Digital economy — U.S. reconsiders safe harbour demand

Digital economy — U.S. reconsiders safe harbour demand

The United States’ reported decision to drop its safe harbour demand may help clear the way to reaching global consensus on the OECD’s “Pillar One”

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It appears that the United States has dropped its request that the Organization for Economic Cooperation and Development's (OECD) proposal for a unified approach to taxing the profits of certain multinational entities include a safe harbour rule. The United States' safe harbour demand was seen as a major stumbling block to reaching a global agreement on the OECD's "Pillar One" tax proposals to ensure certain multinational enterprises pay tax in countries where they have consumer-facing activities, but do not have a physical presence.

The OECD reports in its latest "Tax Talks" webcast that, although not written, the United States Secretary of Treasury announced this development at the G20 Finance Ministers meeting held on February 26, 2021. The G20 Finance Ministers also recommitted to reaching a global consensus-based solution on the OECD's proposals by mid-2021.

Background

Generally, the OECD is working to achieve global consensus on tax proposals to address the digitalization of the economy under two specific "pillars". Pillar One focuses on ensuring that certain multinational enterprises pay tax in countries where they have consumer-facing activities but do not have a physical presence by proposing changes to the allocation of taxing rights, including nexus and profit allocation. Pillar Two, the Global Anti-Base Erosion (GloBE) proposal, addresses remaining BEPS challenges by ensuring that the profits of internationally operating businesses are subject to a minimum rate of tax. The OECD released blueprints of the proposals in October 2020, and completed public consultations in January 2021. The public consultations identified several issues that the OECD and Inclusive Framework continue to address, including the need for greater simplification of the proposed rules, among other issues.

U.S. safe harbour proposal

The United States previously called upon the OECD to temporarily "pause" some of its discussions on a multilateral approach to address tax challenges of the digitalization of the economy. In a letter to France, Italy, Spain and the UK, dated June 12, 2020, the United States indicated that changes to the taxable nexus threshold of physical presence and the arm's-length principle should be implemented on a safe harbour basis, and that it was at an impasse since the Finance Ministers had rejected this proposal in discussions about Pillar One of the OECD framework.

KPMG observations

Although various political and technical issues still need to be addressed, the OECD says it hopes to achieve global consensus on both Pillars before the G20 mid-year meeting in July 2021. While Canada is committed to a multilateral solution, it intends to introduce its own unilateral measures to tax international corporations providing digital services in Canada as of January 1, 2022 if a global agreement hasn't been reached. Canada further stated that these measures would apply until an acceptable common approach comes into effect. Further details of Canada's potential measures are expected in the 2021 federal budget. If Canada implements unilateral measures, it will be joining several countries who have already implemented, or are considering implementing such measures.

For more information, contact your KPMG advisor.

Information is current to March 8, 2021. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500

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