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Analysing the potential impact of the OECD digital tax proposals

Potential impact of OECD digital tax proposals

Jeremy Capes and Tim Keeling consider the OECD’s modelling of the revenue impacts of the BEPS 2.0 proposals.

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The global initiative to address the tax challenges of the digitalisation of the economy could raise an extra US$100 billion (AUD$148 billion) in global corporate income tax (CIT) revenue, according to recent OECD modelling.

This amount equates to an increase of about 4 percent, and reflects the combined impact of the OECD/G20 Inclusive Framework’s Pillar One and Pillar Two proposals.

As the 130-plus countries making up the OED/G20 Inclusive Framework on BEPS continue on the path to consensus, this modelling provides new insights into what’s at stake under BEPS 2.0 for both governments and taxpayers.

Given that none of the details of the Pillar One and Pillar Two proposals have yet been formally agreed, the modelling should of course be treated with some caution (and taxpayers might be wise to track developments in modelling as the Inclusive Framework design evolves over 2020).

However, while some key elements of the design are yet to be agreed (such as the application of safe harbours, opt in or out rules and the impacts of amounts B and C under Pillar 1 and the minimum global tax rate under Pillar 2), it does provide an interesting illustration of how a plausible consensus scenario could play out.

Key modelling insights

At a high level, the modelling materials suggest that the aggregate impact of the two Pillars would differ slightly across jurisdictions according to their level of national income, and that the clear majority of the extra CIT is attributable to the Pillar Two policy.

In particular, two key points regarding the Pillar One numbers may be of interest to tax-watchers: 

  • First, while the materials show Pillar One would have a small increase in CIT revenues in most jurisdictions (and most notably, low and middle-income economies are expected to gain relatively more revenue on average than advanced economies), it could reduce revenue by up to 5 percent on average in jurisdictions described as “investment hubs” (noting that only broad group average data has been released to date and jurisdictional model data has not been published). 
  • Second, the materials estimate that more than half of the profit reallocated under this proposal would be attributable to just 100 MNE groups. The potential implications of this are discussed further below.

While there is much of interest to discuss here, there are three preliminary observations concerning key aspects of the materials.

To continue reading this article, please visit KPMG Tax Now.

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