Close
Close

OECD releases revised digital tax proposals

RFP
Tax Hot Topics newsletter The Organization for Economic Co-operation and Development (OECD) released new proposals for digital taxation on Oct. 9, continuing the consultation that commenced in January 2019 under Action 1 of BEPS.

The proposals refine the May 31, 2019, work plan and further consider the right to taxation and income allocation under pillar one to countries in which there are consumers regardless of a physical presence. The Group of 20 Finance Ministers supported the proposals but did not endorse specific provisions of the proposal and stressed the need for global consensus.

The May work plan contained a two-pillar approach consisting of: 1) allocation of profits and taxable nexus, and 2) a global minimum tax under a new global anti-base erosion provision. The focus of the new proposal was on pillar one.

The new proposal represents a change from the May 31 work plan in the following areas: 
  • Limited to large enterprises that deal with consumer based activities (either directly or indirectly) combined with a minimum level of local country sales
  • Potentially excludes extractive, financial services, commodities, and some business to business activities
  • Suggests a modified residual profit split approach that establishes benchmark returns for routine activities that somewhat retains the Arm’s Length Principle and a residual profit allocation based on an objective formula indicator (sales is the suggested approach)
  • Development of a nexus threshold based on changes to local tax legislation and new income tax treaty provisions
  • Requires a simultaneous global implementation and an effective dispute resolution mechanism

There are a number of key open points that would need to be addressed in the proposal consisting of:
  • Definition of the scope of consumer facing businesses and what exceptions exist
  • Definition of the new nexus rule for local taxation, including the threshold for application
  • Calculation of group profits (by business unit or consolidated financial statements)
  • Determination of residual profit, allocation indicators and issues
  • Determination of routine activities that are subject to a fixed benchmark return
  • Drafting of income tax treaty provisions
  • Suggested wording of a provision on local nexus taxation

The revised proposals provide for a consultation period that ends on Nov. 12, 2019. A meeting in Paris on Nov. 21 and 22, 2019, will follow this. Updated proposals for pillar two should also be released in November. The OECD continues to target a global political agreement leading to the tax policy architecture to be released in early 2020 so that global consensus can be reached by the end of that year. 

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

David Zaiken
Managing Director
Washington National Tax Office
T +1 202 521 1543

Cory Perry
Senior Manager
Washington National Tax Office
T +1 202 521 1509

Mike Del Medico
Manager
Washington National Tax Office
T +1 202 521 1522

Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.