The OECD has released a new report discussing the progress on their efforts to address the tax challenges arising from digitalization. The OECD has seeking a consensus solution under a two-pillar approach: Pillar 1 proposes a “unified approach” to revise taxing nexus and income allocation rules, while Pillar 2 proposes a global anti-base-erosion approach with a global minimum tax. The new report contains an outline and updated work program for Pillar 1 and discussed the progress made on Pillar 2, noting that areas of resolution still need to be addressed.
The report comes after a November consultation on Pillar 1 failed to develop consensus support, and re-affirms the OECD’s commitment to a consensus solution to tax challenges of digitalization, while noting that numerous issues need to be resolved in order to achieve a consensus agreement by the end of 2020.
Pillar 1 expands taxing jurisdiction to “market” countries that do not have taxing jurisdiction under traditional tax norms and applies a three-tiered profit allocation that uses a residual profit split methodology with formulary apportionment of the deemed residual. A number of differences in scope and application remain to be resolved. Key issues for resolution include the United States’s request that the Pillar 1 approach be applied on a safe-harbor basis, the suggestion of binding dispute resolution to enforce outcomes under the Pillar 1 approach, and the so-called “unilateral measures” employed by some countries while waiting for resolution, such as digital services taxes (DST).
Pillar 2 expands the taxing rights of countries to include a global base erosion tax. A number of design and application elements are still open and would need to be addressed. The report noted that some progress has been made toward this goal.
The report stressed that agreement must be reached on key policy issues of Pillar 1 and 2 by the next meeting to achieve a global consensus in July 2020. Significant work is needed to arrive at a consensus-based solution that addresses the United States safe-harbor approach.
In a related development, Turkey has enacted a new DST, effective March 1, 2020, that imposes a 7.5% excise tax on digital services. This is the highest DST rate in Europe, and it also expands the definition of digital services to include video gaming and subscription services.
The tax challenges of digitalization have sparked heated policy discussions between countries with divergent viewpoints. Those discussions could potentially lead to sweeping changes in fundamental tax concepts, and those changes are unlikely to be limited to internet service providers. All active multinational enterprises should actively monitor developments in this area.
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