Taxation of the Digital Economy and pushing fiscal boundaries
On Friday 8 October 2021, after years of negotiations, the OECD announced that 136 countries had reached agreement on a sweeping overhaul of the international tax system that will impose a 15% minimum tax rate on some multinational enterprises (MNEs) and reallocate more than USD 125 billion of profits from approximately 100 of the world’s largest and most profitable MNEs to countries worldwide. The OECD released an eight-page statement that updates its July 1 blueprint and includes an annex that provides important details regarding implementation of the agreement. The new statement follows the outline of the original plan: a two-pronged framework, with Pillar One addressing taxing rights and distribution of profits and Pillar Two the imposition of a global minimum tax.
On 13 October, the G20 finance ministers released a communique following their meeting in Washington, endorsing the key components of the two pillar approach to the reallocation of profits of MNEs and a global minimum tax. The G-20 leaders endorsed the plan on 30 October during the Leaders’ Summit—the final step in the process of adoption of the agreement by the international community.
BDO’s Global Tax Alert ‘Global Tax: OECD announcement of agreement on International Tax Reform’, 2 November 2021, provides a useful summary of the key features of the agreement and of those points which have been clarified since the initial announcements of July 2021.
The announcement has been greeted with enthusiasm by numerous governments across the globe. It is seen by its supporters as an agreement that will restore stability to the international tax system and reset the base on which countries compete with one another from a fiscal standpoint. Many technical details remain to be ironed out in the coming months, and the ambitious timeline for implementation remains. We expect to see more details and reaction emerge in the coming weeks and months. Over the next period we will be updating our Opinion piece and reflecting on some of the implementation challenges globally and from a regional perspective. The first of these insights following the 8 October announcement is published as ‘A Regional Perspective on Global Tax reform’.
Read on for a synopsis of the journey so far
There has been widespread agreement that the international tax system needs reform to address the digitalisation of the global economy. Both the OECD and the EU had published papers on this subject and the OECD subsequently released proposals on allocating profit to countries in which a multinational entity makes sales or derives value. The OECD also proposed the imposition of a global minimum rate of corporate tax. This is the OECD’s two-pillar approach, which is supported by the OECD/G20 Inclusive Framework on BEPS. On 12 October 2020 the OECD released draft blueprints of the technical aspects of the proposals under both pillars.
On 1 July 2021 the OECD through the Inclusive Framework announced broad based agreement – following a vast volume of technical work and discussion, though aspects of the proposals then remain ed subject to political agreement as well as technical design. Over 130 members have now reached broad agreement – with an ambitious timeline to implement these new rules with effect from 2023. On 10 July 2021, the G-20 also backed the plan and tasked the Inclusive Framework with the momentous challenge of finalising the details and create an implementation plan by October 2021.
Although the timeline to implementation is ambitious, it is actually a delay relative to the originally intended timeline. Our Autumn 2020 ‘Rethinking the world tax system – the OECD and what a delay in global agreement may mean’, outlined how the delay to the OECD timeline for global agreement increased the likelihood of proliferation of unilateral measures and of possible shifts in tax authority behaviours. Since then, we’ve witnessed a further increase in the number of jurisdictions considering and introducing tax measures such as digital levies, including DST (see the BDO Global Taxation of the Digital Economy Tool).
However, as momentum gathered behind the OECD workplan, we witnessed the European Union stating that it no longer planned to proceed with its digital levy, and we expect it to instead refocus its efforts around, for example, the carbon border adjustment mechanism to raise own revenues for the EU Commission budget. We expected many other countries will wait until the OECD’s two-pillar approach is implemented into law, however even then, such levies may continue to be attractive mechanisms to raise revenue for developing economies.
So perhaps the most significant open question in the July 1 statement revolved around the future of digital services taxes (DSTs). That statement called for the removal of all DSTs and similar measures but did not provide any details as to the timing or the mechanism to accomplish that removal. The October 8 statement provides that a multilateral convention (MLC) will require all parties to the MLC to remove all DSTs with respect to all companies, and to commit not to introduce such measures in the future. No newly enacted DSTs can be imposed on any company from 8 October 2021 and until the earlier of 31 December 2023 or the coming into force of the MLC. The precise timeline for repeal of existing DSTs, and the future of DSTs beyond 31 December 2023, particularly for those that are not signatories to the MLC or for companies that are not within the scope of Amount A, remains unclear.
Our direct interaction with the OECD during and after the formal consultation process, along with views gathered to date from global business through our ongoing surveys, continue
s to provide insights. You can view BDO’s submissions to the OECD on Pillars One and Two as well as other subjects here.
Political overlay and regional perspectives
The question of international tax reform including both the taxation of the digital economy and a global minimum rate of tax remains politically sensitive, with different stakeholders holding different views. The U.S. had wished to broaden the scope of Pillar One to include companies in any industry, but to limit its reach, initially, with size and profitability thresholds. The U.S. was also a strong advocate for the repeal of unilateral measures and the setting of a high bar for the global minimum tax rate. Meanwhile, the EU envisaged potentially a more significant number of companies in scope for Pillar One. Developing nations felt they may stand to gain little from the proposals as currently drafted and wanted to ensure that they are able to participate fairly in the discussion of reattribution of taxing rights. Other territories use their corporate tax rate as an incentive to drive foreign direct investment to their economies, and therefore were concerned about the impact of a potentially high global minimum tax rate.
The latest announcement signifies a compromise, though with a heavy focus towards satisfying the requirements of the US as a key party in any global agreement. The coming weeks and months will provide further insight into how comfortable nations truly are with the resultant agreement.
In the months since the July announcement, and with the subsequent announcement of agreement reached on October 8, numerous publications attempt to tackle the many open questions that remain and the challenges of implementation. Few of these efforts however have focused on a comparative review of the attitudes toward these proposals in the countries participating in the exercise. In a forthcoming insight from BDO, we provide such a regional perspective – providing a window into the views expressed by governments and leading commentators, in local markets. It is based on responses to questions asked of BDO Tax partners from across the globe. The insight is launching shortly. To register to receive a copy and for our regular updates, click here.
Leading Insights – highlights to date
BDO has been a leading commentator on the debate on the taxation of the digital economy, with our opinions on the subject featured extensively in Bloomberg Tax, Financial Times, The Wall Street Journal, The New York Times, Global Finance and more.
- October / November 2021: Global Tax: OECD announcement of agreement on International Tax Reform and A Regional Perspective on Global Tax reform - this summary provides insights into the attitudes to the global tax agreement across a range of jurisdictions – attitudes that can be expected to influence how the agreement is implemented (and perhaps even evolves) in the coming years.
- July 2021: OECD achieves broad based consensus in Two pillar deal on global business taxes set to go ahead. Followed by the G-20 backing of the plan, in mid-July, in G-20 backs G7 support for global minimum tax and new allocation rules - what's the real impact?
- June 2021: G-7 Finance Ministers Announce Support for Global Minimum Tax and New Allocation Rules, follows the announcement by G-7 Finance Ministers in early June 2021.
- 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: