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OECD revises digital tax proposals

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Tax Hot Topics newsletter The Organization for Economic Co-operation and Development (OECD) has released a new tax proposal, the Global Anti-Base Erosion (GloBE proposal), which is similar to the United States’ Global Intangible Low-Taxed Income (GILTI) and Base Erosion and Anti-Abuse Tax (BEAT) regimes.

The proposal is part of an effort to address tax challenges of digitization under two “pillars,” on focusing on allocations (pillar one) and the rest on the remaining BEPS issues (pillar two). The GLoBE proposal more specifically continues the May 31, 2019, Programme of Work for Addressing the Challenges of Digitization of the Economy (Programme of Work) under pillar two. The aim of the proposals is to develop a harmonized, global set of rules to address risks from structures that allow multinational enterprise (MNE) to transfer profits to jurisdictions where they are subject to no or very low taxation.

In general, the GloBE proposal appears to be heavily focused on the income inclusion rule, and describes broad principles on how the income inclusion rule might operate. Specifically, if implemented, the income inclusion rule would tax income that was subject to tax at an effective rate below a minimum rate. Notwithstanding the focus on the income inclusion rule, the original Programme of Work includes four components:

  • An undertaxed payments rule that would deny a deduction or impose a source-based tax (including withholding tax) for a payment to a related party if that payment was not subject to tax at or above a minimum rate
  • A switch-over rule to be introduced into tax treaties to allow a residence jurisdiction to switch from an exemption to a credit method where the profits attributable to a PE or derived from immovable property are subject to an effective rate below the minimum rate
  • A subject to tax rule that would complement the undertaxed payment rule by subjecting a payment to withholding or other taxes at source and adjusting eligibility for treaty benefits on certain items of income where the payment is not subject to tax at a minimum rate
  • The income inclusion rule described above

The consultation paper highlights design concerns with respect to certain technical aspects of pillar two and seeks comments from stakeholders. Specifically, the consultation document seeks comments on three technical areas of the GloBE proposal:

  • The use of financial accounts as a starting point for determining the tax base
  • The extent to which a MNE can combine income and taxes from different sources in determining the effective (blended) tax rate on such income
  • Experience and views of stakeholders on carve-outs and thresholds that may be considered as part of the GloBE proposal

The OECD requests comments by Dec. 2, 2019, and expects that these comments will assist in advancing of a solution for addressing these concerns in its final report to the G20 in 2020.

Contact:
David Sites
Partner
Washington National Tax Office
T +1 202 861 4104

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