OECD releases revised digital tax proposals

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. 

David Sites
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
Washington National Tax Office
T +1 202 521 1522

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