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Digital economy tax note reveals focus on ‘pillars’

Digital economy tax note reveals focus on ‘pillars’

KPMG's Andy Hutt discusses the policy note on the tax challenges of digitalisation released by the Inclusive Framework on BEPS.

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Director, Australian Tax Centre

KPMG Australia

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The Inclusive Framework (“IF”) on base erosion and profit shifting (“BEPS”), operating under the auspices of the G20 countries and the Organisation for Economic Cooperation and Development (OECD), released on Tuesday, 29 January a policy note on the tax challenges of digitalisation.

The IF comprises over 160 countries who have come together for the purpose of achieving a mutually agreed solution to these challenges. The policy note provides an update on the IF’s work and future direction, following on from its interim report of March 2018.

The IF’s future discussions will focus, on a “without prejudice” basis, on two central “pillars” that it has identified as the potential basis for a multilateral solution to the taxation of highly digitalised business models. The first of these has been on the IF’s agenda for some time, but the second is a relatively recent development:

Pillar 1 – modification of the international rules that divide up the right to tax the income of multinational enterprises (“MNEs”) among jurisdictions. This would include a re-examination of the so-called “nexus” rules which determine whether a MNE has a taxable connection with a particular jurisdiction. It would also require work to be done on the rules which govern how much profit is allocated.

The IF is exploring proposals to allocate more taxing rights to market or user jurisdictions, in situations where value may be perceived as being created through user participation and this is not currently recognised in the framework for allocating profits. Such proposals would go beyond the current “arm’s length” principle of profit allocation that currently underpin transfer pricing rules.

Pillar 2 – resolution of remaining BEPS issues through exploring two sets of interlocking rules, designed to provide a remedy where income is subject to very low or no taxation.

This pillar could involve the introduction of what is described as an “income inclusion” rule and a tax on base erosion payments (which could have some similarities with the US “GILTI” and “BEAT” regimes respectively).

The IF will shortly issue a consultation document describing these two pillars in more detail, and will also hold two days of public consultation in March 2019. IF members also renewed their commitment to reaching a consensus-based long-term solution by 2020.

The challenge for the IF is in coming up with a set of solutions that is not only broadly acceptable but also practically workable, particularly in the context of its stated desire to only have taxation where there is economic profit, and not to cause double taxation.

The coming months are therefore of great importance for the international community, and success will depend on the ability to prioritise long-term sustainable outcomes over immediate wins whose benefits may prove to be transient.
 

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