The Organisation of Economic Cooperation and Development (OECD) released a policy note
in January that proposes a plan to begin addressing the tax challenges arising from an increasingly digital economy.
Taxation of the digital economy has been a key issue area following the 2015 BEPS (Base Erosion and Profit Shifting) Action 1 Report
, which raised a number of broad, direct tax challenges concerning allocation of profits from cross-border digital activities and determinations around value creation. The policy note provides that the member countries of the Inclusive Framework on BEPS have agreed to review proposals for taxing the digital economy under two pillars, with an end goal of generating a consensus-based solution by the end of 2020.
Proposals being considered under the first pillar address nexus and profit-allocation issues, specifically allocating more taxing rights to market or user jurisdictions. This would attract taxing rights to the jurisdiction in which value has been created by the users of digital services (e.g. user data collected by a search engine or social network) and to the jurisdiction which holds any market intangibles. This proposal varies from the current framework for allocating profits. The Inclusive Framework acknowledges that such changes may require reconsideration of current permanent establishment and transfer pricing rules. The first pillar would analyze nexus based on significant economic presence or significant digital presence, which would require taxation if a certain threshold of connection (e.g. sales) is met.
The second pillar addresses remaining base erosion issues. The Inclusive Framework has agreed to look into giving taxing rights to jurisdictions to tax profits where another jurisdiction with taxing rights applies a low effective tax rate. This proposal would address profit-shifting into low-tax jurisdictions by developing both an income-inclusion rule and a tax that would be applied to any payments that erode the tax base. It is noteworthy that the report references potential solutions under the second pillar, including the development of two inter-related rules to combat profit-shifting and base erosion, an income-inclusion rule and tax on base-eroding payments. This approach appears to be in-line with the solutions enacted by the United States as part of the Tax Cuts and Jobs Act.
It has been mandated by the Inclusive Framework that its Steering Group develop a detailed work plan to be agreed to by the Inclusive Framework at a May 2019 meeting. The OECD expects to report progress to the G20 Finance Ministers in June 2019 and offer a solution by the end of 2020.
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