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OECD at impasse over digital taxation rules

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Tax Hot Topics newsletter The closely watched Organisation for Economic Co-operation and Development (OECD) discussions regarding the Tax Challenges of Digitalization have reached an impasse.

The United States pulled out of continuing discussions in June after the finance ministers of France, Italy, Spain and the United Kingdom proposed a phased-in approach to the implementation of new allocation and nexus rules, starting with automated digital services businesses only. Treasury Secretary Steven Mnuchin rejected the proposal and suggested a pause in negotiations. U.S. Trade Representative Robert Lighthizer then indicated the United States was making “no headway” during talks and would no longer be involved in the negotiations.

The 137-country Inclusive Framework that has been expecting to reach a consensus by the end of 2020 is now expected to submit an interim report in October and re-convene next year.

The global growth of the digital economy produced a serious tax problem. Internet-based business models allow large multinational enterprises (MNEs) to engage in transactions with consumers in a country without triggering the traditional taxing nexus in that market country. The fact that high profile and highly profitable MNEs are not subject to taxing jurisdiction in those market countries has been identified as a tax challenge to be addressed.

The tax challenges of the digital economy has been a topic of discussion since it was the subject of Action 1 of the OECD Base Erosion and Profit Shifting (BEPS) project. However, the Action 1 report merely observed that the pervasive nature of the digital economy made it nearly impossible to isolate the tax aspects of the digital economy. As such, the report made only preliminary recommendations and committed to monitor developments in the digital economy before taking any action.

In the aftermath of the current impasse, multinationals are facing digital services taxes in a growing number of countries and U.S. threats of retaliatory tariffs.

Contacts:
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

Yasmin Dirks
Manager
Washington National Tax Office 
T +1 202 521 1506

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