous pressure to come to a consensus. Where the timelines are not met, there is concern that there is likely to be a proliferation of domestic taxes on digital activities (see the BDO Global Tool) and trade wars. We will therefore be monitoring and updating on the progress of the OECD regularly.
Leading Insights – highlights
BDO has been a leading commentator to the debate on the Taxation of the Digital Economy with our opinions featured extensively on the topic in Bloomberg Tax, Financial Times and more.
- November 2020: ‘Rethinking the world tax system – the OECD and what a delay in global agreement may mean’, outlines how the delay to the OECD timeline for global agreement increases the likelihood of the proliferation of unilateral measures and of possible shifts in tax authority behaviours. The Insight article is published in full by Bloomberg Tax as ‘The OECD and the ticking clock – what a delay in global agreement may mean’.
- October 2020: ‘OECD releases blueprints of digital tax plan’. Laurie Dicker, BDO US Transfer Pricing, Technical Tax Leader discusses what has been accomplished, what should businesses be doing now that these reports have been released, and what can we expect over the next months and into 2021?
- Rethink Transfer Pricing: BDO’s series of Transfer Pricing Insights into current transfer pricing issues. Perspectives from around the world that cover developments from tax authorities, other government agencies, judicial bodies, and the OECD. We explore how current economic and political conditions may impact transfer pricing structures and policies.
- February 2020 Update: following the statement by the OECD/G20 Inclusive Framework on BEPS (IF) issued at the end of January. There is a common international desire to find an international solution to this global challenge, but finding such a solution is not easy. The OECD Inclusive Framework includes 137 countries who believe change, in some form, is needed. We describe the areas of consensus. However, while 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 potentially increased complexity for businesses.
- BDO Global Tech & Media Watch Blog - March 2020: BDO US Tax partner David Yasukochi provides answers to how new rules on taxing the digital economy might affect your business
- BDO US Tax Outlook Survey - February 2020: a survey of senior tax executives at companies with revenues ranging from $100m to $3bn finds that understanding the impact of the ongoing OECD work on taxation of the digital economy is the #1 international tax concern, with 88% believing there should be an international framework in place.
- BDO's interview with the OECD on 3 December 2019: members of BDO's global Taxation of the Digital Economy Taskforce, were joined by 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 shared early insights under consideration, and not then yet in the public domain.
- In BDO Canada's Cross-Border Tax Podcast Series, BDO Tax Partner Harry Chana, alongside BDO Cross-Border Tax professionals Rita Trowbridge and Dan McGeown, talk about BEPS, pillar two of the OECD, and the concept of substance in transfer pricing, and how they all impact businesses crossing the border.
- Tax Notes reporter Ryan Finely's summary of the OECD’s pillar 2 consultation draft and BDO’s Monika Loving provides her take on the proposal.
- Read BDO International Tax Partner, Ross Robertson’s initial response to the OECD announcement of 9 October, and a leading article, recently published by Bloomberg Tax which explores the issues further
- Robert Aziz, BDO Global Head of Tax, in an extract from a recent video interview below shares his perspective on What should a fair and workable global tax system look like in our modern global economy: