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BEPS 2.0.: The current state of play

BEPS 2.0.: The current state of play

An overview of recent OECD pronouncements on the taxation of the digitalised economy.


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On 29–30 January 2019, the OECD Inclusive Framework (IF) – which groups 137 jurisdictions on an equal footing for the multilateral negotiation of international tax rules – decided to move ahead with a two-pillar negotiation to address the tax challenges of digitalisation. This follows on from the public consultations on Pillar One (i.e. the ‘Unified Approach’ to nexus and profit allocation rules) and Pillar Two (i.e. the ‘Global Anti-Base Erosion’ proposal to ensure that all internationally operating businesses pay a minimum level of tax) that took place at the end of 2019. The IF have now contemplated the OECD Secretariat proposals and approved a package of documents which reaffirm a commitment to reach a consensus-based long-term solution to the tax challenges arising from the digitalisation of the economy, with the aim of reaching an agreement by the end of 2020.

Pillar One: Outline of the Architecture of the Unified Approach

The OECD Secretariat had proposed a new nexus rule based on indicators of ‘significant and sustained engagement’ with market jurisdictions in order to grant greater taxing rights to such jurisdictions. The Pillar One ‘Unified Approach’ proposed that three types of taxable profits would be allocated to market jurisdictions: (i) Amount A, being the share of residual profit allocated using a formulaic approach; (ii) Amount B, being a fixed remuneration based on the arm’s length principle for defined baseline distribution and marketing functions that take place in the market jurisdiction; and (iii) Amount C, being any additional profit where in-country functions exceed the baseline activity compensated under Amount B.

In order to take Pillar One forward, the IF has agreed on a document which contains an outline of the architecture of a ‘Unified Approach’. The main elements of the ‘Approach’ have not changed but there are new considerations included in the paper that are worthy of mention. These include:

  • Scope: the paper now considers two main categories of in-scope businesses: (i) automated digital services; and (ii) consumer facing businesses. It is pertinent to note that certain exclusions, for instance relating to certain financial services, are still being considered.
  • Thresholds: Further carve-outs are being considered, for instance, an aggregate in-scope revenue threshold and a de minimis threshold, besides the EUR750m gross revenue threshold.
  • Amount A: Points of clarification include that consolidated group financial accounts should be the basis for calculation of Amount A and ‘profit before tax’ is the preferred profit measure to compute Amount A. Moreover, losses should be brought into consideration and loss carry forward rules will be developed to take account of pre-Amount A regime losses as well as losses that arise after inception of the new taxing right. Business line or regional segmentation may also be required.
  • Amounts B and C: the fixed return under Amount A may be different between industries and regions. Further work is required to clearly define what constitutes ‘baseline activities’. On Amount C, the IF recognises the difficulty of relying on corresponding transfer pricing adjustments to eliminate double taxation.

Other points, for instance relating to design, have been raised. The IF is considering simplified reporting and registration-based mechanisms (for example, a ‘one stop shop’ mechanism). With respect to the US-advocated ‘safe harbour’ rule, the IF has expressed its concerns that it could raise major difficulties from a technical perspective and could increase uncertainty as well as fail to meet all of the policy objectives of the overall project.

Pillar Two: Progress Report

Pillar Two seeks to develop rules that would provide jurisdictions with a right to ‘tax back’ where other jurisdictions have not exercised their primary taxing rights or the payment is otherwise subject to low levels of effective taxation. The IF progress report notes that good technical progress has been made on many aspects of Pillar Two.

In terms of the key design issues for the income inclusion rule and the undertaxed payment rule, work is being undertaken around the use of the parent company’s financial accounts as a starting point to determine income and there are various mechanisms being considered to address temporary differences and adjustments for permanent differences. The types of blending and questions on carve-outs are still being considered by the working group. There are also ongoing constructive discussions around rule coordination, simplification, thresholds and international obligations.

Next steps in 2020 and other work

  • G20 Finance Ministers meet on 22-23 of February and 18-19 July;
  • The OECD intends to reach agreement on key policy features of solution during its meeting on 1-2 July, which then could form the basis for a political agreement; 
  • The role played by the US in negotiations will be key given that many US tech giants would likely be within scope; 
  • The G20 Leader Summit will take place on 21-22 November;
  • The OECD will release transfer pricing guidelines on financial transactions on 11 February 2020; and 
  • The public consultation on Country-by-Country reporting will open on 17 March.

For further information please contact:

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